-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OK1wYTlvGHuUx5Xs/vo4uuGPpmxpJ36Cmhi6j77UUKObQ7LA4IrxxxPqe98kSqk2 G8edhhxp5wtuyATAeWJbjQ== 0000872625-05-000062.txt : 20051229 0000872625-05-000062.hdr.sgml : 20051229 20051229110138 ACCESSION NUMBER: 0000872625-05-000062 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20051031 FILED AS OF DATE: 20051229 DATE AS OF CHANGE: 20051229 EFFECTIVENESS DATE: 20051229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN STRATEGIC SERIES CENTRAL INDEX KEY: 0000872625 IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-06243 FILM NUMBER: 051290264 BUSINESS ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 BUSINESS PHONE: 650-570-3000 MAIL ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN CALIFORNIA 250 GROWTH FUND DATE OF NAME CHANGE: 19911216 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN CALIFORNIA 250 GROWTH INDEX FUND DATE OF NAME CHANGE: 19910917 N-CSRS 1 semincsr.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-06243 --------- FRANKLIN STRATEGIC SERIES ------------------------- (Exact name of registrant as specified in charter) ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 (Address of principal executive offices) (Zip code) CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: 650 312-2000 ------------ Date of fiscal year end: 4/30 ---- Date of reporting period: 10/31/05 -------- ITEM 1. REPORTS TO STOCKHOLDERS. [GRAPHIC OMITTED] - -------------------------------------------------------------------------------- OCTOBER 31, 2005 - -------------------------------------------------------------------------------- Franklin Aggressive Growth Fund Franklin Flex Cap Growth Fund Franklin Small Cap Growth Fund II Franklin Small-Mid Cap Growth Fund - -------------------------------------------------------------------------------- SEMIANNUAL REPORT AND SHAREHOLDER LETTER GROWTH - -------------------------------------------------------------------------------- WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? FRANKLIN STRATEGIC SERIES Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. - -------------------------------------------------------------------------------- [LOGO](R) FRANKLIN TEMPLETON INVESTMENTS FRANKLIN o Templeton o Mutual Series FRANKLIN TEMPLETON INVESTMENTS GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups--Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services. - -------------------------------------------------------------------------------- MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS - -------------------------------------------------------------------------------- [GRAPHIC OMITTED] Not part of the semiannual report CONTENTS SHAREHOLDER LETTER ........................................................ 1 SEMIANNUAL REPORT Economic and Market Overview .............................................. 4 Franklin Aggressive Growth Fund ........................................... 5 Franklin Flex Cap Growth Fund ............................................. 13 Franklin Small Cap Growth Fund II ......................................... 21 Franklin Small-Mid Cap Growth Fund ........................................ 29 Financial Highlights and Statements of Investments ........................ 37 Financial Statements ...................................................... 76 Notes to Financial Statements ............................................. 81 Shareholder Information ................................................... 95 - -------------------------------------------------------------------------------- SEMIANNUAL REPORT ECONOMIC AND MARKET OVERVIEW During the six months ended October 31, 2005, domestic economic expansion was driven by strength across most industries, sectors and regions. Gross domestic product (GDP) rose during the period, benefiting primarily from increased personal consumption, business investment and federal spending. Slower export growth combined with greater demand for imported goods and materials fueled a widening trade gap. The U.S. dollar rallied in 2005 driven largely by rising short-term domestic interest rates, and strong economic growth in the U.S. relative to many of its major trading partners. Oil prices increased substantially during the period largely due to potential long-term supply limitations and strong growth in global demand, especially from China and India. Despite rising commodity prices, inflation remained relatively contained for the 12 months ended October 31, 2005, as measured by the 2.1% rise for the core Consumer Price Index (CPI).(1) With this inflation picture, the Federal Reserve Board raised the federal funds target rate from 2.75% to 3.75%, and said it would continue to undertake appropriate monetary policy action at a measured pace. Compared with the rise in short-term interest rates, long-term interest rates remained relatively stable, supporting overall robust housing and commercial real estate activity, which contributed to economic growth. Many businesses enjoyed their widest profit margins on record, propelled largely by productivity gains. The labor market firmed as employment increased and the unemployment rate dropped from 5.2% to 5.0% during the reporting period.1 Personal income rose, and hiring rebounded in many industries, bolstered by healthy business spending. However, late in the period consumer sentiment fell amid concerns about rising energy costs. In this environment, the blue chip stocks of the Dow Jones Industrial Average posted a six-month total return of +3.57%, while the broader Standard & Poor's 500 Composite Index (S&P 500) and the technology-heavy NASDAQ Composite Index returned +5.26% and +10.78%.(2) (1) Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. (2) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. THIS DISCUSSION REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 2005. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE OBTAINED FROM SOURCES CONSIDERED RELIABLE. 4 | Semiannual Report FRANKLIN AGGRESSIVE GROWTH FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Aggressive Growth Fund seeks capital appreciation by investing substantially in equity securities of companies demonstrating accelerating growth, increasing profitability, or above-average growth or growth potential, when compared with the overall economy. - -------------------------------------------------------------------------------- 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 Aggressive Growth Fund's semiannual report for the period ended October 31, 2005. PERFORMANCE OVERVIEW For the six months under review, Franklin Aggressive Growth Fund - Class A posted a +15.75% cumulative total return. The Fund outperformed its narrow benchmark, the Russell 3000(R) Growth Index, which returned +8.04%, and its broad benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which returned +5.26% for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 8. (1) Source: Standard & Poor's Micropal. The Russell 3000 Growth Index is market capitalization weighted and measures performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values. 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 include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 42. Semiannual Report | 5 PORTFOLIO BREAKDOWN Franklin Aggressive Growth Fund Based on Total Net Assets as of 10/31/05 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Electronic Technology* 21.6% Technology Services* 13.9% Health Technology* 12.9% Consumer Services 7.4% Commercial Services 6.6% Health Services 6.2% Retail Trade 5.4% Finance 4.3% Communications 3.2% Industrial Services 2.7% Producer Manufacturing 2.5% Transportation 2.1% Energy Minerals 1.7% Consumer Non-Durables 1.3% Process Industries 1.0% Other 1.5% Short-Term Investments & Other Net Assets 5.7% *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. INVESTMENT STRATEGY We are research driven, fundamental investors pursuing an aggressive growth strategy. As "bottom-up" investors focusing primarily on individual securities, we choose companies that have clear indicators of future earnings growth and that present, in our opinion, the best trade-off between that earnings growth, business and financial risk, and valuation. We rely on a team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies for distinct and sustainable competitive advantages likely to lead to growth in earnings and/or share price. Competitive advantages such as a particular product niche, proven technology, sound financial profits and records, strong management and industry leadership are all factors we believe may contribute to strong growth potential. MANAGER'S DISCUSSION During the six months under review, Google, a leading provider of Internet products and services, increased in value more than 69% and was the top contributor to the Fund's overall performance. Chicago Mercantile Exchange, which provides a marketplace for agricultural commodities as well as for interest rate, stock index and foreign exchange futures, was the Fund's second-highest contributor during the period as it appreciated more than 87%. Our investment in Marvell Technology Group, a provider of integrated circuits for data storage and communications-related equipment, was another major contributor, appreciating more than 38% during the reporting period. Despite the Fund's solid results versus its benchmarks, we had several detractors from performance during the period. For example, Tempur-Pedic International, a manufacturer of visco-elastic foam mattresses and pillows, was down 42% during the reporting period and negatively impacted the Fund. Gen-Probe, a developer of blood diagnostic products, fell about 19% and also hindered Fund performance. Zimmer Holdings, a provider of orthopedic reconstructive implants, was down nearly 22% during the period, detracting from the Fund's overall results. We sold all three stock holdings by period-end. 6 | Semiannual Report Thank you for your continued participation in Franklin Aggressive Growth Fund. We look forward to serving your future investment needs. /s/ Robert R. Dean [PHOTO OMITTED] Robert R. Dean, CFA /s/ Conrad B. Herrmann [PHOTO OMITTED] Conrad B. Herrmann, CFA Portfolio Management Team Franklin Aggressive Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2005, 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 ADVISER 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. TOP 10 HOLDINGS Franklin Aggressive Growth Fund 10/31/05 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- Cognizant Technology Solutions Corp., A 3.4% TECHNOLOGY SERVICES - -------------------------------------------------------------------------------- Google Inc., A 3.3% TECHNOLOGY SERVICES - -------------------------------------------------------------------------------- Apple Computer Inc. 3.2% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Network Appliance Inc. 3.1% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Roche Holding AG, ADR (Switzerland) 2.1% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- Chicago Mercantile Exchange 2.0% FINANCE - -------------------------------------------------------------------------------- Amgen Inc. 1.9% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- Marvell Technology Group Ltd. (Bermuda) 1.8% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Moody's Corp. 1.8% COMMERCIAL SERVICES - -------------------------------------------------------------------------------- Starbucks Corp. 1.8% CONSUMER SERVICES - -------------------------------------------------------------------------------- Semiannual Report | 7 PERFORMANCE SUMMARY AS OF 10/31/05 FRANKLIN AGGRESSIVE 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 does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION - -------------------------------------------------------------------------------- CLASS A (SYMBOL: FGRAX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.10 $15.43 $13.33 - -------------------------------------------------------------------------------- CLASS B (SYMBOL: FKABX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.97 $14.84 $12.87 - -------------------------------------------------------------------------------- CLASS C (SYMBOL: FKACX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.97 $14.81 $12.84 - -------------------------------------------------------------------------------- CLASS R (SYMBOL: FKARX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.07 $15.31 $13.24 - -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FRAAX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.16 $15.74 $13.58 - -------------------------------------------------------------------------------- 8 | Semiannual Report PERFORMANCE SUMMARY (CONTINUED) PERFORMANCE 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: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ------------------------------------------------------------------------------------------------------------------ CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/23/99) - ------------------------------------------------------------------------------------------------------------------ Cumulative Total Return(1) +15.75% +15.41% -37.68% +57.99% - ------------------------------------------------------------------------------------------------------------------ Average Annual Total Return(2) +9.12% +8.74% -10.10% +6.46% - ------------------------------------------------------------------------------------------------------------------ Value of $10,000 Investment(3) $10,912 $10,874 $5,874 $14,891 - ------------------------------------------------------------------------------------------------------------------ Avg. Ann. Total Return (9/30/05)(4) +12.23% -12.37% +6.54% - ------------------------------------------------------------------------------------------------------------------ CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/23/99) - ------------------------------------------------------------------------------------------------------------------ Cumulative Total Return(1) +15.31% +14.59% -39.77% +51.84% - ------------------------------------------------------------------------------------------------------------------ Average Annual Total Return(2) +11.31% +10.59% -10.01% +6.79% - ------------------------------------------------------------------------------------------------------------------ Value of $10,000 Investment(3) $11,131 $11,059 $5,902 $15,184 - ------------------------------------------------------------------------------------------------------------------ Avg. Ann. Total Return (9/30/05)(4) +14.25% -12.29% +6.89% - ------------------------------------------------------------------------------------------------------------------ CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/23/99) - ------------------------------------------------------------------------------------------------------------------ Cumulative Total Return(1) +15.34% +14.63% -39.77% +51.52% - ------------------------------------------------------------------------------------------------------------------ Average Annual Total Return(2) +14.34% +13.63% -9.64% +6.76% - ------------------------------------------------------------------------------------------------------------------ Value of $10,000 Investment(3) $11,434 $11,363 $6,023 $15,152 - ------------------------------------------------------------------------------------------------------------------ Avg. Ann. Total Return (9/30/05)(4) +17.20% -11.93% +6.85% - ------------------------------------------------------------------------------------------------------------------ CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02) - ------------------------------------------------------------------------------------------------------------------ Cumulative Total Return(1) +15.63% +15.29% +73.58% +11.35% - ------------------------------------------------------------------------------------------------------------------ Average Annual Total Return(2) +14.63% +14.29% +20.18% +2.85% - ------------------------------------------------------------------------------------------------------------------ Value of $10,000 Investment(3) $11,463 $11,429 $17,358 $11,135 - ------------------------------------------------------------------------------------------------------------------ Avg. Ann. Total Return (9/30/05)(4) +17.88% +23.82% +2.90% - ------------------------------------------------------------------------------------------------------------------ ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/23/99) - ------------------------------------------------------------------------------------------------------------------ Cumulative Total Return(1) +15.91% +15.74% -36.76% +61.24% - ------------------------------------------------------------------------------------------------------------------ Average Annual Total Return(2) +15.91% +15.74% -8.76% +7.81% - ------------------------------------------------------------------------------------------------------------------ Value of $10,000 Investment(3) $11,591 $11,574 $6,324 $16,124 - ------------------------------------------------------------------------------------------------------------------ Avg. Ann. Total Return (9/30/05)(4) +19.44% -11.06% +7.90% - ------------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Semiannual Report | 9 PERFORMANCE SUMMARY (CONTINUED) ENDNOTES THE MANAGER OF THE FUND USES AN AGGRESSIVE GROWTH STRATEGY SO AN INVESTMENT IN THE FUND INVOLVES A GREATER DEGREE OF RISK. THE FUND MAY BE MORE VOLATILE THAN A MORE CONSERVATIVE EQUITY FUND, AND IT MAY BE BEST SUITED FOR LONG-TERM INVESTING. THE FUND'S INVESTMENTS IN SMALLER- AND MIDSIZE-COMPANY STOCKS INVOLVE SPECIAL RISKS SUCH AS RELATIVELY SMALLER REVENUES, LIMITED PRODUCT LINES AND SMALLER MARKET SHARE. SMALLER- AND MIDSIZE-COMPANY STOCKS HISTORICALLY HAVE EXHIBITED GREATER PRICE VOLATILITY THAN LARGER-COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM. 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 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 and does not include a sales charge. (2) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. (3) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. (4) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. 10 | Semiannual Report YOUR FUND'S EXPENSES FRANKLIN AGGRESSIVE 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 below 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. Semiannual Report | 11 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 4/30/05 VALUE 10/31/05 PERIOD* 4/30/05-10/31/05 - ----------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,157.50 $ 8.05 - ----------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,017.74 $ 7.53 - ----------------------------------------------------------------------------------------------------------------- CLASS B - ----------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,153.10 $11.99 - ----------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,014.06 $11.22 - ----------------------------------------------------------------------------------------------------------------- CLASS C - ----------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,153.40 $12.00 - ----------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,014.06 $11.22 - ----------------------------------------------------------------------------------------------------------------- CLASS R - ----------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,156.30 $ 9.24 - ----------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.64 $ 8.64 - ----------------------------------------------------------------------------------------------------------------- ADVISOR CLASS - ----------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,159.10 $ 6.64 - ----------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.06 $ 6.21 - -----------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 1.48%; B: 2.21%; C: 2.21%; R: 1.70%; and Advisor: 1.22%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 12 | Semiannual Report FRANKLIN FLEX CAP GROWTH FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Flex Cap Growth seeks capital appreciation. The Fund invests substantially in equity securities of companies that the manager believes have the potential for capital appreciation. The Fund has flexibility to invest in companies located, headquartered or operating inside and outside the United States, across the entire market capitalization spectrum from small, emerging growth companies to well-established, large cap companies. - -------------------------------------------------------------------------------- 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 semiannual report for Franklin Flex Cap Growth Fund covers the period ended October 31, 2005. PERFORMANCE OVERVIEW For the six months under review, Franklin Flex Cap Growth Fund - Class A posted a +7.54% cumulative total return. The Fund underperformed its narrow benchmark, the Russell 3000 Growth Index, which returned +8.04%, but outperformed the broad benchmark Standard & Poor's 500 Composite Index (S&P 500), which returned +5.26% for the same period.(1) The Fund also underperformed its peers in the Lipper Multi-Cap Growth Funds Classification Average, which returned +12.11%.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 16. (1) Source: Standard & Poor's Micropal. The Russell 3000 Growth Index is market capitalization weighted and measures performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values. 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 include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (2) Source: Lipper Inc. The Lipper Multi-Cap Growth Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Multi-Cap Growth Funds classification in the Lipper Open-End underlying funds universe for the period indicated. Lipper Multi-Cap Growth Funds are defined as funds that normally invest in companies of any size, with long-term earnings expected to grow significantly faster than the earnings of the stocks represented in the major unmanaged stock indexes. For the six-month period ended 10/31/05, there were 432 funds in this category. Lipper calculations do not include sales charges, but include reinvestment of any income or distributions. The Fund's performance relative to the average may have differed if these or other factors had been considered. 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 50. Semiannual Report | 13 PORTFOLIO BREAKDOWN Franklin Flex Cap Growth Fund Based on Total Net Assets as of 10/31/05 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Electronic Technology* 16.2% Health Technology* 16.0% Finance 11.3% Technology Services* 10.7% Health Services 8.7% Energy Minerals 5.0% Retail Trade 4.2% Consumer Services 4.1% Industrial Services 3.9% Process Industries 3.5% Consumer Durables 2.8% Commercial Services 2.4% Transportation 2.1% Consumer Non-Durables 1.9% Communications 1.9% Other 1.3% Short-Term Investments & Other Net Assets 4.0% * 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. INVESTMENT STRATEGY We are research driven, fundamental investors pursuing a growth strategy. As "bottom-up" investors focusing primarily on individual securities, we seek companies that have identifiable drivers of future earnings growth and that we believe present a good trade-off between that potential earnings growth, business and financial risk and valuation. We believe that examples of identifiable drivers of future earnings growth are a particular product niche, proven technology, sound financial profits and records, strong management, and industry leadership. We rely on a team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis. MANAGER'S DISCUSSION Relative to the benchmark Russell 3000 Growth Index, our investments in the energy minerals sector provided the most positive contribution to Fund performance over the six-month reporting period, followed by the commercial services, technology services and health technology sectors. Even though our overweighted position in the energy minerals sector relative to the index had a positive effect due to strong returns within the group, our stock selection had a slightly negative effect. Major coal producer Peabody Energy was a standout, returning more than 79%. Among oil and gas production companies, our investment in onshore/offshore oil and gas explorer and producer Apache rose more than 13% but lagged the sector's overall returns. In terms of the commercial services, technology services and health technology sectors, our stock selection contributed favorably to Fund performance. In commercial services, our holdings in Moody's, a major credit rating and other financial information publisher, rose almost 30% for the six months under review, while professional staffing provider Robert Half International was up more than 49%. Within technology services, the strongest contributing stock was Google, the popular Internet search engine provider, which appreciated more than 69% for the period. Smaller positions in payroll accounting firm Paychex and Fair Isaac, a leading developer of consumer credit scoring systems, also contributed positively; both stocks appreciated about 27% this reporting period. We also initiated a new position in Autodesk, the computer-aided design software provider and creator of AutoCAD, which is anticipated to continue to benefit from the transition to its new 3-D rendering software. Within health technology, our overweighted biotechnology allocation relative to the index contributed to the Fund's relative performance. Here, biotech bellwether Amgen, the Fund's largest position at period-end, rose almost 30% in value, and Genentech appreciated almost 28%. 14 | Semiannual Report The Fund's most significant laggard, in terms of contribution to return relative to the index, was the retail trade sector. The retail group in general suffered from rising interest rates and oil prices, both of which pinched consumers' retail budgets. In terms of stock selection, the finance sector had the greatest negative relative effect, largely due to the adverse impact of rising interest rates. Specifically, our positions within mortgage-related companies were hurt the most. For example, Countrywide Financial's stock had a -11% return, Golden West posted a -6% return and Wells Fargo was up roughly 2% for the period. The Fund's investments in the electronic technology and consumer services sectors lagged those sectors' returns within the index. Within electronic technology, our stock selection in the semiconductor industry had the greatest negative effect, as industry leaders such as Intel and Linear Technology continued to show lackluster results with returns of less than 1% and -7% for the six months ended October 31, 2005. Also, our small position in Vitesse Semiconductor continued to lag its industry peers, and the company's share price fell almost 21%. Within consumer services, although our slightly underweighted allocation helped the Fund's relative performance, our stock selection had a modestly negative relative effect. Thank you for your continued participation in Franklin Flex Cap Growth Fund. We look forward to serving your future investment needs. /s/ Conrad B. Herrmann [PHOTO OMITTED] Conrad B. Herrmann, CFA Portfolio Manager Franklin Flex Cap Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2005, 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 ADVISER 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. TOP 10 HOLDINGS Franklin Flex Cap Growth Fund 10/31/05 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- Amgen Inc. 2.6% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- VCA Antech Inc. 2.0% HEALTH SERVICES - -------------------------------------------------------------------------------- Apache Corp. 1.9% ENERGY MINERALS - -------------------------------------------------------------------------------- Varian Medical Systems Inc. 1.9% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- Google Inc., A 1.9% TECHNOLOGY SERVICES - -------------------------------------------------------------------------------- Yahoo! Inc. 1.8% TECHNOLOGY SERVICES - -------------------------------------------------------------------------------- Expeditors International of Washington Inc. 1.8% TRANSPORTATION - -------------------------------------------------------------------------------- Apple Computer Inc. 1.7% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Express Scripts Inc. 1.7% HEALTH SERVICES - -------------------------------------------------------------------------------- St. Jude Medical Inc. 1.6% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- Semiannual Report | 15 PERFORMANCE SUMMARY AS OF 10/31/05 FRANKLIN FLEX CAP 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 does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION - -------------------------------------------------------------------------------- CLASS A (SYMBOL: FKCGX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.66 $37.92 $35.26 - -------------------------------------------------------------------------------- CLASS B (SYMBOL: FKCBX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.40 $35.99 $33.59 - -------------------------------------------------------------------------------- CLASS C (SYMBOL: FCIIX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.40 $36.06 $33.66 - -------------------------------------------------------------------------------- CLASS R (SYMBOL: FRCGX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.59 $37.57 $34.98 - -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FKCAX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.71 $38.03 $35.32 - -------------------------------------------------------------------------------- 16 | Semiannual Report PERFORMANCE SUMMARY (CONTINUED) PERFORMANCE 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: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ---------------------------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +7.54% +8.40% -24.19% +185.86% - ---------------------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +1.36% +2.18% -6.50% +10.42% - ---------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,136 $10,218 $7,146 $26,949 - ---------------------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +6.17% -7.90% +10.61% - ---------------------------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - ---------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +7.15% +7.59% -26.95% +57.91% - ---------------------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +3.15% +3.59% -6.44% +6.91% - ---------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,315 $10,359 $7,168 $15,791 - ---------------------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +7.83% -7.84% +7.27% - ---------------------------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (9/3/96) - ---------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +7.13% +7.58% -26.99% +130.58% - ---------------------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +6.13% +6.58% -6.10% +9.55% - ---------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,613 $10,658 $7,301 $23,058 - ---------------------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +10.84% -7.50% +9.84% - ---------------------------------------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02) - ---------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +7.40% +8.12% +56.80% +18.00% - ---------------------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +6.40% +7.12% +16.18% +4.42% - ---------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,640 $10,712 $15,680 $11,800 - ---------------------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +11.39% +18.87% +4.97% - ---------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS(5) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +7.67% +8.66% -23.97% +186.69% - ---------------------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +7.67% +8.66% -5.33% +11.11% - ---------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,767 $10,866 $7,603 $28,669 - ---------------------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +12.95% -6.75% +11.30% - ----------------------------------------------------------------------------------------------------------------------
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. Semiannual Report | 17 PERFORMANCE SUMMARY (CONTINUED) ENDNOTES THE FUND IS NONDIVERSIFIED, WHICH MEANS IT MAY INVEST A GREATER PORTION OF ITS ASSETS IN THE SECURITIES OF ONE ISSUER THAN A DIVERSIFIED FUND. THE FUND MAY INVEST A SUBSTANTIAL PORTION OF ITS ASSETS IN SECURITIES LINKED TO THE STATE OF CALIFORNIA, WHICH INVOLVES INCREASED VOLATILITY ASSOCIATED WITH ECONOMIC OR REGULATORY DEVELOPMENTS IN THE STATE. SMALLER, NEWER OR UNSEASONED COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS, AND THEIR PROSPECTS FOR GROWTH ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES. THE FUND ALSO INVESTS IN TECHNOLOGY STOCKS, WHICH CAN BE HIGHLY VOLATILE AND INVOLVES SPECIAL RISKS. 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 and does not include a sales charge. (2) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. (3) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. (4) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5) Effective 8/2/04, 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 8/2/04, 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 8/1/04, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 8/2/04 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +14.03% and +11.11%. 18 | Semiannual Report YOUR FUND'S EXPENSES FRANKLIN FLEX CAP 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 below 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. Semiannual Report | 19 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 4/30/05 VALUE 10/31/05 PERIOD* 4/30/05-10/31/05 - --------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,075.40 $4.86 - --------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.52 $4.74 - --------------------------------------------------------------------------------------------------------------------- CLASS B - --------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,071.50 $8.77 - --------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.74 $8.54 - --------------------------------------------------------------------------------------------------------------------- CLASS C - --------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,071.30 $8.77 - --------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.74 $8.54 - --------------------------------------------------------------------------------------------------------------------- CLASS R - --------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,074.00 $6.17 - --------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.26 $6.01 - --------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS - --------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,076.70 $3.56 - --------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.78 $3.47 - ---------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.93%; B: 1.68%; C: 1.68%; R: 1.18%; and Advisor: 0.68%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 20 | Semiannual Report FRANKLIN SMALL CAP GROWTH FUND II YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small Cap Growth Fund II seeks long-term capital growth by investing at least 80% of its net assets in equity securities of small-capitalization companies with market capitalizations not exceeding that of the highest market capitalization in the Russell 2000(R) Index or $1.5 billion, whichever is greater, at the time of purchase.(1) - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- This semiannual report for Franklin Small Cap Growth Fund II covers the period ended October 31, 2005. PERFORMANCE OVERVIEW For the six months under review, Franklin Small Cap Growth Fund II - Class A posted a +9.50% cumulative total return. The Fund underperformed its narrow benchmark, the Russell 2000 Growth Index, which returned +13.15%, but outperformed its broad benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which returned +5.26% for the same period.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 24. (1) The Russell 2000 Index is market capitalization weighted and measures performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of total market capitalization of the Russell 3000 Index. (2) Source: Standard & Poor's Micropal. The Russell 2000 Growth Index is market capitalization weighted and measures performance of those Russell 2000 Index companies with higher price-to-book ratios and higher forecasted growth values. 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 include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 59. Semiannual Report | 21 PORTFOLIO BREAKDOWN Franklin Small Cap Growth Fund II Based on Total Net Assets as of 10/31/05 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Electronic Technology* 19.0% Technology Services* 10.7% Health Technology* 10.2% Finance 10.0% Consumer Services 8.2% Health Services 6.9% Producer Manufacturing 5.8% Industrial Services 5.7% Process Industries 4.8% Transportation 4.3% Commercial Services 3.0% Retail Trade 2.9% Real Estate Investment Trusts 2.3% Energy Minerals 1.9% Consumer Durables 1.8% Other 1.6% Short-Term Investments & Other Net Assets 0.9% * 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. INVESTMENT STRATEGY We are research driven, fundamental investors pursuing a growth strategy. As "bottom-up" investors focusing primarily on individual securities, we choose companies that have identifiable drivers of future earnings growth and that present, in our opinion, the best trade-off between that earnings growth, business and financial risk, and valuation. We rely on a team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies for distinct and sustainable competitive advantages likely to lead to growth in earnings and/or share price. Competitive advantages such as a particular product niche, proven technology, sound financial profits and records, strong management and industry leadership are all factors we believe may contribute to strong growth potential. MANAGER'S DISCUSSION During the six months under review, our stock selection in the transportation sector, especially among companies in the trucking industry, supported strong relative performance for the Fund compared with the benchmark Russell 2000 Growth Index. Stock selection in the commercial services sector also provided a boost to the Fund's relative returns. Within commercial services, our holding in Internet marketing firm ValueClick performed the best and posted a total return of almost 69% for the reporting period. Our stock selection in energy minerals, particularly among oil and gas production, also contributed to the Fund's results. Detractors from performance included an overweighted allocation compared with the benchmark Russell 2000 Growth Index and poor stock selection in the electronic technology sector. Specifically, our semiconductor positions performed worse than the index's semiconductor companies. Similarly, the Fund's results were hindered by an overweighted position and poor stock selection in the process industries sector. In our health technology sector investments, stock selection, particularly among biotechnology stocks, detracted from the Fund's relative performance. 22 | Semiannual Report Thank you for your continued participation in Franklin Small Cap Growth Fund II. We look forward to serving your future investment needs. /s/ Michael P. McCarthy [PHOTO OMITTED] Michael P. McCarthy, CFA Portfolio Manager Franklin Small Cap Growth Fund II THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2005, 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 ADVISER 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. TOP 10 HOLDINGS Franklin Small Cap Growth Fund II 10/31/05 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- Cal Dive International Inc. 2.2% INDUSTRIAL SERVICES - -------------------------------------------------------------------------------- Flowserve Corp. 1.6% PRODUCER MANUFACTURING - -------------------------------------------------------------------------------- Forward Air Corp. 1.6% TRANSPORTATION - -------------------------------------------------------------------------------- Silicon Laboratories Inc. 1.5% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Varian Semiconductor Equipment Associates Inc. 1.5% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Superior Energy Services Inc. 1.3% INDUSTRIAL SERVICES - -------------------------------------------------------------------------------- FMC Corp. 1.3% PROCESS INDUSTRIES - -------------------------------------------------------------------------------- Penn National Gaming Inc. 1.3% CONSUMER SERVICES - -------------------------------------------------------------------------------- Global Payments Inc. 1.2% TECHNOLOGY SERVICES - -------------------------------------------------------------------------------- ViaSat Inc. 1.2% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Semiannual Report | 23 PERFORMANCE SUMMARY AS OF 10/31/05 FRANKLIN SMALL CAP GROWTH FUND II Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION - -------------------------------------------------------------------------------- CLASS A (SYMBOL: FSGRX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.01 $11.64 $10.63 - -------------------------------------------------------------------------------- CLASS B (SYMBOL: FBSGX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.94 $11.20 $10.26 - -------------------------------------------------------------------------------- CLASS C (SYMBOL: FCSGX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.94 $11.21 $10.27 - -------------------------------------------------------------------------------- CLASS R (SYMBOL: FSSRX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.99 $11.53 $10.54 - -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FSSAX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.05 $11.84 $10.79 - -------------------------------------------------------------------------------- 24 | Semiannual Report PERFORMANCE SUMMARY (CONTINUED) PERFORMANCE 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: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ----------------------------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00) Cumulative Total Return(1) +9.50% +7.48% -0.34% +16.40% - ----------------------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +3.19% +1.31% -1.24% +1.70% - ----------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,319 $10,131 $9,395 $10,971 - ----------------------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +7.86% -1.58% +2.63% - ----------------------------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00) - ----------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +9.16% +6.67% -3.78% +12.00% - ----------------------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +5.16% +2.67% -1.17% +1.92% - ----------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,516 $10,267 $9,430 $11,100 - ----------------------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +9.53% -1.52% +2.86% - ----------------------------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00) - ----------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +9.15% +6.76% -3.78% +12.10% - ----------------------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +8.15% +5.76% -0.77% +2.10% - ----------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,815 $10,576 $9,622 $11,210 - ----------------------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +12.51% -1.10% +3.04% - ----------------------------------------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02) - ----------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +9.39% +7.26% +65.66% +16.70% - ----------------------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +8.39% +6.26% +18.32% +4.12% - ----------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,839 $10,626 $16,566 $11,670 - ----------------------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +13.06% +23.81% +5.54% - ----------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00) - ----------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +9.73% +7.83% +1.11% +18.40% - ----------------------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +9.73% +7.83% +0.22% +3.12% - ----------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,973 $10,783 $10,111 $11,840 - ----------------------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +14.69% -0.13% +4.07% - -----------------------------------------------------------------------------------------------------------------------
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. Semiannual Report | 25 PERFORMANCE SUMMARY (CONTINUED) ENDNOTES SMALLER OR RELATIVELY NEW COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS AND THEIR GROWTH PROSPECTS ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES. THE FUND IS INTENDED FOR LONG-TERM INVESTORS WHO ARE COMFORTABLE WITH SHORT-TERM FLUCTUATIONS IN SHARE PRICE. THE FUND'S PORTFOLIO INCLUDES INVESTMENTS IN TECHNOLOGY, WHICH HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS AND INVOLVES SPECIAL RISKS. 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 and does not include a sales charge. (2) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. (3) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. (4) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. 26 | Semiannual Report YOUR FUND'S EXPENSES FRANKLIN SMALL CAP GROWTH FUND II 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 below 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. Semiannual Report | 27 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 4/30/05 VALUE 10/31/05 PERIOD* 4/30/05-10/31/05 - -------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,095.00 $ 6.18 - -------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.31 $ 5.96 - -------------------------------------------------------------------------------------------------------------- CLASS B - -------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,091.60 $10.17 - -------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,015.53 $ 9.80 - -------------------------------------------------------------------------------------------------------------- CLASS C - -------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,091.50 $10.17 - -------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,015.48 $ 9.80 - -------------------------------------------------------------------------------------------------------------- CLASS R - -------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,093.90 $ 7.55 - -------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.00 $ 7.27 - -------------------------------------------------------------------------------------------------------------- ADVISOR CLASS - -------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,097.30 $ 4.92 - -------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.52 $ 4.74 - --------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 1.17%; B: 1.93%; C: 1.93%; R: 1.43%; and Advisor: 0.93%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 28 | Semiannual Report FRANKLIN SMALL-MID CAP GROWTH FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small-Mid Cap Growth Fund seeks long-term capital growth by investing at least 80% of its net assets in equity securities of small and midsize companies. The Fund defines small-cap companies as those having market values less than $1.5 billion or the highest market cap value in the Russell 2000 Index, whichever is greater, at the time of purchase.(1) Mid-cap companies are those with market cap values not exceeding $8.5 billion. - -------------------------------------------------------------------------------- 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 Small-Mid Cap Growth Fund's semiannual report covering the period ended October 31, 2005. PERFORMANCE OVERVIEW For the six months under review, Franklin Small-Mid Cap Growth Fund - Class A posted a +14.28% cumulative total return. The Fund outperformed its benchmarks, the Russell Midcap(R) Growth Index and the Standard & Poor's 500 Composite Index (S&P 500), which posted +11.37% and +5.26% total returns for the same period.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 32. (1) The Russell 2000 Index is market capitalization weighted and measures performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of total market capitalization of the Russell 3000 Index. (2) Source: Standard & Poor's Micropal. The Russell Midcap Growth Index is market capitalization weighted and measures performance of those Russell Midcap Index companies with higher price-to-book ratios and higher forecasted growth values. 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 include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 69. Semiannual Report | 29 PORTFOLIO BREAKDOWN Franklin Small-Mid Cap Growth Fund Based on Total Net Assets as of 10/31/05 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Electronic Technology* 17.6% Health Technology* 12.7% Technology Services* 9.5% Finance 9.2% Health Services 7.5% Producer Manufacturing 6.1% Energy Minerals 4.9% Retail Trade 4.7% Commercial Services 4.3% Consumer Services 3.7% Process Industries 3.6% Industrial Services 3.4% Consumer Durables 3.4% Transportation 2.6% Consumer Non-Durables 1.6% Communications 1.0% Short-Term Investments & Other Net Assets 4.2% * 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. INVESTMENT STRATEGY We are research driven, fundamental investors pursuing a growth strategy. As "bottom-up" investors focusing primarily on individual securities, we choose companies that have identifiable drivers of future earnings growth and that present, in our opinion, the best trade-off between that earnings growth, business and financial risk, and valuation. We rely on a team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies for distinct and sustainable competitive advantages likely to lead to growth in earnings and/or share price. Competitive advantages such as a particular product niche, proven technology, sound financial profits and records, strong management and industry leadership are all factors we believe may contribute to strong growth potential. MANAGER'S DISCUSSION During the six months under review, small- and mid-capitalization growth companies, as represented by the Russell 2000 Growth Index and Russell Midcap Growth Index, outperformed large capitalization growth companies, as represented by the Russell 1000(R) Growth Index.(3) The Fund benefited from strong stock selection in the consumer services, consumer non-durables and health services sectors relative to the benchmark Russell Midcap Growth Index. Furthermore, our underweighted allocation to the consumer services and consumer non-durables sectors compared with the index proved favorable to the Fund's relative performance. Within consumer services, the Fund's stake in the casino and gaming industry provided strong relative results mostly due to our underweighted position and slightly due to stock selection. Within consumer non-durables, our stock selection in the apparel and footwear industry had the greatest positive relative effect. Within the health services sector, our overweighting and stock selection in the managed health care industry provided the greatest positive effect relative to the index. (3) The Russell 2000 Growth Index is market capitalization weighted and measures performance of those Russell 2000 Index companies with higher price-to-book ratios and higher forecasted values. See footnote 2 for a description of the Russell Midcap Growth Index. The Russell 1000 Growth Index is market capitalization weighted and measures performance of those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values. 30 | Semiannual Report Despite the Fund's solid results this reporting period, there were some factors that mitigated our outperformance of the Russell Midcap Growth Index. For example, our stocks in the technology services sector fared worse than the index's technology services stocks. Within technology services, information technology services industry holdings had the greatest drag on our relative performance due mostly to stock selection. Our overweighting in the process industries sector, and a lack of holdings in the non-energy minerals sector, also hindered relative returns somewhat. Within the process industries sector, our allocation to the agricultural commodities and milling industry, which is not an index component, was the major detriment compared with the index. Within the non-energy minerals sector, our lack of precious metals industry holdings had the greatest negative impact on the Fund's relative performance. Thank you for your continued participation in Franklin Small-Mid Cap Growth Fund. We look forward to serving your future investment needs. /s/ Edward B. Jamieson [PHOTO OMITTED] Edward B. Jamieson Portfolio Manager Franklin Small-Mid Cap Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2005, 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 ADVISER 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. TOP 10 HOLDINGS Franklin Small-Mid Cap Growth Fund 10/31/05 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- Chesapeake Energy Corp. 2.1% ENERGY MINERALS - -------------------------------------------------------------------------------- National-Oilwell Varco Inc. 2.0% INDUSTRIAL SERVICES - -------------------------------------------------------------------------------- Newfield Exploration Co. 1.8% ENERGY MINERALS - -------------------------------------------------------------------------------- Cognizant Technology Solutions Corp., A 1.7% TECHNOLOGY SERVICES - -------------------------------------------------------------------------------- Embraer-Empresa Brasileira de Aeronautica SA, ADR (Brazil) 1.6% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Expeditors International of Washington Inc. 1.6% TRANSPORTATION - -------------------------------------------------------------------------------- Microchip Technology Inc. 1.6% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Gentex Corp. 1.5% PRODUCER MANUFACTURING - -------------------------------------------------------------------------------- Federated Investors Inc., B 1.5% FINANCE - -------------------------------------------------------------------------------- Bunge Ltd. 1.4% PROCESS INDUSTRIES - -------------------------------------------------------------------------------- Semiannual Report | 31 PERFORMANCE SUMMARY AS OF 10/31/05 FRANKLIN SMALL-MID CAP 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 does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION - -------------------------------------------------------------------------------- CLASS A (SYMBOL: FRSGX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.47 $35.78 $31.31 - -------------------------------------------------------------------------------- CLASS B (SYMBOL: FBSMX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.24 $34.89 $30.65 - -------------------------------------------------------------------------------- CLASS C (SYMBOL: FRSIX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.13 $33.95 $29.82 - -------------------------------------------------------------------------------- CLASS R (SYMBOL: FSMRX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.38 $35.42 $31.04 - -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FSGAX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.57 $36.28 $31.71 - -------------------------------------------------------------------------------- 32 | Semiannual Report PERFORMANCE SUMMARY (CONTINUED) PERFORMANCE 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: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ------------------------------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +14.28% +14.42% -22.34% +149.06% - ------------------------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +7.71% +7.84% -6.05% +8.91% - ------------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,771 $10,784 $7,320 $23,476 - ------------------------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +14.26% -7.12% +8.73% - ------------------------------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 3-YEAR INCEPTION (7/1/02) - ------------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +13.83% +13.57% +60.86% +43.40% - ------------------------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +9.83% +9.57% +16.44% +10.71% - ------------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,983 $10,957 $15,786 $14,040 - ------------------------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +16.30% +20.72% +11.84% - ------------------------------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +13.85% +13.47% -25.20% +131.21% - ------------------------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +12.85% +12.47% -5.64% +8.74% - ------------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $11,285 $11,247 $7,480 $23,121 - ------------------------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +19.23% -6.72% +8.71% - ------------------------------------------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02) - ------------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +14.11% +14.11% +63.23% +13.67% - ------------------------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +13.11% +13.11% +17.74% +3.40% - ------------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $11,311 $11,311 $16,323 $11,367 - ------------------------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +19.91% +21.98% +4.13% - ------------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS(5) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +14.41% +14.70% -21.42% +157.88% - ------------------------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +14.41% +14.70% -4.71% +9.94% - ------------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $11,441 $11,470 $7,858 $25,788 - ------------------------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +21.54% -5.79% +9.75% - -------------------------------------------------------------------------------------------------------------------------
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. Semiannual Report | 33 PERFORMANCE SUMMARY (CONTINUED) ENDNOTES SMALL AND MIDSIZE COMPANY STOCKS CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM. SMALLER OR RELATIVELY NEW COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS AND THEIR GROWTH PROSPECTS ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES. THE FUND'S PORTFOLIO INCLUDES INVESTMENTS IN TECHNOLOGY, WHICH HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS AND INVOLVES SPECIAL RISKS. 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 and does not include a sales charge. (2) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. (3) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. (4) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (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 +94.38% and +7.82%. 34 | Semiannual Report YOUR FUND'S EXPENSES FRANKLIN SMALL-MID CAP 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 below 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. Semiannual 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 4/30/05 VALUE 10/31/05 PERIOD* 4/30/05-10/31/05 - ----------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,142.80 $5.29 - ----------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.27 $4.99 - ----------------------------------------------------------------------------------------------------------------- CLASS B - ----------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,138.30 $9.32 - ----------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.48 $8.79 - ----------------------------------------------------------------------------------------------------------------- CLASS C - ----------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,138.50 $9.33 - ----------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.48 $8.79 - ----------------------------------------------------------------------------------------------------------------- CLASS R - ----------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,141.10 $6.64 - ----------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.00 $6.26 - ----------------------------------------------------------------------------------------------------------------- ADVISOR CLASS - ----------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,144.10 $3.95 - ----------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.53 $3.72 - -----------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.98%; B: 1.73%; C: 1.73%; R: 1.23%; and Advisor: 0.73%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 36 | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS FRANKLIN AGGRESSIVE GROWTH FUND
------------------------------------------------------------------------------ SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS A (UNAUDITED) 2005 2004 2003 2002 2001 ------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................ $ 13.33 $ 12.57 $ 9.50 $ 12.39 $ 15.30 $ 25.22 ------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) .................... (0.08) (0.14) (0.15) (0.13) (0.15) (0.17) Net realized and unrealized gains (losses) ......... 2.18 0.90 3.22 (2.76) (2.76) (9.74) ------------------------------------------------------------------------- Total from investment operations .................... 2.10 0.76 3.07 (2.89) (2.91) (9.91) ------------------------------------------------------------------------- Less distributions from net realized gains .......... -- -- -- -- -- (0.01) ------------------------------------------------------------------------- Redemption fees ..................................... --(c) --(c) -- -- -- -- ------------------------------------------------------------------------- Net asset value, end of period ...................... $ 15.43 $ 13.33 $ 12.57 $ 9.50 $ 12.39 $ 15.30 ========================================================================= Total return(b) ..................................... 15.75% 6.05% 32.32% (23.33)% (19.02)% (39.31)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................... $87,509 $80,611 $86,983 $67,934 $100,240 $127,678 Ratios to average net assets: Expenses ........................................... 1.48%(d) 1.51% 1.62% 1.80% 1.57% 1.35% Expenses net of waiver and payments by affiliate ..................................... 1.48%(d) 1.51% 1.62% 1.80% 1.50% 1.25% Net investment income (loss) ....................... (1.10)%(d) (1.05)% (1.26)% (1.35)% (1.12)% (0.77)% Portfolio turnover rate ............................. 94.29% 157.48% 114.66% 93.49% 120.87% 157.74%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 37 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN AGGRESSIVE GROWTH FUND (CONTINUED)
------------------------------------------------------------------------------ SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS B (UNAUDITED) 2005 2004 2003 2002 2001 ------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 12.87 $ 12.22 $ 9.30 $ 12.20 $ 15.17 $ 25.18 ------------------------------------------------------------------------ Income from investment operations: Net investment income (loss)(a) ................ (0.13) (0.23) (0.22) (0.19) (0.23) (0.31) Net realized and unrealized gains (losses) ..... 2.10 0.88 3.14 (2.71) (2.74) (9.69) ------------------------------------------------------------------------ Total from investment operations ................ 1.97 0.65 2.92 (2.90) (2.97) (10.00) ------------------------------------------------------------------------ Less distributions from net realized gains ...... -- -- -- -- -- (0.01) ------------------------------------------------------------------------ Redemption fees ................................. --(c) --(c) -- -- -- -- ------------------------------------------------------------------------ Net asset value, end of period .................. $ 14.84 $ 12.87 $ 12.22 $ 9.30 $ 12.20 $ 15.17 ======================================================================== Total return(b) ................................. 15.31% 5.32% 31.40% (23.77)% (19.58)% (39.73)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $17,048 $17,017 $18,059 $13,100 $20,259 $27,587 Ratios to average net assets: Expenses ....................................... 2.21%(d) 2.21% 2.28% 2.47% 2.24% 2.00% Expenses net of waiver and payments by affiliate ................................. 2.21%(d) 2.21% 2.28% 2.47% 2.17% 1.90% Net investment income (loss) ................... (1.83)%(d) (1.75)% (1.92)% (2.02)% (1.78)% (1.42)% Portfolio turnover rate ......................... 94.29% 157.48% 114.66% 93.49% 120.87% 157.74%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 38 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN AGGRESSIVE GROWTH FUND (CONTINUED)
------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS C (UNAUDITED) 2005 2004 2003 2002 2001 ------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 12.84 $ 12.19 $ 9.28 $ 12.18 $ 15.14 $ 25.12 ------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ................. (0.13) (0.23) (0.22) (0.19) (0.23) (0.31) Net realized and unrealized gains (losses) ...... 2.10 0.88 3.13 (2.71) (2.73) (9.66) ------------------------------------------------------------------------- Total from investment operations ................. 1.97 0.65 2.91 (2.90) (2.96) (9.97) ------------------------------------------------------------------------- Less distributions from net realized gains ....... -- -- -- -- -- (0.01) ------------------------------------------------------------------------- Redemption fees .................................. --(c) --(c) -- -- -- -- ------------------------------------------------------------------------- Net asset value, end of period ................... $ 14.81 $ 12.84 $ 12.19 $ 9.28 $ 12.18 $ 15.14 ========================================================================= Total return(b) .................................. 15.34% 5.33% 31.36% (23.81)% (19.55)% (39.71)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $25,784 $24,450 $30,054 $25,660 $40,877 $60,294 Ratios to average net assets: Expenses ........................................ 2.21%(d) 2.22% 2.29% 2.48% 2.24% 1.99% Expenses net of waiver and payments by affiliate ................................. 2.21%(d) 2.22% 2.29% 2.48% 2.17% 1.89% Net investment income (loss) .................... (1.83)%(d) (1.76)% (1.93)% (2.03)% (1.77)% (1.41)% Portfolio turnover rate .......................... 94.29% 157.48% 114.66% 93.49% 120.87% 157.74%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 39 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN AGGRESSIVE GROWTH FUND (CONTINUED)
------------------------------------------------------------------------ SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS R (UNAUDITED) 2005 2004 2003 2002(e) ------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................ $13.24 $ 12.51 $ 9.47 $ 12.38 $ 13.75 ----------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) .................... (0.10) (0.17) (0.17) (0.14) (0.06) Net realized and unrealized gains (losses) ......... 2.17 0.90 3.21 (2.77) (1.31) ----------------------------------------------------------------- Total from investment operations .................... 2.07 0.73 3.04 (2.91) (1.37) ----------------------------------------------------------------- Redemption fees ..................................... --(c) --(c) -- -- -- ----------------------------------------------------------------- Net asset value, end of period ...................... $15.31 $ 13.24 $ 12.51 $ 9.47 $ 12.38 ================================================================= Total return(b) ..................................... 15.63% 5.84% 32.10% (23.51)% (9.96)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................... $3,625 $ 3,041 $ 1,761 $ 608 $ 53 Ratios to average net assets: Expenses ........................................... 1.70%(d) 1.72% 1.79% 1.98% 1.75%(d) Net investment income (loss) ....................... (1.32)%(d) (1.26)% (1.43)% (1.53)% (1.48)%(d) Portfolio turnover rate ............................. 94.29% 157.48% 114.66% 93.49% 120.87%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the period January 1, 2002 (effective date) to April 30, 2002. 40 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN AGGRESSIVE GROWTH FUND (CONTINUED)
------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, ADVISOR CLASS (UNAUDITED) 2005 2004 2003 2002 2001 ------------------------------------------------------------------------------- Per share operating performance (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 13.58 $ 12.77 $ 9.62 $ 12.51 $ 15.40 $ 25.31 -------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ................. (0.06) (0.10) (0.11) (0.10) (0.10) (0.09) Net realized and unrealized gains (losses) ...... 2.22 0.91 3.26 (2.79) (2.79) (9.81) -------------------------------------------------------------------------- Total from investment operations ................. 2.16 0.81 3.15 (2.89) (2.89) (9.90) -------------------------------------------------------------------------- Less distributions from net realized gains ....... -- -- -- -- -- (0.01) -------------------------------------------------------------------------- Redemption fees .................................. --(c) --(c) -- -- -- -- -------------------------------------------------------------------------- Net asset value, end of period ................... $ 15.74 $ 13.58 $ 12.77 $ 9.62 $ 12.51 $ 15.40 ========================================================================== Total return(b) .................................. 15.91% 6.34% 32.74% (23.10)% (18.77)% (39.13)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $26,491 $22,731 $22,374 $17,369 $10,839 $22,276 Ratios to average net assets: Expenses ........................................ 1.22%(d) 1.22% 1.29% 1.48% 1.25% 1.00% Expenses net of waiver and payments by affiliate ................................. 1.22%(d) 1.22% 1.29% 1.48% 1.18% 0.90% Net investment income (loss) .................... (0.84)%(d) (0.76)% (0.93)% (1.03)% (0.77)% (0.42)% Portfolio turnover rate .......................... 94.29% 157.48% 114.66% 93.49% 120.87% 157.74%
(a) Based on average daily shares outstanding. (b) Total return is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 41 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN AGGRESSIVE GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS 94.3% COMMERCIAL SERVICES 6.6% (a)Concur Technologies Inc. .................................................................. 71,100 $ 960,561 Corporate Executive Board Co. ............................................................. 29,300 2,421,352 (a)Getty Images Inc. ......................................................................... 18,200 1,510,782 (a)Laureate Education Inc. ................................................................... 42,000 2,074,800 Moody's Corp. ............................................................................. 53,600 2,854,736 (a)Ultimate Software Group Inc. .............................................................. 47,100 800,229 ------------- 10,622,460 ------------- COMMUNICATIONS 3.2% (a)NII Holdings Inc. ......................................................................... 31,900 2,645,148 (a)West Corp. ................................................................................ 62,800 2,477,460 ------------- 5,122,608 ------------- CONSUMER DURABLES 0.9% Harman International Industries Inc. ...................................................... 14,900 1,487,914 ------------- CONSUMER NON-DURABLES 1.3% (a)Coach Inc. ................................................................................ 65,000 2,091,700 ------------- CONSUMER SERVICES 7.4% (a)Apollo Group Inc., A ...................................................................... 37,100 2,338,042 (a)eBay Inc. ................................................................................. 30,900 1,223,640 (a)Pixar ..................................................................................... 54,500 2,764,785 (a)Starbucks Corp. ........................................................................... 100,400 2,839,312 Station Casinos Inc. ...................................................................... 30,200 1,935,820 (a)XM Satellite Radio Holdings Inc., A ....................................................... 23,200 668,856 ------------- 11,770,455 ------------- DISTRIBUTION SERVICES 0.6% (a)MWI Veterinary Supply Inc. ................................................................ 39,684 889,715 ------------- ELECTRONIC TECHNOLOGY 21.6% (a)Apple Computer Inc. ....................................................................... 90,500 5,211,895 (a)Avocent Corp. ............................................................................. 35,500 1,088,430 (a)Broadcom Corp., A ......................................................................... 18,000 764,280 (a)Corning Inc. .............................................................................. 128,600 2,583,574 (a)Dell Inc. ................................................................................. 82,600 2,633,288 (a)FormFactor Inc. ........................................................................... 46,800 1,152,216 Harris Corp. .............................................................................. 68,600 2,819,460 (a)Marvell Technology Group Ltd. (Bermuda) ................................................... 62,600 2,905,266 Microchip Technology Inc. ................................................................. 42,400 1,279,208 (a)Microsemi Corp. ........................................................................... 95,400 2,210,418 (a)Network Appliance Inc. .................................................................... 182,800 5,001,408 QUALCOMM Inc. ............................................................................. 64,600 2,568,496 (a)Research in Motion Ltd. (Canada) .......................................................... 12,100 744,029 (a)Silicon Laboratories Inc. ................................................................. 58,500 1,881,945 (a)Trimble Navigation Ltd. ................................................................... 37,200 1,073,964 (a)Varian Semiconductor Equipment Associates Inc. ............................................ 18,300 692,106 ------------- 34,609,983 -------------
42 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN AGGRESSIVE GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONT.) ENERGY MINERALS 1.7% (a)Newfield Exploration Co. .................................................................. 24,400 $ 1,106,052 XTO Energy Inc. ........................................................................... 37,800 1,642,788 ------------- 2,748,840 ------------- FINANCE 4.3% BlackRock Inc., A ......................................................................... 19,000 1,801,200 Chicago Mercantile Exchange ............................................................... 8,700 3,176,805 East West Bancorp Inc. .................................................................... 51,500 1,971,935 ------------- 6,949,940 ------------- HEALTH SERVICES 6.2% (a)Caremark Rx Inc. .......................................................................... 47,700 2,499,480 (a)Psychiatric Solutions Inc. ................................................................ 35,600 1,947,320 (a)Stericycle Inc. ........................................................................... 26,600 1,531,096 (a)United Surgical Partners International Inc. ............................................... 48,350 1,733,348 (a)WellPoint Inc. ............................................................................ 30,700 2,292,676 ------------- 10,003,920 ------------- HEALTH TECHNOLOGY 12.9% (a)Amgen Inc. ................................................................................ 40,500 3,068,280 (a)Celgene Corp. ............................................................................. 36,700 2,058,870 (a)Endo Pharmaceuticals Holdings Inc. ........................................................ 59,100 1,590,972 (a)Genentech Inc. ............................................................................ 8,900 806,340 (a)Illumina Inc. ............................................................................. 53,800 837,666 (a)Intuitive Surgical Inc. ................................................................... 11,000 976,030 (a)IVAX Corp. ................................................................................ 56,400 1,610,220 (a)Kyphon Inc. ............................................................................... 31,000 1,242,790 (a)Panacos Pharmaceuticals Inc. .............................................................. 38,300 302,570 (a)Respironics Inc. .......................................................................... 58,200 2,087,633 Roche Holding AG, ADR (Switzerland) ....................................................... 44,200 3,306,160 (a)St. Jude Medical Inc. ..................................................................... 57,400 2,759,218 ------------- 20,646,749 ------------- INDUSTRIAL SERVICES 2.7% (a)Bronco Drilling Co. Inc. .................................................................. 21,200 513,888 (a)Cal Dive International Inc. ............................................................... 33,400 2,055,436 (a)FMC Technologies Inc. ..................................................................... 49,300 1,797,478 ------------- 4,366,802 ------------- PROCESS INDUSTRIES 1.0% (a)Headwaters Inc. ........................................................................... 49,100 1,563,344 ------------- PRODUCER MANUFACTURING 2.5% (a)Evergreen Solar Inc. ...................................................................... 46,300 381,975 (a)Gehl Co. .................................................................................. 35,900 824,623 Oshkosh Truck Corp. ....................................................................... 63,700 2,774,772 ------------- 3,981,370 -------------
Semiannual Report | 43 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN AGGRESSIVE GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONT.) RETAIL TRADE 5.4% Fastenal Co. .............................................................................. 17,100 $ 1,199,223 Lowe's Cos. Inc. .......................................................................... 38,700 2,351,799 (a)Urban Outfitters Inc. ..................................................................... 65,800 1,864,114 Whole Foods Market Inc. ................................................................... 14,000 2,017,820 (a)Zumiez Inc. ............................................................................... 37,700 1,287,078 ------------ 8,720,034 ------------ TECHNOLOGY SERVICES 13.9% (a)Alliance Data Systems Corp. ............................................................... 36,300 1,290,828 Autodesk Inc. ............................................................................. 44,200 1,994,746 (a)Cognizant Technology Solutions Corp., A ................................................... 123,500 5,431,530 (a)Google Inc., A ............................................................................ 14,100 5,247,174 (a)Neustar Inc., A ........................................................................... 73,600 2,252,160 (a)Salesforce.com Inc. ....................................................................... 71,600 1,789,284 (a)SRA International Inc., A ................................................................. 56,200 1,844,484 (a)Yahoo! Inc. ............................................................................... 67,800 2,506,566 ------------ 22,356,772 ------------ TRANSPORTATION 2.1% Expeditors International of Washington Inc. ............................................... 26,300 1,595,621 Knight Transportation Inc. ................................................................ 49,100 1,336,011 (a)Republic Airways Holdings Inc. ............................................................ 26,700 416,521 ------------ 3,348,153 ------------ TOTAL COMMON STOCKS (COST $123,086,377) ................................................... 151,280,759 ------------ SHORT TERM INVESTMENT (COST $7,120,731) 4.4% MONEY FUND 4.4% (b)Franklin Institutional Fiduciary Trust Money Market Portfolio ............................. 7,120,731 7,120,731 ------------ TOTAL INVESTMENTS (COST $130,207,108) 98.7% ............................................... 158,401,490 OTHER ASSETS, LESS LIABILITIES 1.3% ....................................................... 2,054,544 ------------ NET ASSETS 100.0% ......................................................................... $160,456,034 ============
See Selected Portfolio Abbreviations on page 75. (a) Non-income producing. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. 44 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS FRANKLIN FLEX CAP GROWTH FUND
--------------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS A (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ... $ 35.26 $ 33.76 $ 25.56 $ 30.71 $ 34.05 $ 50.15 ------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ....... (0.02) (0.10) (0.09) (0.08) (0.09) -- Net realized and unrealized gains (losses) ............................ 2.68 1.60 8.29 (5.07) (3.25) (13.47) ------------------------------------------------------------------------------------- Total from investment operations ....... 2.66 1.50 8.20 (5.15) (3.34) (13.47) ------------------------------------------------------------------------------------- Less distributions from: Net investment income ................. -- -- -- -- -- (0.19) Net realized gains .................... -- -- -- -- -- (2.44) ------------------------------------------------------------------------------------- Total distributions .................... -- -- -- -- -- (2.63) ------------------------------------------------------------------------------------- Redemption fees ........................ --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------------- Net asset value, end of period ......... $ 37.92 $ 35.26 $ 33.76 $ 25.56 $ 30.71 $ 34.05 ===================================================================================== Total return(b) ........................ 7.54% 4.44% 32.08% (16.77)% (9.81)% (27.84)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ...... $1,823,312 $1,505,342 $1,456,685 $1,025,348 $1,398,753 $1,680,032 Ratios to average net assets: Expenses .............................. 0.93%(d) 0.96% 1.01% 1.07% 1.00% 0.88% Net investment income (loss) .......... (0.13)%(d) (0.29)% (0.29)% (0.31)% (0.29)% -- Portfolio turnover rate ................ 32.76% 41.91% 39.92% 32.93% 48.55% 35.47%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 45 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLEX CAP GROWTH FUND (CONTINUED)
------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS B (UNAUDITED) 2005 2004 2003 2002 2001 ------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 33.59 $ 32.40 $ 24.72 $ 29.92 $ 33.43 $ 49.64 --------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ................ (0.16) (0.35) (0.31) (0.26) (0.32) (0.33) Net realized and unrealized gains (losses) ..... 2.56 1.54 7.99 (4.94) (3.19) (13.25) --------------------------------------------------------------------------- Total from investment operations ................ 2.40 1.19 7.68 (5.20) (3.51) (13.58) --------------------------------------------------------------------------- Less distributions from: Net investment income .......................... -- -- -- -- -- (0.19) Net realized gains ............................. -- -- -- -- -- (2.44) --------------------------------------------------------------------------- Total distributions ............................. -- -- -- -- -- (2.63) --------------------------------------------------------------------------- Redemption fees ................................. --(c) --(c) -- -- -- -- --------------------------------------------------------------------------- Net asset value, end of period .................. $ 35.99 $ 33.59 $ 32.40 $ 24.72 $ 29.92 $ 33.43 =========================================================================== Total return(b) ................................. 7.15% 3.67% 31.07% (17.38)% (10.50)% (28.36)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $135,442 $136,052 $134,589 $92,632 $116,075 $119,847 Ratios to average net assets: Expenses ....................................... 1.68%(d) 1.70% 1.76% 1.82% 1.75% 1.63% Net investment income (loss) ................... (0.88)%(d) (1.03)% (1.04)% (1.06)% (1.05)% (0.76)% Portfolio turnover rate ......................... 32.76% 41.91% 39.92% 32.93% 48.55% 35.47%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 46 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLEX CAP GROWTH FUND (CONTINUED)
-------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS C (UNAUDITED) 2005 2004 2003 2002 2001 -------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 33.66 $ 32.47 $ 24.77 $ 29.98 $ 33.50 $ 49.55 ---------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ................ (0.16) (0.35) (0.31) (0.26) (0.32) (0.34) Net realized and unrealized gains (losses) ..... 2.56 1.54 8.01 (4.95) (3.20) (13.27) ---------------------------------------------------------------------------- Total from investment operations ................ 2.40 1.19 7.70 (5.21) (3.52) (13.61) ---------------------------------------------------------------------------- Less distributions from net realized gains ...... -- -- -- -- -- (2.44) ---------------------------------------------------------------------------- Redemption fees ................................. --(c) --(c) -- -- -- -- ---------------------------------------------------------------------------- Net asset value, end of period .................. $ 36.06 $ 33.66 $ 32.47 $ 24.77 $ 29.98 $ 33.50 ============================================================================ Total return(b) ................................. 7.13% 3.67% 31.09% (17.38)% (10.51)% (28.39)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $332,536 $296,868 $298,114 $219,023 $299,840 $370,165 Ratios to average net assets: Expenses ....................................... 1.68%(d) 1.71% 1.76% 1.82% 1.74% 1.63% Net investment income (loss) ................... (0.88)%(d) (1.04)% (1.04)% (1.06)% (1.04)% (0.74)% Portfolio turnover rate ......................... 32.76% 41.91% 39.92% 32.93% 48.55% 35.47%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 47 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLEX CAP GROWTH FUND (CONTINUED)
--------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS R (UNAUDITED) 2005 2004 2003 2002(e) --------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................... $ 34.98 $ 33.57 $ 25.49 $ 30.68 $ 31.84 ----------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ....................... (0.07) (0.19) (0.18) (0.16) (0.12) Net realized and unrealized gains (losses) ............ 2.66 1.60 8.26 (5.03) (1.04) ----------------------------------------------------------------- Total from investment operations ....................... 2.59 1.41 8.08 (5.19) (1.16) ----------------------------------------------------------------- Redemption fees ........................................ --(c) --(c) -- -- -- ----------------------------------------------------------------- Net asset value, end of period ......................... $ 37.57 $ 34.98 $ 33.57 $ 25.49 $ 30.68 ================================================================= Total return(b) ........................................ 7.40% 4.20% 31.70% (16.92)% (3.64)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ...................... $ 82,429 $ 69,103 $ 44,988 $ 15,123 $ 443 Ratios to average net assets: Expenses .............................................. 1.18%(d) 1.21% 1.26% 1.32% 1.24%(d) Net investment income (loss) .......................... (0.38)%(d) (0.54)% (0.54)% (0.56)% (1.21)%(d) Portfolio turnover rate ................................ 32.76% 41.91% 39.92% 32.93% 48.55%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the period January 1, 2002 (effective date) to April 30, 2002. 48 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLEX CAP GROWTH FUND (CONTINUED)
----------------------------------- SIX MONTHS ENDED PERIOD ENDED OCTOBER 31, 2005 APRIL 30, ADVISOR CLASS (UNAUDITED) 2005(e) ----------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................................... $ 35.32 $ 33.35 ------------------------------ Income from investment operations: Net investment income (loss)(a) .............................................. 0.02 (0.01) Net realized and unrealized gains (losses) ................................... 2.69 1.98 ------------------------------ Total from investment operations .............................................. 2.71 1.97 ------------------------------ Redemption fees ............................................................... --(c) --(c) ------------------------------ Net asset value, end of period ................................................ $ 38.03 $ 35.32 ============================== Total return(b) ............................................................... 7.67% 5.91% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............................................. $128,096 $71,193 Ratios to average net assets: Expenses ..................................................................... 0.68%(d) 0.71%(d) Net investment income (loss) ................................................. 0.12%(d) (0.04)%(d) Portfolio turnover rate ....................................................... 32.76% 41.91%
(a) Based on average daily shares outstanding. (b) Total return is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the period August 2, 2004 (effective date) to April 30, 2005. Semiannual Report | See notes to financial statements. | 49 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS 95.4% COMMERCIAL SERVICES 2.4% Moody's Corp. ........................................................................... 700,000 $ 37,282,000 Robert Half International Inc. .......................................................... 629,300 23,208,584 ------------- 60,490,584 ------------- COMMUNICATIONS 1.9% America Movil SA de CV, L, ADR (Mexico) ................................................. 950,000 24,937,500 (a)NII Holdings Inc. ....................................................................... 275,000 22,803,000 ------------- 47,740,500 ------------- CONSUMER DURABLES 2.8% (a)Activision Inc. ......................................................................... 1,600,000 25,232,000 (a)Electronic Arts Inc. .................................................................... 300,000 17,064,000 Harman International Industries Inc. .................................................... 275,000 27,461,500 ------------- 69,757,500 ------------- CONSUMER NON-DURABLES 1.9% PepsiCo Inc. ............................................................................ 419,500 24,784,060 Procter & Gamble Co. .................................................................... 423,600 23,717,364 ------------- 48,501,424 ------------- CONSUMER SERVICES 4.1% (a),(b)Apollo Group Inc., A .................................................................... 225,000 14,179,500 (a)eBay Inc. ............................................................................... 850,000 33,660,000 (a)Entravision Communications Corp. ........................................................ 1,250,000 10,250,000 (a)Global Cash Access LLC .................................................................. 103,600 1,452,472 (a),(b)Pixar ................................................................................... 450,000 22,828,500 (a),(b)XM Satellite Radio Holdings Inc., A ..................................................... 650,000 18,739,500 ------------- 101,109,972 ------------- ELECTRONIC TECHNOLOGY 16.2% (a)Apple Computer Inc. ..................................................................... 750,000 43,192,500 (a)Cisco Systems Inc. ...................................................................... 1,000,000 17,450,000 (a)Dell Inc. ............................................................................... 850,000 27,098,000 Harris Corp. ............................................................................ 399,500 16,419,450 Intel Corp. ............................................................................. 700,000 16,450,000 KLA-Tencor Corp. ........................................................................ 340,900 15,780,261 L-3 Communications Holdings Inc. ........................................................ 200,000 15,564,000 (a)Lam Research Corp. ...................................................................... 839,000 28,307,860 Linear Technology Corp. ................................................................. 400,000 13,284,000 (a)Marvell Technology Group Ltd. (Bermuda) ................................................. 800,000 37,128,000 Microchip Technology Inc. ............................................................... 850,000 25,644,500 (a)Microsemi Corp. ......................................................................... 750,000 17,377,500 QUALCOMM Inc. ........................................................................... 850,000 33,796,000 Rockwell Automation Inc. ................................................................ 734,100 39,017,415 Rockwell Collins Inc. ................................................................... 850,000 38,947,000 (a),(b)Vitesse Semiconductor Corp. ............................................................. 4,500,000 7,425,000 Xilinx Inc. ............................................................................. 500,000 11,975,000 ------------- 404,856,486 -------------
50 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONT.) ENERGY MINERALS 5.0% Apache Corp. ............................................................................ 750,000 $ 47,872,500 ExxonMobil Corp. ........................................................................ 550,000 30,877,000 Peabody Energy Corp. .................................................................... 300,000 23,448,000 XTO Energy Inc. ......................................................................... 550,000 23,903,000 ------------- 126,100,500 ------------- FINANCE 11.3% Calamos Asset Management Inc., A ........................................................ 600,000 14,574,000 (a),(b)CapitalSource Inc. ...................................................................... 1,258,500 27,687,000 Chicago Mercantile Exchange ............................................................. 55,000 20,083,250 City National Corp. ..................................................................... 419,500 30,782,910 Countrywide Financial Corp. ............................................................. 399,998 12,707,936 (a)E*TRADE Financial Corp. ................................................................. 2,000,000 37,100,000 Golden West Financial Corp. ............................................................. 372,000 21,847,560 National Financial Partners Corp. ....................................................... 500,000 22,615,000 (b)Nuveen Investments Inc. ................................................................. 600,000 24,282,000 The PMI Group Inc. ...................................................................... 262,200 10,456,536 ProLogis ................................................................................ 220,411 9,477,673 UCBH Holdings Inc. ...................................................................... 1,048,800 18,249,120 Wells Fargo & Co. ....................................................................... 550,000 33,110,000 ------------- 282,972,985 ------------- HEALTH SERVICES 8.7% (a)Community Health Systems Inc. ........................................................... 1,050,000 38,965,500 (a)Express Scripts Inc. .................................................................... 550,000 41,475,500 Quest Diagnostics Inc. .................................................................. 419,500 19,594,845 (a)Stericycle Inc. ......................................................................... 500,000 28,780,000 (a)United Surgical Partners International Inc. ............................................. 300,000 10,755,000 (a)VCA Antech Inc. ......................................................................... 1,900,000 49,020,000 (a)WellPoint Inc. .......................................................................... 400,000 29,872,000 ------------- 218,462,845 ------------- HEALTH TECHNOLOGY 15.4% (a)Amgen Inc. ............................................................................. 850,000 64,396,000 (b)Biomet Inc. ............................................................................. 550,000 19,156,500 Cooper Cos. Inc. ........................................................................ 275,000 18,931,000 (a)Endo Pharmaceuticals Holdings Inc. ...................................................... 84,800 2,282,816 (a)Genentech Inc. .......................................................................... 269,300 24,398,580 (a)Gilead Sciences Inc. .................................................................... 550,000 25,987,500 (a)Invitrogen Corp. ........................................................................ 450,000 28,615,500 Johnson & Johnson ....................................................................... 629,300 39,406,766 (a)Kinetic Concepts Inc. ................................................................... 200,000 7,180,000 (a),(b)Nuvelo Inc. ............................................................................. 667,300 5,605,320 (a)ResMed Inc. ............................................................................. 900,000 34,317,000 (a)St. Jude Medical Inc. ................................................................... 850,000 40,859,500 (a)Varian Medical Systems Inc. ............................................................. 1,048,800 47,783,328 (a)Zimmer Holdings Inc. .................................................................... 400,000 25,508,000 ------------- 384,427,810 -------------
Semiannual Report | 51 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONT.) INDUSTRIAL SERVICES 3.9% (a)Cal Dive International Inc. ........................................................... 550,000 $ 33,847,000 (a)Dresser-Rand Group Inc. ............................................................... 750,000 16,275,000 (a)Jacobs Engineering Group Inc. ......................................................... 340,900 21,732,375 Smith International Inc. .............................................................. 800,000 25,920,000 -------------- 97,774,375 -------------- PROCESS INDUSTRIES 3.5% Bunge Ltd. ............................................................................ 297,300 15,441,762 Ecolab Inc. ........................................................................... 524,400 17,347,152 (a)Headwaters Inc. ....................................................................... 900,000 28,656,000 Praxair Inc. .......................................................................... 500,000 24,705,000 -------------- 86,149,914 -------------- REAL ESTATE INVESTMENT TRUSTS 1.0% Alexandria Real Estate Equities Inc. .................................................. 312,300 25,249,455 -------------- RETAIL TRADE 4.2% Big 5 Sporting Goods Corp. ............................................................ 499,900 11,087,782 (a)Chico's FAS Inc. ...................................................................... 524,400 20,734,776 Lowe's Cos. Inc. ...................................................................... 200,000 12,154,000 (a)Pacific Sunwear of California Inc. .................................................... 650,000 16,263,000 Target Corp. .......................................................................... 250,000 13,922,500 Walgreen Co. .......................................................................... 650,000 29,529,500 -------------- 103,691,558 -------------- TECHNOLOGY SERVICES 10.7% (b)Adobe Systems Inc. .................................................................... 300,000 9,675,000 Autodesk Inc. ......................................................................... 700,000 31,591,000 (a)Cognizant Technology Solutions Corp., A ............................................... 681,700 29,981,166 (a)Cognos Inc. (Canada) .................................................................. 450,000 16,888,500 Fair Isaac Corp. ...................................................................... 400,000 16,704,000 First Data Corp. ...................................................................... 250,000 10,112,500 (a)Google Inc., A ........................................................................ 125,000 46,517,500 Infosys Technologies Ltd., ADR (India) ................................................ 325,000 22,100,000 Microsoft Corp. ....................................................................... 700,000 17,990,000 Paychex Inc. .......................................................................... 524,400 20,325,744 (a)Yahoo! Inc. ........................................................................... 1,250,000 46,212,500 -------------- 268,097,910 -------------- TRANSPORTATION 2.1% C.H. Robinson Worldwide Inc. .......................................................... 237,000 8,356,620 Expeditors International of Washington Inc. ........................................... 734,100 44,537,847 -------------- 52,894,467 -------------- UTILITIES 0.3% American States Water Co. ............................................................. 262,200 8,217,348 -------------- TOTAL COMMON STOCKS (COST $1,845,525,718) ............................................. 2,386,495,633 --------------
52 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS 0.6% ELECTRONIC TECHNOLOGY 0.0% (a),(c)Anda Networks, cvt. pfd., D ................................................................ 145,772 $ -- (a),(c)Kestrel Solutions, cvt. pfd., D ............................................................ 124,712 -- --------------- -- --------------- HEALTH TECHNOLOGY 0.6% (a),(c)Fibrogen Inc., cvt. pfd., E ................................................................ 2,227,171 10,133,628 (a),(c)Masimo Corp., cvt. pfd., F ................................................................. 772,727 4,249,999 --------------- 14,383,627 --------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $22,124,992) ...................................... 14,383,627 --------------- TOTAL LONG TERM INVESTMENTS (COST $1,867,650,710) .......................................... 2,400,879,260 --------------- SHORT TERM INVESTMENTS 4.6% MONEY FUND (COST $68,421,431) 2.7% (d)Franklin Institutional Fiduciary Trust Money Market Portfolio .............................. 68,421,431 68,421,431 --------------- ---------------- PRINCIPAL AMOUNT ---------------- REPURCHASE AGREEMENTS 1.9% (e),(f)Banc of America Securities LLC, 4.04%, 11/01/05 (Maturity Value $8,000,898) Collateralized by U.S. Goverment Agency Securities, 5.00%, 6/01/35 ........................ $ 8,000,000 8,000,000 (e),(f)Bear, Stearns & Co. Inc., 4.02%, 11/01/05 (Maturity Value $8,000,893) Collateralized by U.S. Government Agency Securities, 1.875 - 8.25%, 2/15/06 - 9/11/28; (g)U.S. Government Agency Discount Notes, 11/29/05 - 1/19/06 ............................. 8,000,000 8,000,000 (e),(f)Citigroup Global Markets Inc., 4.03%, 11/01/05, (Maturity Value $8,000,896) Collateralized by U.S. Government Agency Securities, 0.875 - 13.25%, 11/07/05 - 8/06/38; (g)U.S. Government Agency Discount Notes, 11/01/05 - 5/15/30 ............................. 8,000,000 8,000,000 (e),(f)Deutsche Bank Securities Inc., 4.03%, 11/01/05 (Maturity Value $8,000,896) Collateralized by U.S. Government Agency Securities, 3.647 - 7.00%, 4/25/17 - 10/25/35 .... 8,000,000 8,000,000 (e),(f)J. P. Morgan Securities Inc., 4.02%, 11/01/05 (Maturity Value $8,000,893) Collateralized by U.S. Goverment Agency Securities, 1.66 - 8.875%, 12/15/05 - 7/15/32; (g)U.S. Government Agency Discount Notes, 11/24/14 - 12/11/25 ............................ 8,000,000 8,000,000 (e),(f)Morgan Stanley & Co. Inc., 4.04%, 11/01/05 (Maturity Value $8,028,901) Collateralized by U.S. Goverment Agency Securities, 5.00 - 6.00%, 8/01/33 - 7/01/35 ....... 8,028,000 8,028,000 --------------- TOTAL REPURCHASE AGREEMENTS (COST $48,028,000) ............................................. 48,028,000 --------------- TOTAL INVESTMENTS (COST $1,984,100,141) 100.6% ............................................. 2,517,328,691 OTHER ASSETS, LESS LIABILITIES (0.6)% ...................................................... (15,514,444) --------------- NET ASSETS 100.0% .......................................................................... $ 2,501,814,247 ===============
See Selected Portfolio Abbreviations on page 75. (a) Non-income producing. (b) A portion or all of the security is on loan as of October 31, 2005. See Note 1(e). (c) See Note 8 regarding restricted and illiquid securities. (d) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. (e) See Note 1(c) regarding repurchase agreements. (f) Investments from cash collateral received for loaned securities. See Note 1(e). (g) A portion or all of the security is traded on a discount basis with no stated coupon rate. Semiannual Report | See notes to financial statements. | 53 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS FRANKLIN SMALL CAP GROWTH FUND II
---------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS A (UNAUDITED) 2005 2004 2003 2002 2001 ---------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 10.63 $ 10.55 $ 7.46 $ 9.79 $ 10.27 $ 10.00 ------------------------------------------------------------------------------ Income from investment operations: Net investment income (loss)(a) ................ (0.04) (0.09) (0.07) (0.06) (0.06) (0.04) Net realized and unrealized gains (losses) ..... 1.05 0.17 3.16 (2.27) (0.42) 0.31 ------------------------------------------------------------------------------ Total from investment operations ................ 1.01 0.08 3.09 (2.33) (0.48) 0.27 ------------------------------------------------------------------------------ Redemption fees ................................. --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------ Net asset value, end of period .................. $ 11.64 $ 10.63 $ 10.55 $ 7.46 $ 9.79 $ 10.27 ============================================================================== Total return(b) ................................. 9.50% 0.76% 41.42% (23.80)% (4.67)% 2.70% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $618,759 $765,216 $908,599 $696,642 $1,076,341 $456,452 Ratios to average net assets: Expenses ....................................... 1.17%(d) 1.15% 1.08% 1.32% 1.21% 1.32% Net investment income (loss) ................... (0.73)%(d) (0.84)% (0.70)% (0.76)% (0.63)% (0.36)% Portfolio turnover rate ......................... 18.62% 46.35% 47.08% 34.99% 41.31% 74.97%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 54 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL CAP GROWTH FUND II (CONTINUED)
------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS B (UNAUDITED) 2005 2004 2003 2002 2001 ------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .............. $ 10.26 $ 10.27 $ 7.33 $ 9.66 $ 10.20 $ 10.00 --------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) .................. (0.08) (0.17) (0.15) (0.10) (0.12) (0.11) Net realized and unrealized gains (losses) ....... 1.02 0.16 3.09 (2.23) (0.42) 0.31 --------------------------------------------------------------------------- Total from investment operations .................. 0.94 (0.01) 2.94 (2.33) (0.54) 0.20 --------------------------------------------------------------------------- Redemption fees ................................... --(c) --(c) -- -- -- -- --------------------------------------------------------------------------- Net asset value, end of period .................... $ 11.20 $ 10.26 $ 10.27 $ 7.33 $ 9.66 $ 10.20 =========================================================================== Total return(b) ................................... 9.16% (0.10)% 40.11% (24.12)% (5.29)% 2.00% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................. $104,035 $105,070 $122,004 $96,077 $145,217 $104,640 Ratios to average net assets: Expenses ......................................... 1.93%(d) 1.91% 1.92% 1.97% 1.86% 1.97% Net investment income (loss) ..................... (1.49)%(d) (1.60)% (1.54)% (1.41)% (1.26)% (1.03)% Portfolio turnover rate ........................... 18.62% 46.35% 47.08% 34.99% 41.31% 74.97%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 55 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL CAP GROWTH FUND II (CONTINUED)
-------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS C (UNAUDITED) 2005 2004 2003 2002 2001 -------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 10.27 $ 10.27 $ 7.33 $ 9.67 $ 10.21 $ 10.00 ---------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ................. (0.08) (0.17) (0.15) (0.10) (0.12) (0.11) Net realized and unrealized gains (losses) ...... 1.02 0.17 3.09 (2.24) (0.42) 0.32 ---------------------------------------------------------------------------- Total from investment operations ................. 0.94 -- 2.94 (2.34) (0.54) 0.21 ---------------------------------------------------------------------------- Redemption fees .................................. --(c) --(c) -- -- -- -- ---------------------------------------------------------------------------- Net asset value, end of period ................... $ 11.21 $ 10.27 $ 10.27 $ 7.33 $ 9.67 $ 10.21 ============================================================================ Total return(b) .................................. 9.15% --% 40.11% (24.20)% (5.29)% 2.10% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $161,152 $164,117 $200,037 $163,466 $249,188 $158,053 Ratios to average net assets: Expenses ........................................ 1.93%(d) 1.91% 1.92% 1.97% 1.86% 1.97% Net investment income (loss) .................... (1.49)%(d) (1.60)% (1.54)% (1.41)% (1.26)% (1.03)% Portfolio turnover rate .......................... 18.62% 46.35% 47.08% 34.99% 41.31% 74.97%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 56 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL CAP GROWTH FUND II (CONTINUED)
----------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS R (UNAUDITED) 2005 2004 2003 2002(e) ----------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................... $ 10.54 $ 10.49 $ 7.45 $ 9.79 $ 9.88 ------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ....................... (0.06) (0.12) (0.10) (0.07) (0.03) Net realized and unrealized gains (losses) ............ 1.05 0.17 3.14 (2.27) (0.06) ------------------------------------------------------------------- Total from investment operations ....................... 0.99 0.05 3.04 (2.34) (0.09) ------------------------------------------------------------------- Redemption fees ........................................ --(c) --(c) -- -- -- ------------------------------------------------------------------- Net asset value, end of period ......................... $ 11.53 $ 10.54 $ 10.49 $ 7.45 $ 9.79 =================================================================== Total return(b) ........................................ 9.39% 0.48% 40.81% (23.90)% (0.91)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ...................... $ 4,872 $ 4,392 $ 4,542 $ 2,562 $ 492 Ratios to average net assets: Expenses .............................................. 1.43%(d) 1.41% 1.42% 1.47% 1.36%(d) Net investment income (loss) .......................... (0.99)%(d) (1.10)% (1.04)% (0.91)% (1.05)%(d) Portfolio turnover rate ................................ 18.62% 46.35% 47.08% 34.99% 41.31%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the period January 1, 2002 (effective date) to April 30, 2002. Semiannual Report | See notes to financial statements. | 57 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL CAP GROWTH FUND II (CONTINUED)
----------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, ADVISOR CLASS (UNAUDITED) 2005 2004 2003 2002 2001 ----------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......... $ 10.79 $ 10.69 $ 7.55 $ 9.86 $ 10.31 $ 10.00 ------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) .............. (0.03) (0.07) (0.05) (0.03) (0.03) (0.01) Net realized and unrealized gains (losses) ... 1.08 0.17 3.19 (2.28) (0.42) 0.32 ------------------------------------------------------------------------------- Total from investment operations .............. 1.05 0.10 3.14 (2.31) (0.45) 0.31 ------------------------------------------------------------------------------- Redemption fees ............................... --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------- Net asset value, end of period ................ $ 11.84 $ 10.79 $ 10.69 $ 7.55 $ 9.86 $ 10.31 =============================================================================== Total return(b) ............................... 9.73% 0.94% 41.59% (23.43)% (4.36)% 3.10% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............. $273,863 $235,101 $211,271 $135,529 $157,653 $ 55,606 Ratios to average net assets: Expenses ..................................... 0.93%(d) 0.91% 0.92% 0.97% 0.86% 0.97% Net investment income (loss) ................. (0.49)%(d) (0.60)% (0.54)% (0.41)% (0.28)% (0.05)% Portfolio turnover rate ....................... 18.62% 46.35% 47.08% 34.99% 41.31% 74.97%
(a) Based on average daily shares outstanding. (b) Total return is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 58 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN SMALL CAP GROWTH FUND II SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ CLOSED END MUTUAL FUND (COST $8,055,672) 0.7% Ares Capital Corp. .................................................................. 478,665 $ 7,333,148 ------------- COMMON STOCKS 98.4% COMMERCIAL SERVICES 3.0% (a)Aquantive Inc. ...................................................................... 19,100 413,515 CDI Corp. ........................................................................... 405,800 11,187,906 (a)LECG Corp. .......................................................................... 317,800 7,020,202 Maximus Inc. ........................................................................ 178,600 6,474,250 (a)ValueClick Inc. ..................................................................... 534,000 9,345,000 ------------- 34,440,873 ------------- COMMUNICATIONS 0.5% (a)TNS Inc. ............................................................................ 334,400 5,878,752 ------------- CONSUMER DURABLES 1.8% Clarcor Inc. ........................................................................ 120,100 3,302,750 (a)THQ Inc. ............................................................................ 399,300 9,255,774 Winnebago Industries Inc. ........................................................... 270,900 7,942,788 ------------- 20,501,312 ------------- CONSUMER NON-DURABLES 0.4% (a)Prestige Brands Holdings Inc. ....................................................... 300,600 3,622,230 (a)Volcom Inc. ......................................................................... 22,100 675,818 ------------- 4,298,048 ------------- CONSUMER SERVICES 8.2% (a)BJ's Restaurant Inc. ................................................................ 323,600 7,022,120 (a)Entravision Communications Corp. .................................................... 680,700 5,581,740 Four Seasons Hotels Inc. (Canada) ................................................... 157,500 8,446,725 (a)Gaylord Entertainment Co., A ........................................................ 132,100 5,215,308 (a)Global Cash Access LLC .............................................................. 434,800 6,095,896 Jackson Hewitt Tax Service Inc. ..................................................... 242,200 5,987,184 (a)La Quinta Corp. ..................................................................... 1,220,200 10,188,670 (a)Lincoln Educational Services ........................................................ 360,900 4,843,278 Orient Express Hotels Ltd., A ....................................................... 394,600 11,127,720 (a)P.F. Chang's China Bistro Inc. ...................................................... 154,200 7,053,108 (a)Panera Bread Co. .................................................................... 150,100 8,884,419 (a)Penn National Gaming Inc. ........................................................... 499,300 14,754,315 ------------- 95,200,483 ------------- ELECTRONIC TECHNOLOGY 19.0% (a)Actel Corp. ......................................................................... 650,300 9,071,685 (a)Arris Group Inc. .................................................................... 820,400 6,784,708 (a)Avocent Corp. ....................................................................... 375,299 11,506,667 (a)Catapult Communications Corp. ....................................................... 166,600 3,047,114 (a)Coherent Inc. ....................................................................... 270,500 8,009,505 (a)Electro Scientific Industries Inc. .................................................. 451,500 9,919,455 (a)Essex Corp. ......................................................................... 525,800 9,448,626 (a)Exar Corp. .......................................................................... 148,884 1,874,450 (a)FLIR Systems Inc. ................................................................... 392,300 8,222,608 (a)FormFactor Inc. ..................................................................... 355,700 8,757,334 (a)Integrated Device Technology Inc. ................................................... 333,590 3,295,869
Semiannual Report | 59 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN SMALL CAP GROWTH FUND II SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONT.) ELECTRONIC TECHNOLOGY (CONT.) (a)Microsemi Corp. ....................................................................... 527,900 $ 12,231,443 (a)Microtune Inc. ........................................................................ 1,115,700 4,306,602 National Instruments Corp. ............................................................ 477,702 11,417,078 (a)Orbital Sciences Corp. ................................................................ 624,300 7,260,609 (a)Photronics Inc. ....................................................................... 215,300 3,875,400 (a)Power Integrations Inc. ............................................................... 543,600 11,475,396 (a)Semtech Corp. ......................................................................... 830,400 12,522,432 (a)Silicon Laboratories Inc. ............................................................. 542,800 17,461,876 Tektronix Inc. ........................................................................ 227,200 5,221,056 (a)Trimble Navigation Ltd. ............................................................... 386,050 11,145,263 (a)Varian Inc. ........................................................................... 292,000 10,736,840 (a)Varian Semiconductor Equipment Associates Inc. ........................................ 451,600 17,079,512 (a)ViaSat Inc. ........................................................................... 572,600 14,194,754 (a)ZiLOG Inc. ............................................................................ 556,200 1,529,550 ------------- 220,395,832 ------------- ENERGY MINERALS 1.9% (a)Alpha Natural Resources Inc. .......................................................... 228,300 5,422,125 (a)Bill Barrett Corp. .................................................................... 222,700 7,088,541 (a)Denbury Resources Inc. ................................................................ 220,600 9,624,778 ------------- 22,135,444 ------------- FINANCE 10.0% Advance America Cash Advance Centers Inc. ............................................. 419,700 5,099,355 Aspen Insurance Holdings Ltd. ......................................................... 267,400 6,468,406 (a)CapitalSource Inc. .................................................................... 628,400 13,824,800 Doral Financial Corp. (Puerto Rico) ................................................... 527,200 4,512,832 East West Bancorp Inc. ................................................................ 221,000 8,462,090 EMC Insurance Group Inc. .............................................................. 216,825 4,011,263 Financial Federal Corp. ............................................................... 252,000 9,621,360 First State Bancorp ................................................................... 383,314 8,551,735 (a)Franklin Bank Corp. ................................................................... 216,400 3,732,900 (a)GFI Group Inc. ........................................................................ 145,500 6,541,680 Greater Bay Bancorp ................................................................... 247,021 6,197,757 Hancock Holding Co. ................................................................... 145,700 5,197,119 IPC Holdings Ltd. ..................................................................... 102,400 2,696,192 Max Re Capital Ltd. ................................................................... 250,900 5,999,019 National Financial Partners Corp. ..................................................... 242,900 10,986,367 (a)NCO Group Inc. ........................................................................ 250,700 4,505,079 (a)Signature Bank ........................................................................ 168,726 4,893,054 Westamerica Bancorp ................................................................... 82,200 4,382,082 ------------- 115,683,090 ------------- HEALTH SERVICES 6.9% (a)PAREXEL International Corp. ........................................................... 383,600 8,393,168 Pharmaceutical Product Development Inc. ............................................... 185,700 10,672,179 (a)Psychiatric Solutions Inc. ............................................................ 201,200 11,005,640 (a)Rehabcare Group Inc. .................................................................. 325,800 6,936,282 (a)Sierra Health Services Inc. ........................................................... 166,400 12,480,000
60 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN SMALL CAP GROWTH FUND II SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONT.) HEALTH SERVICES (CONT.) (a)Symbion Inc. .......................................................................... 259,100 $ 5,863,433 (a)United Surgical Partners International Inc. ........................................... 352,550 12,638,917 (a)VCA Antech Inc. ....................................................................... 460,200 11,873,160 ------------- 79,862,779 ------------- HEALTH TECHNOLOGY 10.2% (a)Advanced Neuromodulation Systems Inc. ................................................. 135,800 8,282,442 (a)American Medical Systems Holdings Ltd. ................................................ 703,700 11,505,495 (a)Angiotech Pharmaceuticals Inc. ........................................................ 616,000 8,254,400 (a)Coley Pharmaceutical Group ............................................................ 447,700 6,630,437 (a)Digene Corp. .......................................................................... 321,600 9,712,320 (a)Impax Laboratories Inc. ............................................................... 709,500 7,520,700 (a)Medicines Co. ......................................................................... 349,600 5,992,144 (a)Merit Medical Systems Inc. ............................................................ 530,934 6,328,733 (a)Molecular Devices Corp. ............................................................... 273,600 6,128,640 (a)Nabi Biopharmaceuticals ............................................................... 191,100 2,455,635 (a)Panacos Pharmaceuticals Inc. .......................................................... 467,400 3,692,460 (a)Pharmion Corp. ........................................................................ 196,200 3,706,218 (a)Serologicals Corp. .................................................................... 323,800 6,307,624 STERIS Corp. .......................................................................... 306,900 7,000,389 (a)Symmetry Medical Inc. ................................................................. 195,500 4,328,370 (a)Taro Pharmaceutical Industries Ltd. ................................................... 235,680 5,184,960 (a)Telik Inc. ............................................................................ 551,700 8,242,398 (a)Trimeris Inc. ......................................................................... 612,235 7,799,874 ------------- 119,073,239 ------------- INDUSTRIAL SERVICES 5.7% (a)Bronco Drilling Co. Inc. .............................................................. 106,100 2,571,864 (a)Cal Dive International Inc. ........................................................... 413,700 25,459,098 (a)FMC Technologies Inc. ................................................................. 332,516 12,123,533 (a)Oil States International Inc. ......................................................... 178,600 5,911,660 (a)Superior Energy Services Inc. ......................................................... 761,600 15,521,408 (a)Waste Connections Inc. ................................................................ 126,950 4,236,322 ------------- 65,823,885 ------------- PROCESS INDUSTRIES 4.8% Cabot Corp. ........................................................................... 280,500 9,567,855 (a)Cabot Microelectronics Corp. .......................................................... 146,300 4,301,220 (a)FMC Corp. ............................................................................. 273,500 14,889,340 (a)Headwaters Inc. ....................................................................... 312,300 9,943,632 Minerals Technologies Inc. ............................................................ 206,100 11,018,106 Westlake Chemical Corp. ............................................................... 228,600 6,652,260 ------------- 56,372,413 ------------- PRODUCER MANUFACTURING 5.8% Ametek Inc. ........................................................................... 125,100 5,095,323 (a)Flowserve Corp. ....................................................................... 524,800 18,368,000
Semiannual Report | 61 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN SMALL CAP GROWTH FUND II SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONT.) PRODUCER MANUFACTURING (CONT.) (a)Greatbatch Inc. ..................................................................... 520,300 $ 13,559,018 The Manitowoc Co. Inc. .............................................................. 181,200 9,641,652 (a)Mettler-Toledo International Inc. (Switzerland) ..................................... 111,400 5,748,240 Oshkosh Truck Corp. ................................................................. 166,200 7,239,672 Wabash National Corp. ............................................................... 454,300 8,363,663 -------------- 68,015,568 -------------- REAL ESTATE INVESTMENT TRUSTS 2.3% Innkeepers USA Trust ................................................................ 506,700 7,904,520 Jones Lang LaSalle Inc. ............................................................. 233,800 11,755,464 (a)MeriStar Hospitality Corp. .......................................................... 829,200 7,189,164 -------------- 26,849,148 -------------- RETAIL TRADE 2.9% (a)Cost Plus Inc. ...................................................................... 460,600 7,074,816 (a)Hot Topic Inc. ...................................................................... 435,000 6,477,150 Regis Corp. ......................................................................... 161,700 6,202,812 (a)Tractor Supply Co. .................................................................. 166,100 8,055,850 Tuesday Morning Corp. ............................................................... 266,800 6,400,532 -------------- 34,211,160 -------------- TECHNOLOGY SERVICES 10.7% (a)BearingPoint Inc. ................................................................... 1,178,500 8,273,070 (a)Entrust Inc. ........................................................................ 1,411,500 6,281,175 (a)FileNET Corp. ....................................................................... 478,000 13,455,700 Global Payments Inc. ................................................................ 335,400 14,371,890 (a)Heartland Payment Systems Inc. ...................................................... 54,900 1,329,678 (a)Hyperion Solutions Corp. ............................................................ 162,300 7,848,828 Jack Henry & Associates Inc. ........................................................ 375,100 6,744,298 (a)JAMDAT Mobile Inc. .................................................................. 342,900 6,316,218 (a)Marchex Inc., B ..................................................................... 740,100 12,470,685 (a)Micromuse Inc. ...................................................................... 834,700 5,984,799 (a)Micros Systems Inc. ................................................................. 236,500 10,860,080 (a)NetIQ Corp. ......................................................................... 539,400 6,467,406 (a)Quest Software Inc. ................................................................. 884,100 12,297,831 (a)Rightnow Technologies Inc. .......................................................... 296,200 4,508,164 (a)Sapient Corp. ....................................................................... 1,489,300 7,729,467 -------------- 124,939,289 -------------- TRANSPORTATION 4.3% Forward Air Corp. ................................................................... 516,250 18,301,063 Knight Transportation Inc. .......................................................... 456,500 12,421,365 Landstar System Inc. ................................................................ 304,000 11,710,080 (a)Republic Airways Holdings Inc. ...................................................... 510,300 7,960,680 -------------- 50,393,188 -------------- TOTAL COMMON STOCKS (COST $931,026,707) ............................................. 1,144,074,503 -------------- TOTAL LONG TERM INVESTMENTS (COST $939,082,379) ..................................... 1,151,407,651 --------------
62 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN SMALL CAP GROWTH FUND II SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ SHORT TERM INVESTMENT (COST $4,031,579) 0.3% MONEY FUND 0.3% (b)Franklin Institutional Fiduciary Trust Money Market Portfolio ....................... 4,031,579 $ 4,031,579 -------------- TOTAL INVESTMENTS (COST $943,113,958) 99.4%.......................................... 1,155,439,230 OTHER ASSETS, LESS LIABILITIES 0.6%.................................................. 7,241,016 -------------- NET ASSETS 100.0%.................................................................... $1,162,680,246 ==============
(a) Non-income producing. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. Semiannual Report | See notes to financial statements. | 63 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS FRANKLIN SMALL-MID CAP GROWTH FUND
-------------------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS A (UNAUDITED) 2005 2004 2003 2002 2001 -------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period $ 31.31 $ 29.69 $ 23.14 $ 28.85 $ 34.15 $ 45.48 ------------------------------------------------------------------------------------------ Income from investment operations: Net investment income (loss)(a) ... (0.05) (0.08) (0.14) (0.09) (0.06) 0.12 Net realized and unrealized gains (losses) ........................ 4.52 1.70 6.69 (5.62) (5.16) (10.98) ------------------------------------------------------------------------------------------ Total from investment operations ... 4.47 1.62 6.55 (5.71) (5.22) (10.86) ------------------------------------------------------------------------------------------ Less distributions from: Net investment income ............. -- -- -- -- (0.08) (0.24) Net realized gains ................ -- -- -- -- -- (0.23) ------------------------------------------------------------------------------------------ Total distributions ................ -- -- -- -- (0.08) (0.47) ------------------------------------------------------------------------------------------ Redemption fees .................... --(c) --(c) --(c) -- -- -- ------------------------------------------------------------------------------------------ Net asset value, end of period ..... $ 35.78 $ 31.31 $ 29.69 $ 23.14 $ 28.85 $ 34.15 ========================================================================================== Total return(b) .................... 14.28% 5.46% 28.31% (19.79)% (15.28)% (24.00)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .. $6,718,062 $6,636,792 $7,355,269 $5,791,141 $7,784,125 $9,606,125 Ratios to average net assets: Expenses .......................... 0.98%(d) 0.97% 0.98% 1.02% 0.89% 0.86% Net investment income (loss) ...... (0.27)%(d) (0.27)% (0.51)% (0.41)% (0.18)% 0.29% Portfolio turnover rate ............ 18.54% 42.96% 52.84% 36.47% 47.38% 27.23%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 64 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND (CONTINUED)
---------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS B (UNAUDITED) 2005 2004 2003(e) ---------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ......................... $ 30.65 $ 29.28 $ 23.00 $ 24.33 ----------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ............................. (0.17) (0.31) (0.36) (0.23) Net realized and unrealized gains (losses) .................. 4.41 1.68 6.64 (1.10) ----------------------------------------------------------- Total from investment operations ............................. 4.24 1.37 6.28 (1.33) ----------------------------------------------------------- Redemption fees .............................................. --(c) --(c) --(c) -- ----------------------------------------------------------- Net asset value, end of period ............................... $ 34.89 $ 30.65 $ 29.28 $ 23.00 =========================================================== Total return(b) .............................................. 13.83% 4.68% 27.30% (5.47)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............................ $ 33,641 $ 31,733 $ 26,161 $ 7,601 Ratios to average net assets: Expenses .................................................... 1.73%(d) 1.72% 1.73% 1.77%(d) Net investment income (loss) ................................ (1.02)%(d) (1.02)% (1.26)% (1.16)%(d) Portfolio turnover rate ...................................... 18.54% 42.96% 52.84% 36.47%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the period July 1, 2002 (effective date) to April 30, 2003. Semiannual Report | See notes to financial statements. | 65 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND (CONTINUED)
-------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS C (UNAUDITED) 2005 2004 2003 2002 2001 -------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......... $ 29.82 $ 28.49 $ 22.37 $ 28.09 $ 33.41 $ 44.58 ----------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) .............. (0.17) (0.31) (0.34) (0.26) (0.27) (0.19) Net realized and unrealized gains (losses) ... 4.30 1.64 6.46 (5.46) (5.05) (10.75) ----------------------------------------------------------------------------- Total from investment operations .............. 4.13 1.33 6.12 (5.72) (5.32) (10.94) ----------------------------------------------------------------------------- Less distributions from net realized gains .... -- -- -- -- -- (0.23) ----------------------------------------------------------------------------- Redemption fees ............................... --(c) --(c) --(c) -- -- -- ----------------------------------------------------------------------------- Net asset value, end of period ................ $ 33.95 $ 29.82 $ 28.49 $ 22.37 $ 28.09 $ 33.41 ============================================================================= Total return(b) ............................... 13.85% 4.67% 27.36% (20.36)% (15.92)% (24.61)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............. $685,797 $654,549 $762,602 $639,524 $948,940 $1,263,169 Ratios to average net assets: Expenses ..................................... 1.73%(d) 1.72% 1.71% 1.77% 1.64% 1.61% Net investment income (loss) ................. (1.02)%(d) (1.02)% (1.24)% (1.16)% (0.92)% (0.45)% Portfolio turnover rate ....................... 18.54% 42.96% 52.84% 36.47% 47.38% 27.23%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 66 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND (CONTINUED)
------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS R (UNAUDITED) 2005 2004 2003 2002(e) ------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................... $ 31.04 $ 29.50 $ 23.06 $ 28.81 $ 31.16 ------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ....................... (0.09) (0.15) (0.22) (0.17) (0.12) Net realized and unrealized gains (losses) ............ 4.47 1.69 6.66 (5.58) (2.23) ------------------------------------------------------------------- Total from investment operations ....................... 4.38 1.54 6.44 (5.75) (2.35) ------------------------------------------------------------------- Redemption fees ........................................ --(c) --(c) --(c) -- -- ------------------------------------------------------------------- Net asset value, end of period ......................... $ 35.42 $ 31.04 $ 29.50 $ 23.06 $ 28.81 =================================================================== Total return(b) ........................................ 14.11% 5.22% 27.93% (19.96)% (7.54)% Ratios/supplemental data Net assets, end of period (000's) ...................... $ 72,437 $ 54,139 $ 41,404 $ 15,309 $ 1,253 Ratios to average net assets: Expenses .............................................. 1.23%(d) 1.22% 1.23% 1.27% 1.14%(d) Net investment income (loss) .......................... (0.52)%(d) (0.52)% (0.76)% (0.66)% (1.26)%(d) Portfolio turnover rate ................................ 18.54% 42.96% 52.84% 36.47% 47.38%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the period January 1, 2002 (effective date) to April 30, 2002. Semiannual Report | See notes to financial statements. | 67 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND (CONTINUED)
---------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, ADVISOR CLASS (UNAUDITED) 2005 2004 2003 2002 2001 ---------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......... $ 31.71 $ 29.99 $ 23.32 $ 29.00 $ 34.37 $ 45.74 ------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) .............. --(c) --(c) (0.07) (0.04) 0.02 0.23 Net realized and unrealized gains (losses) ... 4.57 1.72 6.74 (5.64) (5.20) (11.06) ------------------------------------------------------------------------------- Total from investment operations .............. 4.57 1.72 6.67 (5.68) (5.18) (10.83) ------------------------------------------------------------------------------- Less distributions from: Net investment income ........................ -- -- -- -- (0.19) (0.31) Net realized gains ........................... -- -- -- -- -- (0.23) ------------------------------------------------------------------------------- Total distributions ........................... -- -- -- -- (0.19) (0.54) ------------------------------------------------------------------------------- Redemption fees ............................... --(c) --(c) --(c) -- -- -- ------------------------------------------------------------------------------- Net asset value, end of period ................ $ 36.28 $ 31.71 $ 29.99 $ 23.32 $ 29.00 $ 34.37 =============================================================================== Total return(b) ............................... 14.41% 5.74% 28.60% (19.59)% (15.10)% (23.83)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............. $595,685 $347,518 $320,154 $266,723 $321,921 $357,832 Ratios to average net assets: Expenses ..................................... 0.73%(d) 0.72% 0.73% 0.77% 0.64% 0.61% Net investment income (loss) ................. (0.02)%(d) (0.02)% (0.26)% (0.16)% 0.05% 0.54% Portfolio turnover rate ....................... 18.54% 42.96% 52.84% 36.47% 47.38% 27.23%
(a) Based on average daily shares outstanding. (b) Total return is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 68 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS 95.7% COMMERCIAL SERVICES 4.3% Corporate Executive Board Co. ......................................................... 783,200 $ 64,723,648 Dex Media Inc. ........................................................................ 257,060 6,932,908 (a),(b)Getty Images Inc. ..................................................................... 856,400 71,089,764 (a),(b)Laureate Education Inc. ............................................................... 1,528,600 75,512,840 Moody's Corp. ......................................................................... 1,473,800 78,494,588 (a)Robert Half International Inc. ........................................................ 1,461,900 53,914,872 ------------- 350,668,620 ------------- COMMUNICATIONS 1.0% (b)NII Holdings Inc. ..................................................................... 969,300 80,374,356 ------------- CONSUMER DURABLES 3.4% (a),(b)Activision Inc. ....................................................................... 4,174,000 65,823,980 Harman International Industries Inc. .................................................. 727,400 72,638,164 (a),(b)Hovnanian Enterprises Inc., A ......................................................... 648,700 29,185,013 (a),(b)NVR Inc. .............................................................................. 80,800 55,388,400 The Ryland Group Inc. ................................................................. 805,800 54,230,340 ------------- 277,265,897 ------------- CONSUMER NON-DURABLES 1.6% Alberto-Culver Co. .................................................................... 511,300 22,195,533 (a),(b)Dean Foods Inc. ....................................................................... 1,718,200 62,112,930 Polo Ralph Lauren Corp. ............................................................... 969,500 47,699,400 ------------- 132,007,863 ------------- CONSUMER SERVICES 3.6% Orient Express Hotels Ltd., A ......................................................... 843,600 23,789,520 (a),(b)P.F. Chang's China Bistro Inc. ........................................................ 716,300 32,763,562 (a),(b)Pixar ................................................................................. 1,155,700 58,628,661 Station Casinos Inc. .................................................................. 640,700 41,068,870 (a),(b)Weight Watchers International Inc. .................................................... 1,583,800 83,260,366 (a),(b)XM Satellite Radio Holdings Inc., A ................................................... 1,800,200 51,899,766 ------------- 291,410,745 ------------- ELECTRONIC TECHNOLOGY 17.6% (a),(b)Altera Corp. .......................................................................... 2,730,900 45,469,485 (a),(b)Avocent Corp. ......................................................................... 1,384,036 42,434,544 (b)Coherent Inc. ......................................................................... 1,236,800 36,621,648 (b)Dolby Laboratories Inc., A ............................................................ 543,600 8,751,960 (a)Embraer-Empresa Brasileira de Aeronautica SA, ADR (Brazil) ............................ 3,431,400 133,104,006 (b)FLIR Systems Inc. ..................................................................... 1,442,675 30,238,468 (a),(b)FormFactor Inc. ....................................................................... 1,781,600 43,862,992 Harris Corp. .......................................................................... 2,816,800 115,770,480 Intersil Corp., A ..................................................................... 4,272,500 97,242,100 L-3 Communications Holdings Inc. ...................................................... 1,052,900 81,936,678 (a),(b)Lam Research Corp. .................................................................... 1,952,800 65,887,472 Linear Technology Corp. ............................................................... 792,100 26,305,641 (b)Logitech International SA, ADR (Switzerland) .......................................... 522,200 20,031,592 Microchip Technology Inc. ............................................................. 4,258,600 128,481,962
Semiannual Report | 69 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONT.) ELECTRONIC TECHNOLOGY (CONT.) (b)Network Appliance Inc. .......................................................... 2,455,600 $ 67,185,216 Rockwell Collins Inc. ........................................................... 2,443,600 111,965,752 (a)Scientific-Atlanta Inc. ......................................................... 616,400 21,845,216 (b)Semtech Corp. ................................................................... 1,346,600 20,306,728 (a),(b)Silicon Laboratories Inc. ....................................................... 1,079,300 34,721,081 (a),(c)Tektronix Inc. .................................................................. 4,865,900 111,818,382 (b)Thermo Electron Corp. ........................................................... 2,617,700 79,028,363 (a),(b)Trimble Navigation Ltd. ......................................................... 2,109,080 60,889,139 (a),(b)Varian Inc. ..................................................................... 1,044,300 38,398,911 -------------- 1,422,297,816 -------------- ENERGY MINERALS 4.9% (a)Chesapeake Energy Corp. ......................................................... 5,289,200 169,783,320 (b)Newfield Exploration Co. ........................................................ 3,198,000 144,965,340 Peabody Energy Corp. ............................................................ 1,063,800 83,146,608 -------------- 397,895,268 -------------- FINANCE 9.2% (a),(b)Ameritrade Holding Corp. ........................................................ 2,015,800 42,392,274 aBlackRock Inc., A ............................................................... 527,100 49,969,080 Boston Private Financial Holdings Inc. .......................................... 322,000 9,321,900 Brown & Brown Inc. .............................................................. 931,800 50,624,694 Calamos Asset Management Inc., A ................................................ 738,700 17,943,023 (a),(b)CapitalSource Inc. .............................................................. 3,501,250 77,027,500 Chicago Mercantile Exchange ..................................................... 278,300 101,621,245 City National Corp. ............................................................. 626,800 45,994,584 (a)Commerce Bancorp Inc. ........................................................... 1,171,400 35,692,558 (a)Cullen/Frost Bankers Inc. ....................................................... 612,300 32,341,686 (a)Doral Financial Corp. (Puerto Rico) ............................................. 3,709,100 31,749,896 (b)E*TRADE Financial Corp. ......................................................... 4,215,300 78,193,815 East West Bancorp Inc. .......................................................... 597,900 22,893,591 Federated Investors Inc., B ..................................................... 3,383,400 118,452,834 (a)Montpelier Re Holdings Ltd. (Bermuda) ........................................... 367,100 7,378,710 UCBH Holdings Inc. .............................................................. 1,337,600 23,274,240 -------------- 744,871,630 -------------- HEALTH SERVICES 7.5% (b)Community Health Systems Inc. ................................................... 2,938,800 109,058,868 (b)Coventry Health Care Inc. ....................................................... 1,836,900 99,174,231 (a),(b)Express Scripts Inc. ............................................................ 949,800 71,624,418 (b)Health Net Inc., A .............................................................. 1,301,900 60,980,996 (b)LifePoint Hospitals Inc. ........................................................ 1,959,900 76,632,090 (b)Lincare Holdings Inc. ........................................................... 552,500 22,569,625 Omnicare Inc. ................................................................... 752,900 40,731,890 Pharmaceutical Product Development Inc. ......................................... 1,304,200 74,952,374 (a),(b)VCA Antech Inc. ................................................................. 1,974,100 50,931,780 -------------- 606,656,272 --------------
70 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONT.) HEALTH TECHNOLOGY 12.7% (a),(b),(c)Adolor Corp. .................................................................. 2,073,360 $ 21,977,616 (a),(b)Advanced Neuromodulation Systems Inc. ......................................... 620,000 37,813,800 (b)American Medical Systems Holdings Ltd. ........................................ 1,162,300 19,003,605 (a),(b)Angiotech Pharmaceuticals Inc. ................................................ 1,338,600 17,937,240 Biomet Inc. ................................................................... 1,161,400 40,451,562 C.R. Bard Inc. ................................................................ 1,070,400 66,771,552 (a),(b)Charles River Laboratories International Inc. ................................. 436,600 19,105,616 (b)Cytyc Corp. ................................................................... 2,436,000 61,752,600 (a)DENTSPLY International Inc. ................................................... 391,800 21,603,852 (a),(b)Digene Corp. .................................................................. 827,100 24,978,420 (b)Endo Pharmaceuticals Holdings Inc. ............................................ 1,183,400 31,857,128 (a),(b)Fisher Scientific International Inc. .......................................... 1,856,100 104,869,650 (b)INAMED Corp. .................................................................. 102,870 7,314,057 (a),(b)Inspire Pharmaceuticals Inc. .................................................. 993,200 6,257,160 (a),(b)Invitrogen Corp. .............................................................. 773,300 49,174,147 (a),(b)Keryx Biopharmaceuticals Inc. ................................................. 646,200 9,337,590 (a),(b)Kinetic Concepts Inc. ......................................................... 669,800 24,045,820 (a),(b)Medicines Co. ................................................................. 1,248,700 21,402,718 (a),(b)MGI Pharma Inc. ............................................................... 1,186,600 22,260,616 (a),(b)Neurocrine Biosciences Inc. ................................................... 200,000 10,564,000 Pall Corp. .................................................................... 2,433,620 63,663,499 (a),(b)Pharmion Corp. ................................................................ 332,200 6,275,258 (a),(b)Protein Design Labs Inc. ...................................................... 957,300 26,823,546 (a),(b)Sepracor Inc. ................................................................. 374,900 21,088,125 (a),(b),(c)Stereotaxis Inc. .............................................................. 1,463,200 10,388,720 (a),(b)Telik Inc. .................................................................... 2,221,800 33,193,692 (a),(b)Trimeris Inc. ................................................................. 321,600 4,097,184 (b)Varian Medical Systems Inc. ................................................... 2,189,800 99,767,288 (b)Waters Corp. .................................................................. 2,508,900 90,822,180 (a),(b)Watson Pharmaceuticals Inc. ................................................... 1,180,700 40,804,992 (a),(b)Wright Medical Group Inc. ..................................................... 852,900 15,872,469 -------------- 1,031,275,702 -------------- INDUSTRIAL SERVICES 3.4% (a)GlobalSantaFe Corp. (Cayman Islands) .......................................... 1,111,000 49,495,050 (b)National-Oilwell Varco Inc. ................................................... 2,544,946 158,982,777 (a)Rowan Cos. Inc. ............................................................... 2,090,200 68,955,698 -------------- 277,433,525 -------------- PROCESS INDUSTRIES 3.6% Ashland Inc. .................................................................. 364,200 19,488,342 (a)Bunge Ltd. .................................................................... 2,245,890 116,651,527 (a)Cabot Corp. ................................................................... 1,242,100 42,368,031 (a),(b)Headwaters Inc. ............................................................... 570,000 18,148,800 (a)Lyondell Chemical Co. ......................................................... 2,829,400 75,827,920 (b)Rockwood Holdings Inc. ........................................................ 1,094,300 21,962,601 -------------- 294,447,221 --------------
Semiannual Report | 71 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONT.) PRODUCER MANUFACTURING 6.1% Borg Warner Inc. .................................................................. 1,629,900 $ 94,517,901 (a)Gentex Corp. ...................................................................... 6,308,400 118,724,088 (a)Gibraltar Industries Inc. ......................................................... 1,314,673 26,622,128 Kennametal Inc. ................................................................... 914,100 46,719,651 (b)Mettler-Toledo International Inc. (Switzerland) ................................... 1,544,500 79,696,200 (b),(d)Mirapoint Inc., 144A .............................................................. 682,128 -- (a)Oshkosh Truck Corp. ............................................................... 1,666,800 72,605,808 (b)Terex Corp. ....................................................................... 1,049,200 57,674,524 -------------- 496,560,300 -------------- RETAIL TRADE 4.7% (b)Advance Auto Parts Inc. ........................................................... 1,467,750 55,040,625 (b)Chico's FAS Inc. .................................................................. 2,121,700 83,892,018 Dollar General Corp. .............................................................. 4,913,000 95,508,720 (a)Ross Stores Inc. .................................................................. 1,209,200 32,696,768 (a)Tuesday Morning Corp. ............................................................. 1,582,200 37,956,978 (b)Urban Outfitters Inc. ............................................................. 1,315,700 37,273,781 (a)Whole Foods Market Inc. ........................................................... 250,400 36,090,152 -------------- 378,459,042 -------------- TECHNOLOGY SERVICES 9.5% (b)Alliance Data Systems Corp. ....................................................... 1,643,000 58,425,080 (a),(b)Amdocs Ltd. ....................................................................... 3,257,500 86,226,025 Autodesk Inc. ..................................................................... 629,500 28,409,335 (a),(b)CNET Networks Inc. ................................................................ 3,262,000 44,330,580 (b)Cognizant Technology Solutions Corp., A ........................................... 3,145,000 138,317,100 Fair Isaac Corp. .................................................................. 1,173,500 49,005,360 (a),(b)FileNET Corp. ..................................................................... 803,100 22,607,265 Global Payments Inc. .............................................................. 359,800 15,417,430 (b)Hewitt Associates Inc. ............................................................ 1,592,400 42,501,156 (a),(b)Hyperion Solutions Corp. .......................................................... 1,866,600 90,268,776 (a),(b)JAMDAT Mobile Inc. ................................................................ 315,800 5,817,036 (b)Kanbay International Inc. ......................................................... 584,000 8,514,720 (a),(b)Marchex Inc., B ................................................................... 1,052,200 17,729,570 (a),(b)Mercury Interactive Corp. ......................................................... 1,161,200 40,398,148 (a),(b)NAVTEQ Corp. ...................................................................... 1,078,100 42,175,272 (b)Nuance Communiactions Inc. ........................................................ 1,038,499 5,337,885 (a),(b)Salesforce.com Inc. ............................................................... 483,800 12,090,162 (b)VeriSign Inc. ..................................................................... 2,480,500 58,614,215 -------------- 766,185,115 -------------- TRANSPORTATION 2.6% (a)Expeditors International of Washington Inc. ....................................... 2,134,500 129,500,115 J.B. Hunt Transport Services Inc. ................................................. 4,150,500 80,561,205 -------------- 210,061,320 -------------- TOTAL COMMON STOCKS (COST $6,217,649,801) ......................................... 7,757,870,692 --------------
72 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ PREFERRED STOCK (COST $561,391) 0.0%(e) PRODUCER MANUFACTURING 0.0%e (b),(d)Mirapoint Inc., pfd ........................................................... 301,660 $ 561,391 -------------- Convertible Preferred Stocks 0.1% Consumer Services 0.1% (b),(d)Foveon Inc., cvt. pfd., D, 144A ............................................... 1,792,573 201,665 (b),(d)Foveon Inc., cvt. pfd., E, 144A ............................................... 2,597,593 2,635,024 -------------- 2,836,689 -------------- Electronic Technology 0.0% (b),(d)Anda Networks, cvt. pfd., D ................................................... 364,431 -- (b),(d)Kestrel Solutions, cvt. pfd., D ............................................... 239,831 -- -------------- -- -------------- Total Convertible Preferred Stocks (Cost $24,760,017) ......................... 2,836,689 -------------- Total Long Term Investments (Cost $6,242,971,209) ............................. 7,761,268,772 -------------- Short Term Investments 10.2% Money Fund (Cost $164,534,010) 2.0% (f)Franklin Institutional Fiduciary Trust Money Market Portfolio ................. 164,534,010 164,534,010 -------------- ---------------- Principal Amount ---------------- (g)Repurchase Agreements 8.2% Joint Repurchase Agreement, 3.969%, 11/01/05 .................................. $ 188,458,494 188,458,494 (Maturity Value $188,479,273) ABN AMRO Bank, N.V., New York Branch (Maturity Value $18,333,379) Banc of America Securities LLC (Maturity Value $17,668,047) Barclays Capital Inc. (Maturity Value $17,668,047) Bear, Stearns & Co. Inc. (Maturity Value $13,334,909) BNP Paribas Securities Corp. (Maturity Value $17,668,047) Deutsche Bank Securities Inc. (Maturity Value $17,668,047) Greenwich Capital Markets Inc. (Maturity Value $18,333,379) Lehman Brothers Inc. (Maturity Value $14,135,945) Merrill Lynch Government Securities Inc. (Maturity Value $17,668,047) Morgan Stanley & Co. Inc. (Maturity Value $17,668,047) UBS Securities LLC (Maturity Value $18,333,379) Collateralized by U.S. Government Agency Securities, 1.75 - 7.125%, 12/15/05 - 5/15/10; hU.S. Government Agency Discount Notes, 11/01/05 - 11/14/05; and U.S. Treasury Notes, 2.50 - 6.50%, 10/31/06 - 9/15/10
Semiannual Report | 73 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN SMALL-MID CAP GROWTH FUND PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------------------------ (g)REPURCHASE AGREEMENTS (CONT.) (i)Banc of America Securities LLC, 4.04%, 11/01/05 (Maturity Value $100,011,222) Collateralized by U.S. Government Agency Securities, 5.00%, 6/01/35 ....................... $100,000,000 $ 100,000,000 (i)Barclays Capital Inc., 4.04%, 11/01/05 (Maturity Value $100,011,222) Collateralized by U.S. Government Agency Securities, 3.625 - 4.11%, 1/18/08 - 2/16/10 ....................................................................... 100,000,000 100,000,000 (i)Deutsche Bank Securities Inc., 4.03%, 11/01/05 (Maturity Value $13,241,482) Collateralized by U.S. Government Agency Securities, 3.647 - 7.00%, 4/25/17 - 10/25/35 ...................................................................... 13,240,000 13,240,000 (i)Goldman, Sachs & Co., 4.03%, 11/01/05 (Maturity Value $76,511,564) Collateralized by U.S. Government Agency Securities, 3.185 - 9.00%, 10/01/06 - 4/01/41 ...................................................................... 76,503,000 76,503,000 (i)Merrill Lynch Government Securities Inc., 4.05%, 11/01/05 (Maturity Value $89,025,014) Collateralized by U.S. Government Agency Securities, 2.05 - 9.375%,11/04/05 - 8/06/38; (h)U.S. Government Agency Discount Notes, 11/01/05 - 12/11/25 ........................... 89,015,000 89,015,000 (i)Morgan Stanley & Co. Inc., 4.04%, 11/01/05 (Maturity Value $100,011,222) Collateralized by U.S. Government Agency Securities, 5.00 - 6.00%, 8/01/33 - 7/01/35 ....................................................................... 100,000,000 100,000,000 --------------- TOTAL REPURCHASE AGREEMENTS (COST $667,216,494) ............................................. 667,216,494 --------------- TOTAL INVESTMENTS (COST $7,074,721,713) 106.0% .............................................. 8,593,019,276 OTHER ASSETS, LESS LIABILITIES (6.0)% ....................................................... (487,398,351) --------------- NET ASSETS 100.0% ........................................................................... $ 8,105,620,925 ===============
See Selected Portfolio Abbreviations on page 75. (a) A portion or all of the security is on loan as of October 31, 2005. See Note 1(e). (b) Non-income producing. (c) See Note 9 regarding holdings of 5% voting securities. (d) See Note 8 regarding restricted and illiquid securities. (e) Rounds to less than 0.05% of net assets. (f) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. (g) See Note 1(c) regarding repurchase agreements. (h) A portion or all of the security is traded on a discount basis with no stated coupon rate. (i) Investments from cash collateral received for loaned securities. See Note 1(e). 74 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED) SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt Semiannual Report | See notes to financial statements. | 75 FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES October 31, 2005 (unaudited)
---------------------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND ---------------------------------------------------------------------- Assets: Investments in securities: Cost - Unaffiliated issuers ............................ $ 123,086,377 $ 1,867,650,710 $ 939,082,379 $ 6,054,647,620 Cost - Non-controlled affiliated issuers (Note 9) ...... -- -- -- 188,323,589 Cost - Sweep Money Fund (Note 7) ....................... 7,120,731 68,421,431 4,031,579 164,534,010 Cost - Repurchase agreements ........................... -- 48,028,000 -- 667,216,494 ---------------------------------------------------------------------- Total cost of investments .............................. $ 130,207,108 $ 1,984,100,141 $ 943,113,958 $ 7,074,721,713 ====================================================================== Value - Unaffiliated issuers(a) ........................ $ 151,280,759 $ 2,400,879,260 $ 1,151,407,651 $ 7,617,084,054 Value - Non-controlled affiliated issuers (Note 9)(a) .. -- -- -- 144,184,718 Value - Sweep Money Fund (Note 7) ...................... 7,120,731 68,421,431 4,031,579 164,534,010 Value - Repurchase agreements .......................... -- 48,028,000 -- 667,216,494 ---------------------------------------------------------------------- Total value of investments ............................. 158,401,490 2,517,328,691 1,155,439,230 8,593,019,276 Receivables: Investment securities sold ............................. 4,062,101 86,064,815 12,110,614 64,939,474 Capital shares sold .................................... 360,306 4,470,299 1,229,128 7,894,624 Dividends and interest ................................. 2,345 354,605 239,525 2,170,516 ---------------------------------------------------------------------- Total assets ....................................... 162,826,242 2,608,218,410 1,169,018,497 8,668,023,890 ---------------------------------------------------------------------- Liabilities: Payables: Investment securities purchased ........................ 1,823,570 50,431,652 2,804,148 24,360,827 Capital shares redeemed ................................ 323,507 5,646,191 2,018,997 49,055,813 Affiliates ............................................. 192,342 2,020,331 1,161,687 5,908,083 Payable upon return of securities loaned ................ -- 48,028,000 -- 478,758,000 Accrued expenses and other liabilities .................. 30,789 277,989 353,419 4,320,242 ---------------------------------------------------------------------- Total liabilities .................................. 2,370,208 106,404,163 6,338,251 562,402,965 ---------------------------------------------------------------------- Net assets, at value .............................. $ 160,456,034 $ 2,501,814,247 $ 1,162,680,246 $ 8,105,620,925 ====================================================================== Net assets consist of: Paid-in capital ......................................... $ 302,650,386 $ 2,261,356,958 $ 1,006,289,377 $ 6,765,798,329 Undistributed net investment income (loss) .............. (1,003,357) (3,270,352) (5,491,707) (2,862,670) Net unrealized appreciation (depreciation) .............. 28,194,382 533,228,550 212,325,272 1,518,297,563 Accumulated net realized gain (loss) .................... (169,385,377) (289,500,909) (50,442,696) (175,612,297) ---------------------------------------------------------------------- Net assets, at value .............................. $ 160,456,034 $ 2,501,814,247 $ 1,162,680,246 $ 8,105,620,925 ======================================================================
(a) The Franklin Flex Cap Growth Fund and the Franklin Small-Mid Cap Growth Fund include $47,715,992 and $475,475,658 of securities loaned, respectively. 76 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) October 31, 2005 (unaudited)
-------------------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND -------------------------------------------------------------------- CLASS A: Net assets, at value ...................................... $ 87,508,624 $1,823,311,569 $ 618,759,156 $6,718,061,713 -------------------------------------------------------------------- Shares outstanding ........................................ 5,669,522 48,081,914 53,152,530 187,752,150 -------------------------------------------------------------------- Net asset value per sharea ................................ $ 15.43 $ 37.92 $ 11.64 $ 35.78 -------------------------------------------------------------------- Maximum offering price per share (net asset value per share / 94.25%) ..................................... $ 16.37 $ 40.23 $ 12.35 $ 37.96 -------------------------------------------------------------------- CLASS B: Net assets, at value ...................................... $ 17,048,234 $ 135,441,825 $ 104,034,526 $ 33,641,143 -------------------------------------------------------------------- Shares outstanding ........................................ 1,148,775 3,763,464 9,287,107 964,235 -------------------------------------------------------------------- Net asset value and maximum offering price per share(a) ............................................ $ 14.84 $ 35.99 $ 11.20 $ 34.89 -------------------------------------------------------------------- CLASS C: Net assets, at value ...................................... $ 25,783,823 $ 332,536,399 $ 161,151,887 $ 685,796,712 -------------------------------------------------------------------- Shares outstanding ........................................ 1,740,899 9,221,299 14,378,158 20,199,121 -------------------------------------------------------------------- Net asset value and maximum offering price per share(a) ............................................ $ 14.81 $ 36.06 $ 11.21 $ 33.95 -------------------------------------------------------------------- CLASS R: Net assets, at value ...................................... $ 3,624,835 $ 82,428,843 $ 4,872,145 $ 72,436,702 -------------------------------------------------------------------- Shares outstanding ........................................ 236,826 2,193,898 422,538 2,044,825 -------------------------------------------------------------------- Net asset value and maximum offering price per share(a) ............................................ $ 15.31 $ 37.57 $ 11.53 $ 35.42 -------------------------------------------------------------------- ADVISOR CLASS: Net assets, at value ...................................... $ 26,490,518 $ 128,095,611 $ 273,862,532 $ 595,684,655 -------------------------------------------------------------------- Shares outstanding ........................................ 1,682,662 3,368,338 23,133,393 16,417,981 -------------------------------------------------------------------- Net asset value and maximum offering price per share(a) ............................................ $ 15.74 $ 38.03 $ 11.84 $ 36.28 --------------------------------------------------------------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. Semiannual Report | See notes to financial statements. | 77 FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the six months ended October 31, 2005 (unaudited)
------------------------------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN FRANKLIN AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND ------------------------------------------------------------------------ Investment income: Dividends: Unaffiliated issuers ................................. $ 164,357 $ 6,822,878 $ 2,679,786 $ 23,728,498 Non-controlled affiliated issuers (Note 9) ........... -- -- -- 1,643,311 Sweep Money Fund (Note 7) ............................ 136,934 2,544,778 168,319 2,487,926 Interest .............................................. -- -- -- 1,115,459 Income from securities loaned - net ................... -- 91,195 -- 1,086,349 ------------------------------------------------------------------------ Total investment income .......................... 301,291 9,458,851 2,848,105 30,061,543 ------------------------------------------------------------------------ Expenses: Management fees (Note 3a) ............................. 380,282 5,167,299 3,088,232 18,619,717 Administrative fees (Note 3b) ......................... 158,591 -- 1,302,125 -- Distribution fees: (Note 3c) Class A .............................................. 111,691 2,168,431 888,167 8,810,357 Class B .............................................. 86,984 701,283 552,602 172,064 Class C .............................................. 128,376 1,627,706 860,799 3,504,642 Class R .............................................. 8,247 198,485 12,331 150,419 Transfer agent fees (Note 3e) ......................... 367,452 2,577,910 1,455,637 11,200,513 Custodian fees (Note 4) ............................... 1,298 19,517 16,849 84,922 Reports to shareholders ............................... 24,748 144,335 67,036 303,562 Registration and filing fees .......................... 24,730 51,411 45,556 169,389 Professional fees ..................................... 8,343 23,766 20,809 40,983 Trustees' fees and expenses ........................... 1,115 13,472 9,450 82,492 Other ................................................. 2,822 35,672 20,225 198,467 ------------------------------------------------------------------------ Total expenses ................................... 1,304,679 12,729,287 8,339,818 43,337,527 Expense reductions (Note 4) ...................... (31) (84) (6) (754) ------------------------------------------------------------------------ Net expenses .................................... 1,304,648 12,729,203 8,339,812 43,336,773 ------------------------------------------------------------------------ Net investment income (loss) ................... (1,003,357) (3,270,352) (5,491,707) (13,275,230) ------------------------------------------------------------------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments Unaffiliated Issuers ................................ 10,621,869 75,703,615 70,765,349 364,643,252 Non-controlled affiliated issuers (Note 9) .......... -- -- -- 30,206,577 Foreign currency transactions ........................ 682 (11,818) 26,387 50,652 ------------------------------------------------------------------------ Net realized gain (loss) ....................... 10,622,551 75,691,797 70,791,736 394,900,481 ------------------------------------------------------------------------ Net change in unrealized appreciation (depreciation) on investments ....................................... 13,003,975 85,396,244 65,219,117 707,441,291 ------------------------------------------------------------------------ Net realized and unrealized gain (loss) ................ 23,626,526 161,088,041 136,010,853 1,102,341,772 ------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations ........................................... $ 22,623,169 $ 157,817,689 $ 130,519,146 $ 1,089,066,542 ========================================================================
78 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
------------------------------------------------------------------------ FRANKLIN AGGRESSIVE FRANKLIN FLEX CAP GROWTH FUND GROWTH FUND ------------------------------------------------------------------------ SIX MONTHS ENDED SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED OCTOBER 31, 2005 YEAR ENDED (UNAUDITED) APRIL 30, 2005 (UNAUDITED) APRIL 30, 2005 ------------------------------------------------------------------------ Increase (decrease) in net assets: Operations: Net investment income (loss) ......................... $ (1,003,357) $ (1,935,371) $ (3,270,352) $ (9,278,164) Net realized gain (loss) from investments and foreign currency transactions ...................... 10,622,551 12,078,232 75,691,797 130,308,800 Net change in unrealized appreciation (depreciation) on investments ...................... 13,003,975 (830,115) 85,396,244 4,600,879) ------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations .................... 22,623,169 9,312,746 157,817,689 76,429,757 ------------------------------------------------------------------------ Capital share transactions: (Note 2) Class A ............................................. (5,505,868) (11,496,514) 202,421,448 (13,092,591) Class B ............................................. (2,459,088) (2,073,076) (10,206,068) (3,595,930) Class C ............................................. (2,292,620) (7,287,508) 14,368,012 (11,762,550) Class R ............................................. 105,795 1,197,531 8,032,670 22,351,261 Advisor Class ....................................... 133,778 (1,036,191) 50,808,237 73,833,648 ------------------------------------------------------------------------ Total capital share transactions ...................... (10,018,003) (20,695,758) 265,424,299 67,733,838 ------------------------------------------------------------------------ Redemption fees ....................................... 839 2,758 14,136 18,422 ------------------------------------------------------------------------ Net increase (decrease) in net assets .......... 12,606,005 (11,380,254) 423,256,124 144,182,017 Net assets: Beginning of period ................................... 147,850,029 159,230,283 2,078,558,123 1,934,376,106 ------------------------------------------------------------------------ End of period ......................................... $ 160,456,034 $ 147,850,029 $ 2,501,814,247 $ 2,078,558,123 ========================================================================= Undistributed net investment income (loss) included in net assets: End of period ........................................ $ (1,003,357) $ -- $ (3,270,352) $ -- =========================================================================
Semiannual Report | See notes to financial statements. | 79 FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
--------------------------------------------------------------------------- FRANKLIN SMALL CAP FRANKLIN SMALL-MID CAP GROWTH FUND II GROWTH FUND SIX MONTHS ENDED SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED OCTOBER 31, 2005 YEAR ENDED (UNAUDITED) APRIL 30, 2005 (UNAUDITED) APRIL 30, 2005 --------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) .................... $ (5,491,707) $ (13,576,520) $ (13,275,230) $ (27,517,128) Net realized gain (loss) from investments and foreign currency transactions .............. 70,791,736 143,434,247 394,900,481 784,604,017 Net change in unrealized appreciation (depreciation) on investments .................. 65,219,117 (114,371,123) 707,441,291 (289,130,102) --------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ................. 130,519,146 15,486,604 1,089,066,542 467,956,787 --------------------------------------------------------------------------- Capital share transactions: (Note 2) Class A ......................................... (228,730,131) (154,630,443) (851,517,888) (1,132,754,446) Class B ......................................... (10,725,577) (17,538,958) (2,423,776) 4,360,345 Class C ......................................... (18,075,643) (37,234,680) (57,726,604) (144,750,592) Class R ......................................... 59,687 (183,822) 10,706,977 10,639,889 Advisor Class ................................... 15,734,896 21,541,213 192,758,161 13,620,527 --------------------------------------------------------------------------- Total capital share transactions .................. (241,736,768) (188,046,690) (708,203,130) (1,248,884,277) --------------------------------------------------------------------------- Redemption fees ................................... 1,865 2,869 26,088 69,252 --------------------------------------------------------------------------- Net increase (decrease) in net assets ....... (111,215,757) (172,557,217) 380,889,500 (780,858,238) Net assets: Beginning of period ............................... 1,273,896,003 1,446,453,220 7,724,731,425 8,505,589,663 --------------------------------------------------------------------------- End of period ..................................... $ 1,162,680,246 $ 1,273,896,003 $ 8,105,620,925 $ 7,724,731,425 =========================================================================== Undistributed net investment income (loss) included in net assets: End of period ................................... $ (5,491,707) $ -- $ (2,862,670) $ 10,412,560 ===========================================================================
80 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Strategic Series (the Trust) is registered under the Investment Company Act of 1940 as an open-end investment company, consisting of twelve separate series. All funds included in this report (the Funds) are diversified except the Franklin Flex Cap Growth Fund. The financial statements of the remaining funds in the series are presented separately. 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. 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 Trust has 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 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. 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 Trust's Board of Trustees. 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 Semiannual Report | 81 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION (CONTINUED) 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 Trust's Board of Trustees. 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 Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. REPURCHASE AGREEMENTS The Funds may enter into a joint repurchase agreement 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. The Funds may also enter into repurchase agreements. Repurchase agreements are accounted for as a loan by the Funds to the seller, collateralized by securities which are delivered to the Funds' 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 securities marked to market daily to maintain coverage of at least 100%. Repurchase agreements are valued at cost. At October 31, 2005, all repurchase agreements held by the Funds had been entered into on that date. D. 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 Statement 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 Statement of Assets and Liabilities. 82 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. SECURITIES LENDING The Franklin Flex Cap Growth Fund and the Franklin Small-Mid Cap Growth Fund loan securities to certain brokers through a securities lending agent for which they receive cash and securities collateral against the loaned securities in an amount initially equal to at least 102% of the market value of the loaned securities. The cash collateral is invested in short-term instruments as noted in the Statement of Investments. The securities received as collateral are held in a segregated account with the funds' custodian on the funds' behalf. The funds receive interest income from the investment of cash collateral and from the securities held as collateral, adjusted by lender fees and broker rebates. At October 31, 2005, the market values of securities on loan were $47,715,992 and $475,475,658, respectively, for which the funds' custodian held cash collateral valued at $48,028,000 and $478,758,000, respectively. The funds bear the risk of loss with respect to the investment of the cash collateral and the securities loaned. The securities lending agent has agreed to indemnify the funds in the case of default of any securities borrower. F. INCOME TAXES No provision has been made for U.S. income taxes because each Fund's policy is to continue 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. G. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date. 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 generally accepted accounting principles. 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 their operations. Temporary differences are not reclassified, as they will reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. Distributions received by the Trust from securities may be a return of capital (ROC). Such distributions reduce the cost basis of the securities, and any distributions in excess of the cost basis are recognized as capital gains. Semiannual Report | 83 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) 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. H. 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. I. 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 (30 days or less prior to June 1, 2004 for the Franklin Small Cap Growth Fund II and the Franklin Small-Mid Cap Growth Fund). 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. J. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. However, based on experience, the Trust expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST The Funds offer five classes of shares: Class A, Class B, Class C, Class R and Advisor Class. Effective March 1, 2005, Class B shares are only offered to existing Class B shareholders in the form of reinvested distributions and certain exchanges from other Franklin Templeton Class B shares. 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. 84 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED) At October 31, 2005, there were an unlimited number of shares authorized ($0.01 par value). Transactions in the Funds' shares were as follows:
--------------------------------------------------------------------------- FRANKLIN FRANKLIN AGGRESSIVE GROWTH FUND FLEX CAP GROWTH FUND --------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT --------------------------------------------------------------------------- CLASS A SHARES: Six months ended October 31, 2005 Shares sold ................................... 550,407 $ 8,116,337 10,639,101 $ 399,239,442 Shares redeemed ............................... (926,321) (13,622,205) (5,250,386) (196,817,994) --------------------------------------------------------------------------- Net increase (decrease) ....................... (375,914) $ (5,505,868) 5,388,715 $ 202,421,448 =========================================================================== Year ended April 30, 2005 Shares sold ................................... 1,232,860 $ 16,815,210 9,680,502 $ 342,784,116 Shares redeemed ............................... (2,106,694) (28,311,724) (10,138,711) (355,876,707) --------------------------------------------------------------------------- Net increase (decrease) ....................... (873,834) $ (11,496,514) (458,209) $ (13,092,591) =========================================================================== CLASS B SHARES: Six months ended October 31, 2005 Shares sold ................................... 19,495 $ 277,664 98,813 $ 3,522,780 Shares redeemed ............................... (193,167) (2,736,752) (385,628) (13,728,848) --------------------------------------------------------------------------- Net increase (decrease) ....................... (173,672) $ (2,459,088) (286,815) $ (10,206,068) =========================================================================== Year ended April 30, 2005 Shares sold ................................... 168,584 $ 2,203,100 538,201 $ 18,051,032 Shares redeemed ............................... (324,292) (4,276,176) (642,071) (21,646,962) --------------------------------------------------------------------------- Net increase (decrease) ....................... (155,708) $ (2,073,076) (103,870) $ (3,595,930) =========================================================================== CLASS C SHARES: Six months ended October 31, 2005 Shares sold ................................... 89,932 $ 1,277,134 1,350,192 $ 48,222,830 Shares redeemed ............................... (252,863) (3,569,754) (949,050) (33,854,818) --------------------------------------------------------------------------- Net increase (decrease) ....................... (162,931) $ (2,292,620) 401,142 $ 14,368,012 =========================================================================== Year ended April 30, 2005 Shares sold ................................... 249,194 $ 3,255,629 1,604,564 $ 54,440,891 Shares redeemed ............................... (809,895) (10,543,137) (1,966,987) (66,203,441) --------------------------------------------------------------------------- Net increase (decrease) ....................... (560,701) $ (7,287,508) (362,423) $ (11,762,550) =========================================================================== CLASS R SHARES: Six months ended October 31, 2005 Shares sold ................................... 36,174 $ 531,891 463,842 $ 17,154,811 Shares redeemed ............................... (29,057) (426,096) (245,433) (9,122,141) --------------------------------------------------------------------------- Net increase (decrease) ....................... 7,117 $ 105,795 218,409 $ 8,032,670 =========================================================================== Year ended April 30, 2005 Shares sold ................................... 134,439 $ 1,799,280 1,038,716 $ 36,498,408 Shares redeemed ............................... (45,539) (601,749) (403,277) (14,147,147) --------------------------------------------------------------------------- Net increase (decrease) ....................... 88,900 $ 1,197,531 635,439 $ 22,351,261 ===========================================================================
Semiannual Report | 85 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
---------------------------------------------------------------------------- FRANKLIN FRANKLIN AGGRESSIVE GROWTH FUND FLEX CAP GROWTH FUND ---------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------------------- ADVISOR CLASS SHARES: Six months ended October 31, 2005 Shares sold ............................... 152,206 $ 2,276,455 1,360,295 $ 51,102,914 Shares redeemed ........................... (143,084) (2,142,677) (7,820) (294,677) ------------------------------------------------------------------------------ Net increase (decrease) ................... 9,122 $ 133,778 1,352,475 $ 50,808,237 ============================================================================== Year ended April 30, 2005a Shares sold ............................... 242,685 $ 3,334,333 2,018,257 $ 73,920,574 Shares redeemed ........................... (321,388) (4,370,524) (2,394) (86,926) ------------------------------------------------------------------------------ Net increase (decrease) ................... (78,703) $ (1,036,191) 2,015,863 $ 73,833,648 ============================================================================== ------------------------------------------------------------------------------ FRANKLIN FRANKLIN SMALL CAP GROWTH FUND II SMALL-MID CAP GROWTH FUND ------------------------------------------------------------------------------ SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------------------ CLASS A SHARES: Six months ended October 31, 2005 Shares sold ............................... 4,729,884 $ 55,788,542 17,195,865 $ 601,788,673 Shares redeemed ........................... (23,588,563) (284,518,673) (41,402,812) (1,453,306,561) ------------------------------------------------------------------------------ Net increase (decrease) ................... (18,858,679) $ (228,730,131) (24,206,947) $ (851,517,888) Year ended April 30, 2005 Shares sold ............................... 15,269,135 $ 166,066,954 42,423,181 $ 1,329,416,397 Shares redeemed ........................... (29,402,084) (320,697,397) (78,191,573) (2,462,170,843) ------------------------------------------------------------------------------ Net increase (decrease) ................... (14,132,949) $ (154,630,443) (35,768,392) $(1,132,754,446) ============================================================================== CLASS B SHARES: Six months ended October 31, 2005 Shares sold ............................... 17,448 $ 204,079 40,069 $ 1,373,783 Shares redeemed ........................... (966,230) (10,929,656) (111,314) (3,797,559) ------------------------------------------------------------------------------ Net increase (decrease) ................... (948,782) $ (10,725,577) (71,245) $ (2,423,776) ============================================================================== Year ended April 30, 2005 Shares sold ............................... 142,615 $ 1,499,723 298,767 $ 9,156,433 Shares redeemed ........................... (1,790,441) (19,038,681) (156,836) (4,796,088) ------------------------------------------------------------------------------ Net increase (decrease) ................... (1,647,826) $ (17,538,958) 141,931 $ 4,360,345 ============================================================================== CLASS C SHARES: Six months ended October 31, 2005 Shares sold ............................... 215,013 $ 2,438,068 605,016 $ 20,030,782 Shares redeemed ........................... (1,816,412) (20,513,711) (2,354,078) (77,757,386) ------------------------------------------------------------------------------ Net increase (decrease) ................... (1,601,399) $ (18,075,643) (1,749,062) $ (57,726,604) ============================================================================== Year ended April 30, 2005 Shares sold ............................... 721,864 $ 7,652,478 1,664,298 $ 50,085,764 Shares redeemed ........................... (4,215,413) (44,887,158) (6,482,845) (194,836,356) ------------------------------------------------------------------------------ Net increase (decrease) ................... (3,493,549) $ (37,234,680) (4,818,547) $ (144,750,592) ==============================================================================
86 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
--------------------------------------------------------------------------- FRANKLIN FRANKLIN SMALL CAP GROWTH FUND II SMALL-MID CAP GROWTH FUND --------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT --------------------------------------------------------------------------- CLASS R SHARES: Six months ended October 31, 2005 Shares sold ................................... 41,791 $ 487,260 739,131 $ 25,618,081 Shares redeemed ............................... (36,001) (427,573) (438,588) (14,911,104) --------------------------------------------------------------------------- Net increase (decrease) ....................... 5,790 $ 59,687 300,543 $ 10,706,977 =========================================================================== Year ended April 30, 2005 Shares sold ................................... 199,611 $ 2,183,942 965,638 $ 30,392,161 Shares redeemed ............................... (215,963) (2,367,764) (624,840) (19,752,272) --------------------------------------------------------------------------- Net increase (decrease) ....................... (16,352) $ (183,822) 340,798 $ 10,639,889 =========================================================================== ADVISOR CLASS SHARES: Six months ended October 31, 2005 Shares sold ................................... 2,765,280 $ 32,713,154 8,660,770 $ 308,358,910 Shares redeemed ............................... (1,412,953) (16,978,258) (3,202,012) (115,600,749) --------------------------------------------------------------------------- Net increase (decrease) ....................... 1,352,327 $ 15,734,896 5,458,758 $ 192,758,161 =========================================================================== Year ended April 30, 2005 Shares sold ................................... 4,549,795 $ 49,882,770 4,597,299 $ 148,878,750 Shares redeemed ............................... (2,534,202) (28,341,557) (4,311,876) (135,258,223) --------------------------------------------------------------------------- Net increase (decrease) ....................... 2,015,593 $ 21,541,213 285,423 $ 13,620,527 ===========================================================================
(a) For the period August 2, 2004 (effective date) to April 30, 2005 for the Franklin Flex Cap Growth Fund. 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
- --------------------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION - --------------------------------------------------------------------------------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
Semiannual Report | 87 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES The Franklin Flex Cap Growth Fund and the Franklin Small-Mid Cap Growth Fund pay an investment management fee to Advisers based on the average daily net assets 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% In excess of $15 billion The Franklin Aggressive Growth Fund pays an investment management fee to Advisers based on the average daily net assets of the fund as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.500% Up to and including $500 million 0.400% Over $500 million, up to and including $1 billion 0.350% Over $1 billion, up to and including $1.5 billion 0.300% Over $1.5 billion, up to and including $6.5 billion 0.275% Over $6.5 billion, up to and including $11.5 billion 0.250% Over $11.5 billion, up to and including $16.5 billion 0.240% Over $16.5 billion, up to and including $19 billion 0.230% Over $19 billion, up to and including $21.5 billion 0.220% In excess of $21.5 billion The Franklin Small Cap Growth Fund II pays an investment management fee to Advisers based on the average daily net assets of the fund as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.550% Up to and including $500 million 0.450% Over $500 million, up to and including $1 billion 0.400% Over $1 billion, up to and including $1.5 billion 0.350% Over $1.5 billion, up to and including $6.5 billion 0.325% Over $6.5 billion, up to and including $11.5 billion 0.300% Over $11.5 billion, up to and including $16.5 billion 0.290% Over $16.5 billion, up to and including $19 billion 0.280% Over $19 billion, up to and including $21.5 billion 0.270% In excess of $21.5 billion 88 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) B. ADMINISTRATIVE FEES The Franklin Aggressive Growth Fund and the Franklin Small Cap Growth Fund II pay an administrative fee to FT Services of 0.20% per year of each of the fund's average daily net assets. Under an agreement with Advisers, FT Services provides administrative services to the Franklin Flex Cap Growth Fund and the Franklin Small-Mid Cap Growth Fund. The fee is paid by Advisers based on average daily net assets of each of the funds, and is not an additional expense of the funds. C. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the funds' Class A reimbursement distribution plans, the funds reimburse Distributors for costs incurred in connection with the 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 AGGRESSIVE FLEX CAP SMALL-MID CAP GROWTH FUND GROWTH FUND GROWTH FUND ----------------------------------------- Class A .............................. 0.35% 0.25% 0.25%
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 AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND --------------------------------------------------------- Class A.............................. -- -- 0.35% -- Class B.............................. 1.00% 1.00% 1.00% 1.00% Class C.............................. 1.00% 1.00% 1.00% 1.00% Class R.............................. 0.50% 0.50% 0.50% 0.50%
Semiannual Report | 89 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the period:
--------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND --------------------------------------------------------- Net sales charges received(a)........... $18,940 $640,082 $ 12,056 $196,483 Contingent deferred sales charges retained.............................. $24,196 $158,568 $102,389 $ 60,132
(a) Net of commissions paid to unaffiliated broker/dealers. E. TRANSFER AGENT FEES The Funds paid transfer agent fees as noted in the Statement of Operations of which the following amounts were retained by Investor Services:
--------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND --------------------------------------------------------- Transfer agent fees................... $276,555 $1,724,425 $733,847 $4,638,558
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 period ended October 31, 2005, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES At April 30, 2005, the Funds had tax basis capital losses which may be carried over to offset future capital gains, if any. The capital loss carryforwards were as follows:
--------------------------------- FRANKLIN FRANKLIN AGGRESSIVE FLEX CAP GROWTH FUND GROWTH FUND --------------------------------- Capital loss carryforwards expiring in: 2009........................................................... $ 2,232,725 $ -- 2010........................................................... 129,882,253 173,404,372 2011........................................................... 47,112,100 191,041,838 -------------------------------- $ 179,227,078 $364,446,210 ================================
90 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. INCOME TAXES (CONTINUED)
------------------------------------ FRANKLIN FRANKLIN SMALL CAP SMALL-MID CAP GROWTH FUND II GROWTH FUND ------------------------------------ Capital loss carryforwards expiring in: 2011 ..................................................... $ 118,506,075 $ 570,376,033 ====================================
At October 31, 2005, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
------------------------------------ FRANKLIN FRANKLIN AGGRESSIVE FLEX CAP GROWTH FUND GROWTH FUND ------------------------------------ Cost of investments ....................................... $ 130,725,779 $ 1,984,206,885 ==================================== Unrealized appreciation ................................... $ 28,871,414 $ 588,888,413 Unrealized depreciation ................................... (1,195,703) (55,766,607) ------------------------------------ Net unrealized appreciation (depreciation) ................ $ 27,675,711 $ 533,121,806 ==================================== ------------------------------------ FRANKLIN FRANKLIN SMALL CAP SMALL-MID CAP GROWTH FUND II GROWTH FUND ------------------------------------ Cost of investments ....................................... $ 946,133,148 $ 7,075,737,273 ==================================== Unrealized appreciation ................................... $ 278,719,096 $ 1,958,706,474 Unrealized depreciation ................................... (69,413,014) (441,424,471) ------------------------------------ Net unrealized appreciation (depreciation) ................ $ 209,306,082 $ 1,517,282,003 ====================================
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short-term securities) for the period ended October 31, 2005, were as follows:
-------------------------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND -------------------------------------------------------------------------- Purchases ...................... $ 138,992,843 $1,081,353,360 $ 238,038,632 $1,481,832,997 Sales .......................... $ 142,070,450 $ 713,212,589 $ 472,355,994 $2,398,186,018
Semiannual Report | 91 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 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. RESTRICTED AND ILLIQUID SECURITIES At October 31, 2005, investments in securities included issues that are restricted and illiquid. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration under the Securities Act of 1933, unless the sale is pursuant to an exemption under the 1933 Act. The Funds have registration rights for all restricted securities held at period end. The issuer generally incurs all registrations costs. A security may be considered illiquid if it lacks a readily available market or if its valuation has not changed for a certain period of time. At October 31, 2005, the funds held investments in restricted and illiquid securities, valued in accordance with procedures approved by the Trust's Board of Trustees as reflecting fair value, as follows:
- --------------------------------------------------------------------------------------------------------------------------- ACQUISITION SHARES ISSUER DATE COST VALUE - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN FLEX CAP GROWTH FUND 145,772 Anda Networks, cvt. pfd., D ..................................... 3/24/00 $ 2,000,000 $ -- 2,227,171 Fibrogen Inc., cvt. pfd., E ..................................... 5/19/00 9,999,998 10,133,628 124,712 Kestrel Solutions, cvt. pfd., D ................................. 1/20/00 1,624,997 -- 772,727 Masimo Corp., cvt. pfd., F ...................................... 5/15/00 8,499,997 4,249,999 ----------- Total Restricted and Illiquid Securities (0.57% of Net Assets) ............................. $14,383,627 =========== FRANKLIN SMALL-MID CAP GROWTH FUND 364,431 Anda Networks, cvt. pfd., D ..................................... 3/24/00 $ 5,000,000 $ -- 1,792,573 Foveon Inc., cvt. pfd., D, 144A ................................. 4/08/02 13,999,995 201,665 2,597,593 Foveon Inc., cvt. pfd., E, 144A ................................. 5/31/05 2,635,024 2,635,024 239,831 Kestrel Solutions, cvt. pfd., D ................................. 1/20/00 3,124,998 -- 682,128 Mirapoint Inc., 144A ............................................ 9/09/99 4,999,998 -- 301,660 Mirapoint Inc., pfd ............................................. 7/07/05 561,391 561,391 ----------- Total Restricted and Illiquid Securities (0.04% of Net Assets) ............................. $ 3,398,080 ===========
92 | Semiannual Report SEMIANNUAL REPORT | FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The Investment Company Act of 1940 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 Small-Mid Cap Growth Fund at October 31, 2005, were as shown below.
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER NUMBER OF SHARES OF SHARES HELD AT HELD AT REALIZED BEGINNING GROSS GROSS END OF VALUE AT INVESTMENT CAPITAL NAME OF ISSUER OF PERIOD ADDITIONS REDUCTIONS PERIOD END OF PERIOD INCOME GAIN (LOSS) - ------------------------------------------------------------------------------------------------------------------------------------ NON-CONTROLLED AFFILIATES Adolor Corp. ............................ 1,000,000 1,073,360 -- 2,073,360 $ 21,977,616 $ -- $ -- Advanced Neuromodulation Systems Inc .... 1,281,200 100,000 761,200 620,000 (a) -- 17,880,894 Cabot Corp. ............................. 3,232,600 -- 1,990,500 1,242,100 (a) 890,912 8,104,429 Gibraltar Industries Inc. ............... 1,785,650 -- 470,977 1,314,673 (a) 168,491 4,221,254 Stereotaxis Inc. ........................ 1,463,200 -- -- 1,463,200 10,388,720 -- -- Tektronix Inc. .......................... 4,865,900 -- -- 4,865,900 111,818,382 583,908 -- TOTAL NON-CONTROLLED AFFILIATES -------------------------------------- (1.78% of Net Assets) $144,184,718 $1,643,311 $30,206,577 ======================================
(a) As of October 31, 2005, no longer an affiliate. 10. 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 a plan for distribution of the respective settlement monies. The CAGO approved the distribution plan under the CAGO Settlement and, in accordance with the terms and conditions of that settlement, the monies were disbursed to the relevant funds in March, 2005. The SEC has not yet approved the distribution plan pertaining to the December 13, 2004 SEC Order. When approved, disbursements of settlement monies will be made promptly to the relevant funds, in accordance with the terms and conditions of that order. The IDC continues to develop the plan of distribution under the August 2, 2004 SEC Order that resolved the SEC's market timing investigation. Semiannual Report | 93 SEMIANNUAL REPORT | FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 10. 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 Trust, it is committed to making the Trust or its shareholders whole, as appropriate. 94 | Semiannual Report FRANKLIN STRATEGIC SERIES SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Trust has established Proxy Voting Policies and Procedures ("Policies") that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. Semiannual Report | 95 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 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 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 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 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 Arizona California(7) Colorado Connecticut Florida(7) Georgia Kentucky Louisiana Maryland Massachusetts(6) Michigan(6) Minnesota(6) Missouri New Jersey New York(7) North Carolina Ohio(7) Oregon Pennsylvania Tennessee 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. 09/05 Not part of the semiannual report [LOGO](R) FRANKLIN TEMPLETON One Franklin Parkway INVESTMENTS San Mateo, CA 94403-1906 |_| WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. SEMIANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN STRATEGIC SERIES INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. 1-800/DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES 1-800/632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FSS1 S2005 12/05 [GRAPHIC OMITTED] - -------------------------------------------------------------------------------- OCTOBER 31, 2005 - -------------------------------------------------------------------------------- Franklin Biotechnology Discovery Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Natural Resources Fund Franklin Technology Fund - -------------------------------------------------------------------------------- SEMIANNUAL REPORT AND SHAREHOLDER LETTER SECTOR - -------------------------------------------------------------------------------- FRANKLIN STRATEGIC SERIES WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. - -------------------------------------------------------------------------------- [LOGO](R) FRANKLIN TEMPLETON INVESTMENTS FRANKLIN o Templeton o Mutual Series FRANKLIN TEMPLETON INVESTMENTS GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups--Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services. - -------------------------------------------------------------------------------- MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS - -------------------------------------------------------------------------------- [GRAPHIC OMITTED] Not part of the semiannual report CONTENTS SHAREHOLDER LETTER ......................................................... 1 SEMIANNUAL REPORT Economic and Market Overview ............................................... 4 Franklin Biotechnology Discovery Fund ...................................... 6 Franklin Global Communications Fund ........................................ 13 Franklin Global Health Care Fund ........................................... 20 Franklin Natural Resources Fund ............................................ 27 Franklin Technology Fund ................................................... 35 Financial Highlights and Statements of Investments ......................... 44 Financial Statements ....................................................... 75 Notes to Financial Statements .............................................. 84 Shareholder Information .................................................... 99 - -------------------------------------------------------------------------------- SEMIANNUAL REPORT ECONOMIC AND MARKET OVERVIEW During the six months ended October 31, 2005, domestic economic expansion was driven by strength across most industries, sectors and regions. Gross domestic product (GDP) rose during the period, benefiting primarily from increased personal consumption, business investment and federal spending. Slower export growth combined with greater demand for imported goods and materials fueled a widening trade gap. The U.S. dollar rallied in 2005 driven largely by rising short-term domestic interest rates, and strong economic growth in the U.S. relative to many of its major trading partners. Oil prices increased substantially during the period largely due to potential long-term supply limitations and strong growth in global demand, especially from China and India. Despite rising commodity prices, inflation remained relatively contained for the 12 months ended October 31, 2005, as measured by the 2.1% rise for the core Consumer Price Index (CPI).(1) With this inflation picture, the Federal Reserve Board raised the federal funds target rate from 2.75% to 3.75%, and said it would continue to undertake appropriate monetary policy action at a measured pace. Compared with the rise in short-term interest rates, long-term interest rates remained relatively stable, supporting overall robust housing and commercial real estate activity, which contributed to economic growth. Many businesses enjoyed their widest profit margins on record, propelled largely by productivity gains. The labor market firmed as employment increased and the unemployment rate dropped from 5.2% to 5.0% during the reporting period.(1) Personal income rose, and hiring rebounded in many industries, bolstered by healthy business spending. However, late in the period consumer sentiment fell amid concerns about rising energy costs. (1) Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. 4 | Semiannual Report In this environment, the blue chip stocks of the Dow Jones Industrial Average posted a six-month total return of +3.57%, while the broader Standard & Poor's 500 Composite Index (S&P 500) and the technology-heavy NASDAQ Composite Index returned +5.26% and +10.78%.(2) (2) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 2005. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. Semiannual Report | 5 FRANKLIN BIOTECHNOLOGY DISCOVERY FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Biotechnology Discovery Fund seeks capital appreciation by investing at least 80% of its net assets in securities of biotechnology companies and discovery research firms located in the U.S. and other countries. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PORTFOLIO BREAKDOWN Franklin Biotechnology Discovery Fund Based on Total Net Assets as of 10/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Biotechnology ................................ 85.6% Other Pharmaceuticals ........................ 9.2% Medical Specialties .......................... 1.7% Short-Term Investments & Other Net Assets .... 3.5% - -------------------------------------------------------------------------------- We are pleased to bring you Franklin Biotechnology Discovery Fund's semiannual report for the period ended October 31, 2005. PERFORMANCE OVERVIEW Franklin Biotechnology Discovery Fund - Class A delivered a +17.52% cumulative total return for the six months under review. The Fund outperformed its narrow benchmark, the NASDAQ Biotechnology Index, which returned +16.71% over the same period. The Fund also outperformed the broader market, as measured by the Standard & Poor's 500 Composite Index (S&P 500) and NASDAQ Composite Index, which returned +5.26% and +10.78% for the six-month period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 9. (1) Source: Standard & Poor's Micropal. The NASDAQ Biotechnology Index is a capitalization-weighted index designed to measure the performance of all NASDAQ stocks in the biotechnology sector. The index was developed with a base value of 200 as of 11/1/93. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite Index measures all domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 45. 6 | Semiannual Report INVESTMENT STRATEGY The Fund is managed using a bottom-up approach to individual stock selection, with a focus on fundamental analysis and primary research. We look for biotechnology, biopharmaceutical and platform technology companies that possess products with favorable competitive profiles, large market opportunities and strong intellectual property, supported by thoughtful clinical and market development strategies. Our assessment of these products is based on extensive primary research and due diligence and includes, but is not limited to, a thorough review of medical literature, consultation of community and academic physicians, and attendance at scientific meetings and symposia. Additionally, we favor companies with excellent management, strong financial characteristics and attractive valuations. MANAGER'S DISCUSSION Fund performance benefited from several holdings during the period. The Fund's biggest absolute contributor to overall performance was Amgen. Amgen was the Fund's largest position and returned 30% during the six-month period. One of the primary reasons that Amgen's stock performed well was the strong earnings growth the company reported in the second quarter. Relative to our benchmark, the biggest contributor to performance was Genentech. Genentech was up 28% during the period for two reasons. First, the company announced and presented positive data from a phase III trial for Lucentis, which treats age-related macular degeneration. Results were better than expected and suggested greater efficacy than competing drugs, Visudyne and Macugen. Second, Genentech acquired a large manufacturing facility from Biogen Idec. This seemed to alleviate concerns that the company would run out of manufacturing capacity given the strong growth outlook for its antibody products Avastin, Herceptin and Lucentis. The top two performing stocks on an absolute return basis, and important contributors to performance, were Cotherix and Cubist Pharmaceuticals. Cotherix rose 187% due to a better-than-expected launch with its first approved drug, Ventavis. Ventavis is the first inhaled prostacyclin for the treatment of pulmonary arterial hypertension. Cubist advanced 123% during the period largely due to positive results from a phase III trial for additional uses of its marketed drug Cubicin, which treats endocarditis and bacteremia infections. We believe these results should expand the market opportunity for Cubicin and move the company toward sustainable profitability. There were some detractors from performance during the period. OSI Pharmaceuticals was the largest detractor on an absolute basis. OSI Pharmaceuticals' shares declined following the announcement that it would Semiannual Report | 7 TOP 10 EQUITY HOLDINGS Franklin Biotechnology Discovery Fund 10/31/05 - ----------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - ----------------------------------------------------- Amgen Inc. 9.1% BIOTECHNOLOGY, U.S. - ----------------------------------------------------- Gilead Sciences Inc. 6.3% BIOTECHNOLOGY, U.S. - ----------------------------------------------------- Genentech Inc. 6.1% BIOTECHNOLOGY, U.S. - ----------------------------------------------------- Genzyme Corp. 5.8% BIOTECHNOLOGY, U.S. - ----------------------------------------------------- Biogen Idec Inc. 5.6% BIOTECHNOLOGY, U.S. - ----------------------------------------------------- MedImmune Inc. 4.2% BIOTECHNOLOGY, U.S. - ----------------------------------------------------- Celgene Corp. 4.0% BIOTECHNOLOGY, U.S. - ----------------------------------------------------- Cubist Pharmaceuticals Inc. 2.4% BIOTECHNOLOGY, U.S. - ----------------------------------------------------- Sepracor Inc. 2.3% OTHER PHARMACEUTICALS, U.S. - ----------------------------------------------------- Alkermes Inc. 2.0% BIOTECHNOLOGY, U.S. - ----------------------------------------------------- acquire Eyetech Pharmaceuticals. Although the acquisition diversified OSI's business, it did so by acquiring a company with a deteriorating outlook. OSI shares fell 51% for the period. Eyetech Pharmaceuticals also negatively impacted the Fund during the period as its shares declined 23% in value despite the acquisition by OSI Pharmaceuticals. The decline was in response to the positive data announced by Genentech on its Lucentis phase III trial as stated earlier. Eyetech's lead product, Macugen, will likely be negatively impacted by Lucentis's anticipated launch in 2006. Lastly, Medicines Co. performed poorly, declining 20% in value largely due to weak Angiomax sales trends. Angiomax sales experienced meager growth in 2005 for several reasons. First, a sales force reorganization caused some disruption. Second, inventories at the hospital level were too high at the beginning of the year. Third, wholesalers significantly reduced inventory levels following the completion of inventory management agreements with the company. Thank you for your continued participation in Franklin Biotechnology Discovery Fund. We look forward to serving your future investment needs. /s/ Evan McCulloch [PHOTO OMITTED] Evan McCulloch, CFA Portfolio Manager Franklin Biotechnology Discovery Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2005, 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 ADVISER 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. 8 | Semiannual Report PERFORMANCE SUMMARY AS OF 10/31/05 FRANKLIN BIOTECHNOLOGY DISCOVERY FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION - ------------------------------------------------------------------------------- CLASS A (SYMBOL: FBDIX) CHANGE 10/31/05 4/30/05 - ------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 8.06 $ 54.11 $ 46.05 - ------------------------------------------------------------------------------- PERFORMANCE(1) CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE. CUMULATIVE TOTAL RETURN EXCLUDES THE SALES CHARGE. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE THE MAXIMUM SALES CHARGE.
- ----------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (9/15/97) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return(2) +17.52% +8.59% -35.19% +121.73% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return(3) +10.77% +2.34% -9.39% +9.49% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment(4) $11,077 $10,234 $6,108 $20,894 - ----------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(5) +3.59% -10.46% +10.19% - -----------------------------------------------------------------------------------------------------
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. Semiannual Report | 9 PERFORMANCE SUMMARY (CONTINUED) ENDNOTES INVESTING IN A NONDIVERSIFIED FUND CONCENTRATING IN THE BIOTECHNOLOGY SECTOR INVOLVES SPECIAL RISKS SUCH AS PATENT CONSIDERATIONS, PRODUCT LIABILITY, GOVERNMENT REGULATORY REQUIREMENTS AND REGULATORY APPROVAL FOR NEW DRUGS AND MEDICAL PRODUCTS. BIOTECHNOLOGY COMPANIES ARE OFTEN SMALL AND/OR RELATIVELY NEW. SMALLER COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGES IN ECONOMIC CONDITIONS AND HAVE LESS CERTAIN GROWTH PROSPECTS THAN LARGER, MORE ESTABLISHED COMPANIES AND CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM. THE FUND MAY ALSO INVEST IN FOREIGN COMPANIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. 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. (1) Past expense reductions by the Fund's manager increased the Fund's total returns. If the manager had not taken this action, the Fund's total returns would have been lower. (2) Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. (3) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the current maximum sales charge. Six-month return has not been annualized. (4) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include the current maximum sales charge. (5) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. 10 | Semiannual Report YOUR FUND'S EXPENSES FRANKLIN BIOTECHNOLOGY DISCOVERY 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 below 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. Semiannual Report | 11 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 4/30/04 VALUE 10/31/05 PERIOD* 4/30/05-10/31/05 - ----------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,175.20 $ 6.85 - ----------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,018.90 $ 6.36 - -----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio of 1.25%, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 12 | Semiannual Report FRANKLIN GLOBAL COMMUNICATIONS FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Global Communications Fund seeks capital appreciation and current dividend and interest income, without undue risk, by investing at least 80% of its net assets in securities of companies that are involved in the development, manufacture or sale of communications services and communications equipment. We are pleased to bring you Franklin Global Communications Fund's semiannual report for the period ended October 31, 2005. PERFORMANCE OVERVIEW Franklin Global Communications Fund - Class A delivered an +18.77% cumulative total return for the six months under review. The Fund outperformed its benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which returned +5.26% for the same period.(1) Because the Fund invests in only a few of the index's sectors, performance of the Fund and the S&P 500 are not directly comparable. The Fund also outperformed the Lipper Telecommunications Funds Classification Average's +13.18% return for the same six-month period.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 16. INVESTMENT STRATEGY We use a fundamental, research-driven approach, focusing primarily on individual securities to choose companies we believe are positioned to grow earnings and cash flow at a faster pace than is implied by the security's current valuation. We consider a company's market price relative to our evaluation of its long-term earnings, asset value and cash flow potential. The quality of the management team and the company's strategic position within its industry are (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: Lipper Inc. The Lipper Telecommunications Funds Classification Average is calculated by averaging the total return of all funds within the Lipper Telecommunications Funds classification in the Lipper Open-End underlying fund universe for the period indicated. Lipper Telecommunications Funds are defined as funds that invest at least 65% of their assets in the equity securities of domestic and foreign companies engaged in the development, manufacture or sale of telecommunications services or equipment. For the six months ended 10/31/05, there were 37 funds in this category. Lipper calculations do not include sales charges. Fund performance relative to the average may have differed if these or other factors had been considered. The average includes reinvestment of any income or distributions. One cannot invest directly in the average, nor is the average 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 51. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- GEOGRAPHIC BREAKDOWN Franklin Global Communications Fund Based on Total Net Assets as Of 10/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Americas 87.8% Europe 5.3% Asia 3.6% Middle East & Africa 1.5% Australia & New Zeland 1.0% Short-Term Investments & Other Net Assets 0.8% Semiannual Report | 13 PORTFOLIO BREAKDOWN Franklin Global Communications Fund Based on Total Net Assets as Of 10/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Wireless Communications 24.8% Major Telecommunications 15.5% Telecommunications Equipment 13.6% Specialty Telecommunications 8.8% Internet Software & Services 6.7% Broadcasting 5.1% Advertising & Marketing Services 4.4% Computer Peripherals 4.1% Movies & Entertainment 3.7% Media Conglomerates 2.9% Computer Processing Hardware 2.4% Semiconductors 2.4% Data Processing Services 2.2% Packaged Software 1.7% Cable & Satellite TV 0.9% Short-Term Investments & Other Net Assets 0.8% also major considerations in our investment process. We also consider investment themes that we believe may have possible effects on the communications sector and individual companies. MANAGER'S DISCUSSION During the six months under review, the wireless telecommunications industry provided the greatest contribution to our overall results. We continued to favor wireless over wireline as we expected these growth trends to continue. Several factors support these overall trends. For example, wireless access in less developed countries with low wireless service penetration rates, or number of users, grew more rapidly than many industry analysts expected. Many of these nascent markets continued to hold the potential for strong wireless growth. Relative global economic stability, combined with the rollout of prepaid wireless plans, also fueled the industry's growth. On a company-specific basis, three of the Fund's top performers are outlined below. America Movil is the dominant wireless service provider in Mexico and operates wireless service businesses in Brazil, Argentina, Peru, Colombia, Ecuador, Guatemala and El Salvador. These countries' markets had relatively low wireless penetration rates that experienced rapid growth driven by the introduction of pre-paid wireless plans and stabilized economies. Wireless is a cost-effective solution for telecommunications services in these countries. NII Holdings is the Nextel wireless service provider operating in Mexico, Brazil, Argentina and Peru. We purchased the stock because we thought the company had an attractive stock valuation, a capable management team and a tremendous growth opportunity in its markets. NII's subscriber base grew faster than expected, translating into strong profitability. Recently the company acquired spectrum (the range of frequencies used by radio, TV, wireless, satellite and other technologies) that will allow Nextel's push-to-talk service (centering on a new wireless telephone handset which functions like a walkie-talkie) to be offered nationwide in Mexico. Rogers Communications is a diversified Canadian communications and media company engaged in three primary lines of business. In Canada, Rogers Wireless is the largest wireless voice and data communications services provider, Rogers Cable is the biggest cable television provider, and Rogers Media is the premier collection of category-leading media assets with businesses in radio and television broadcasting. 14 | Semiannual Report The media industry experienced particularly weak performance during the reporting period. Media companies faced threats to their core advertising businesses as new entrants, such as the Internet, competed for market share; and new technology allowing viewers to skip or avoid advertising proliferated. Additionally, the value of original content came into question as piracy threatened to change the economics of content creation. Three media-related detractors to the Fund's overall results are described below. Viacom (media conglomerates) operates worldwide as a diversified entertainment company through five segments: cable networks, television, radio, outdoor and entertainment. Although this holding negatively impacted the Fund, we continued to own Viacom because of its strong asset base of content creating entities. Walt Disney (media conglomerates), a diversified entertainment company, operates worldwide in four segments: media networks, parks and resorts, studio entertainment, and consumer products. We continued to hold this position also for its strong asset base of content creating entities. DreamWorks Animation (movies and entertainment) engages in the development, production and use of computer generated animated feature films in theaters, home video, pay and free broadcast television, and ancillary markets. We sold this stock by period-end. Thank you for your continued participation in Franklin Global Communications Fund. We look forward to serving your future investment needs. /s/ Grant Bowers [PHOTO OMITTED] Grant Bowers Portfolio Manager Franklin Global Communications Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2005, 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 ADVISER 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. TOP 10 EQUITY HOLDINGS Franklin Global Communications Fund 10/31/05 - ----------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - ----------------------------------------------------- America Movil SA de CV, L, ADR 7.5% WIRELESS COMMUNICATIONS, MEXICO - ----------------------------------------------------- American Tower Corp., A 5.1% SPECIALTY TELECOMMUNICATIONS, U.S. - ----------------------------------------------------- Rogers Communications Inc., B 4.5% WIRELESS COMMUNICATIONS, CANADA - ----------------------------------------------------- Google Inc., A 4.4% INTERNET SOFTWARE & SERVICES, U.S. - ----------------------------------------------------- NII Holdings Inc. 4.3% WIRELESS COMMUNICATIONS, U.S. - ----------------------------------------------------- Network Appliance Inc. 4.1% COMPUTER PERIPHERALS, U.S. - ----------------------------------------------------- QUALCOMM Inc. 3.9% TELECOMMUNICATIONS EQUIPMENT, U.S. - ----------------------------------------------------- Verizon Communications Inc. 3.1% MAJOR TELECOMMUNICATIONS, U.S. - ----------------------------------------------------- Nokia Corp., ADR 3.1% TELECOMMUNICATIONS EQUIPMENT, FINLAND - ----------------------------------------------------- Telus Corp. 3.0% MAJOR TELECOMMUNICATIONS, CANADA - ----------------------------------------------------- Semiannual Report | 15 PERFORMANCE SUMMARY AS OF 10/31/05 FRANKLIN GLOBAL COMMUNICATIONS FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION - ------------------------------------------------------------------------------- CLASS A (SYMBOL: FRGUX) CHANGE 10/31/05 4/30/05 - ------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.49 $9.43 $7.94 - ------------------------------------------------------------------------------- CLASS B (SYMBOL: N/A) CHANGE 10/31/05 4/30/05 - ------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.39 $8.98 $7.59 - ------------------------------------------------------------------------------- CLASS C (SYMBOL: FRUTX) CHANGE 10/31/05 4/30/05 - ------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.39 $8.99 $7.60 - ------------------------------------------------------------------------------- PERFORMANCE 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. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ------------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +18.77% +13.62% -39.28% +32.66% - ------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +12.00% +7.06% -10.56% +2.26% - ------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $11,200 $10,706 $5,724 $12,501 - ------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +16.52% -11.23% +2.37% - ------------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - ------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +18.31% +12.81% -41.44% -24.29% - ------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +14.31% +8.81% -10.47% -3.99% - ------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $11,431 $10,881 $5,752 $7,571 - ------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +18.90% -11.15% -3.90% - ------------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +18.29% +12.66% -41.54% +23.38% - ------------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +17.29% +11.66% -10.18% +2.12% - ------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $11,729 $11,166 $5,846 $12,338 - ------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +21.70% -10.86% +2.24% - -------------------------------------------------------------------------------------------------------
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 | Semiannual Report PERFORMANCE SUMMARY (CONTINUED) ENDNOTES INVESTING IN A NONDIVERSIFIED, GLOBAL FUND CONCENTRATING IN A SINGLE INDUSTRY INVOLVES SPECIAL RISKS SUCH AS EXPOSURE TO CURRENCY FLUCTUATION AND INCREASED SUSCEPTIBILITY TO ECONOMIC, POLITICAL AND REGULATORY DEVELOPMENTS. INVESTING IN DEVELOPING MARKETS INVOLVES HEIGHTENED RISKS RELATED TO THE SAME FACTORS. BY FOCUSING ON COMMUNICATIONS COMPANIES, THE FUND CARRIES GREATER RISK OF ADVERSE DEVELOPMENTS AFFECTING THOSE COMPANIES THAN A MORE BROADLY INVESTED FUND. THE FUND'S PORTFOLIO INCLUDES INVESTMENTS IN TECHNOLOGY, WHICH HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS. SMALLER OR RELATIVELY NEW COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS, AND THEIR PROSPECTS FOR GROWTH ARE LESS CERTAIN THAN LARGER COMPANIES. 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 and does not include a sales charge. (2) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. (3) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. (4) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. Semiannual Report | 17 YOUR FUND'S EXPENSES FRANKLIN GLOBAL COMMUNICATIONS 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 below 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. 18 | Semiannual 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 4/30/05 VALUE 10/31/05 PERIOD* 4/30/05-10/31/05 - ---------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,187.70 $ 8.05 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,017.85 $ 7.43 - ---------------------------------------------------------------------------------------------------------- CLASS B - ---------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,183.10 $ 12.16 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,014.06 $ 11.22 - ---------------------------------------------------------------------------------------------------------- CLASS C - ---------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,182.90 $ 12.16 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,014.06 $ 11.22 - ----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 1.46%; B: 2.21%; and C: 2.21%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. Semiannual Report | 19 FRANKLIN GLOBAL HEALTH CARE FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: franklin global health care fund seeks capital appreciation by investing at least 80% of its net assets in securities of health care companies located throughout the world. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- GEOGRAPHIC BREAKDOWN Franklin Global Health Care Fund Based on Total Net Assets as of 10/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] U.S. 80.6% Switzerland 8.1% Germany 2.3% U.K. 1.4% France 1.0% Brazil 0.8% Short-Term Investments & Other Net Assets 5.8% We are pleased to bring you Franklin Global Health Care Fund's semiannual report for the period ended October 31, 2005. PERFORMANCE OVERVIEW Franklin Global Health Care Fund - Class A delivered a +5.94% cumulative total return for the six months under review. The Fund outperformed its narrow benchmark, the S&P 500 Health Care Index, which returned -0.88%, and also outperformed its broader benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which returned +5.26% for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 23. HEALTH CARE SECTOR OVERVIEW Health care spending in the U.S. decelerated modestly in 2005 but posted better results than the broader economy. Despite significant deficits, the government projected a 7%-9% spending growth rate for Medicare and Medicaid programs. Non-government spending slowed moderately to an estimated 6%-8% growth rate as less generous health benefit programs led to cost shifting from employers to employees. Within health care, the pharmaceutical industry was negatively impacted by patent expirations and shifting demand toward generic pharmaceuticals. Demand for medical devices remained steady, driven by an aging population, although increasing competition and political concerns pressured some markets' pricing growth. Health care service providers enjoyed a broadly supportive regulatory and reimbursement environment under the Bush administration. (1) Source: Standard & Poor's Micropal. The S&P 500 Health Care Index is a subsector of the Industrial Sector of the S&P 500. It includes all the companies in the health care industry that are in the S&P 500. 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 include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 57. 20 | Semiannual Report INVESTMENT STRATEGY We use a fundamental, research-driven approach, focusing primarily on individual securities to choose companies we believe are positioned for rapid revenue, earnings or asset growth. We look for companies with competitive advantages such as a proprietary technology, economies of scale or captive customers, and strong management. We use bottom-up analysis to derive an intrinsic value for the security, which we compare to the market price to help us assess whether there is potential for meaningful capital appreciation. MANAGER'S DISCUSSION The Fund was underweighted in the major pharmaceuticals industry during the six months ended October 31, 2005. This decision, combined with stock selection within the industry, contributed favorably to Fund returns relative to the S&P 500 Health Care Index. Our positions in several European stocks not included in the index, such as Novartis and Roche Holding, positively impacted the Fund's performance. In the U.S., our underweighted positions in Pfizer and Johnson & Johnson, and not holding Merck & Co. also benefited performance. Our overweighted position in the biotechnology and other pharmaceuticals industries helped the Fund, but stock selection detracted from Fund performance relative to the index. Our Protein Design Labs and Indevus Pharmaceuticals holdings benefited the Fund, while an underweighted position in Amgen and no position in Gilead Sciences proved detrimental as the biotechnology group was the health care sector's strongest performing segment during the period. An overweighted allocation in the health services sector also aided the Fund. Contract research organization Pharmaceutical Product Development and nursing home pharmacy operator Omnicare boosted Fund returns. We did not hold managed care company UnitedHealth Group, which hurt the Fund's relative performance as the company continued to produce strong financial results. Lastly, stock selection within the medical specialties industry helped relative performance. In particular, our holdings in Digene and Advanced Neuromodulation Systems contributed to Fund returns. Our not holding Medtronic, however, negatively impacted performance. PORTFOLIO BREAKDOWN Franklin Global Health Care Fund Based on Total Net Assets as of 10/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Major Pharmaceuticals 27.2% Managed Health Care 14.8% Biotechnology 13.5% Medical Specialties 13.4% Services to the Health Industry 6.4% Other Pharmaceuticals 5.2% Hospital & Nursing Management 4.8% Medical & Nursing Services 3.3% Generic Pharmaceuticals 1.4% Medical Distributors 1.4% Electronic Equipment & Instruments 1.0% Other 1.8% Short-Term Investments & Other Net Assets 5.8% Semiannual Report | 21 TOP 10 EQUITY HOLDINGS Franklin Global Health Care Fund 10/31/05 - ----------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - ----------------------------------------------------- Johnson & Johnson 5.1% MAJOR PHARMACEUTICALS, U.S. - ----------------------------------------------------- Roche Holding AG 4.8% MAJOR PHARMACEUTICALS, SWITZERLAND - ----------------------------------------------------- WellPoint Inc. 4.2% MANAGED HEALTH CARE, U.S. - ----------------------------------------------------- Novartis AG 3.4% MAJOR PHARMACEUTICALS, SWITZERLAND - ----------------------------------------------------- Amgen Inc. 3.2% BIOECHNOLOGY, U.S. - ----------------------------------------------------- Pharmaceutical Product Development Inc. 3.0% SERVICES TO THE HEALTH INDUSTRY, U.S. - ----------------------------------------------------- Wyeth 3.0% MAJOR PHARMACEUTICALS, U.S. - ----------------------------------------------------- Schering-Plough Corp. 2.9% MAJOR PHARMACEUTICALS, U.S. - ----------------------------------------------------- Caremark Rx Inc. 2.4% MANAGED HEALTH CARE, U.S. - ----------------------------------------------------- Aetna Inc. 2.4% MANAGED HEALTH CARE, U.S. - ----------------------------------------------------- Thank you for your continued participation in Franklin Global Health Care Fund. We look forward to serving your future investment needs. /s/ Matthew Willey [PHOTO OMITTED] Matthew Willey, CFA Portfolio Manager Franklin Global Health Care Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2005, 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 ADVISER 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. 22 | Semiannual Report PERFORMANCE SUMMARY AS OF 10/31/05 FRANKLIN GLOBAL HEALTH CARE FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION
- --------------------------------------------------------------------------------------------------- CLASS A (SYMBOL: FKGHX) CHANGE 10/31/05 4/30/05 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.21 $21.57 $20.36 - --------------------------------------------------------------------------------------------------- CLASS B (SYMBOL: FGHBX) CHANGE 10/31/05 4/30/05 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.07 $20.51 $19.44 - --------------------------------------------------------------------------------------------------- CLASS C (SYMBOL: FGIIX) CHANGE 10/31/05 4/30/05 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.07 $20.31 $19.24 - ---------------------------------------------------------------------------------------------------
PERFORMANCE 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. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- --------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +5.94% +14.07% -15.38% +91.34% - --------------------------------------------------------------------------------------------------- Average Annual Total Return(2) -0.14% +7.53% -4.43% +6.07% - --------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $ 9,986 $10,753 $7,974 $18,029 - --------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +9.50% -4.69% +6.24% - --------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - --------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +5.50% +13.25% -18.46% +33.34% - --------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +1.50% +9.25% -4.35% +4.30% - --------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,150 $10,925 $8,006 $13,334 - --------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +11.36% -4.60% +4.69% - --------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (9/3/96) - --------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +5.56% +13.21% -18.53% +40.95% - --------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +4.56% +12.21% -4.02% +3.82% - --------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,456 $11,221 $8,147 $14,095 - --------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +14.34% -4.27% +4.10% - ---------------------------------------------------------------------------------------------------
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. Semiannual Report | 23 PERFORMANCE SUMMARY (CONTINUED) ENDNOTES INVESTING IN A NONDIVERSIFIED, GLOBAL FUND CONCENTRATING IN THE HEALTH CARE SECTOR INVOLVES SPECIAL RISKS SUCH AS EXPOSURE TO CURRENCY FLUCTUATION, AND INCREASED SUSCEPTIBILITY TO ECONOMIC, POLITICAL AND REGULATORY DEVELOPMENTS. THE FUND INVESTS IN BIOTECHNOLOGY COMPANIES, WHICH ARE OFTEN SMALL OR RELATIVELY NEW, AND IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN ONE OF THE MARKET'S MOST VOLATILE SECTORS. SMALLER-COMPANY STOCKS CAN ALSO INVOLVE SPECIAL RISKS ASSOCIATED WITH SMALLER REVENUES AND MARKET SHARE, AND MORE LIMITED PRODUCT LINES, AND CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM. 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 and does not include a sales charge. (2) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. (3) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. (4) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. 24 | Semiannual Report YOUR FUND'S EXPENSES FRANKLIN GLOBAL HEALTH CARE 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 below 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. Semiannual Report | 25 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 4/30/05 VALUE 10/31/05 PERIOD* 4/30/05-10/31/05 - ------------------------------------------------------------------------------------------------------ Actual $ 1,000 $ 1,059.40 $ 6.54 - ------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $ 1,000 $ 1,018.85 $ 6.41 - ------------------------------------------------------------------------------------------------------ CLASS B - ------------------------------------------------------------------------------------------------------ Actual $ 1,000 $ 1,055.00 $ 10.41 - ------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $ 1,000 $ 1,015.07 $ 10.21 - ------------------------------------------------------------------------------------------------------ CLASS C - ------------------------------------------------------------------------------------------------------ Actual $ 1,000 $ 1,055.60 $ 10.41 - ------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $ 1,000 $ 1,015.07 $ 10.21 - ------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 1.26%; B: 2.01%; and C: 2.01%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 26 | Semiannual Report FRANKLIN NATURAL RESOURCES FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Natural Resources Fund seeks high total return by investing at least 80% of its net assets in equity and debt securities of companies that own, produce, refine, process, transport or market natural resources, as well as those that provide related services for natural resources companies. - -------------------------------------------------------------------------------- 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 Natural Resources Fund's semiannual report for the period ended October 31, 2005. PERFORMANCE OVERVIEW Franklin Natural Resources Fund - Class A delivered a +25.70% cumulative total return for the six months under review. The Fund outperformed its benchmarks, the Goldman Sachs Natural Resources Index and Standard & Poor's 500 Composite Index (S&P 500), which returned +21.29% and +5.26% for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 31. INVESTMENT STRATEGY We use a fundamental, research-driven approach to identify industries in the natural resources sector that we believe offer the strongest underlying attributes including, but not limited to, favorable supply and demand characteristics, barriers to entry, and pricing power. Within those industries, we seek to identify individual companies that appear to offer the best total return potential. The Fund's holdings are typically concentrated in the energy sector, but also include investments in the metals and mining, chemicals, paper and forest products, and other related sectors. (1) Sources: Goldman Sachs; Standard & Poor's Micropal. The Goldman Sachs Natural Resources Index is a modified capitalization-weighted index that includes companies involved in extractive industries (mining), energy, forestry services, producers of pulp and paper, and owners and operators of timber tracts or plantations. 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 include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 63. Semiannual Report | 27 PORTFOLIO BREAKDOWN Franklin Natural Resources Fund Based on Total Net Assets as of 10/31/05 [THE FOLLOWING TABLE WAS DEPICTED AS A BAR CHART IN THE PRINTED MATERIAL.] Energy Minerals 45.8% Industrial Services 32.2% Non-Energy Minerals 10.7% Process Industries 6.4% Transportation 2.2% Producer Manufacturing 1.0% Short-Term Investments & Other Net Assets 1.7% MANAGER'S DISCUSSION Natural resource equities outperformed the broader market during the six-month period driven by rising commodity prices, revenues and earnings. Nearly all natural resources sectors posted positive returns led by the energy subsectors coal and oil refining. Mining company stocks also performed well due to continued robust demand growth, limited supply and, in the case of precious metals companies, concerns that higher commodity prices would lead to generally higher inflation. However, some metals and mining company shares, including those of steel and aluminum companies, experienced weakness during the period due to worries related to increased production and the potential for oversupply. In the energy minerals sector, exploration and production stocks outperformed as oil and natural gas prices reached all-time highs. The industry represented the Fund's largest weighting and was a significant contributor to performance. Prices had already risen prior to the devastation caused by hurricanes Katrina and Rita, which disrupted supplies and caused significant longer-term damage to offshore oil and natural gas fields. This resulted in even higher prices and is likely to continue to influence supply for the foreseeable future. A large portion of production remained offline as the high-demand winter season approached. Although many companies made good progress restoring production, deliverability may remain constrained for several more months. Although most of the Fund's oil and gas production holdings benefited from higher commodity prices, several stood out.(2) The Fund's largest contributor to performance, Spinnaker Exploration, received an acquisition offer from Norwegian company Norsk Hydro in mid-September. We subsequently sold this position as the shares traded near the offer price. Other excellent performers, and significant Fund holdings, included Chesapeake Energy, Newfield Exploration and Talisman Energy. We initiated several positions in the oil and gas production industry that we expected to benefit from elevated commodity prices and healthy production growth. These included EnCana, Bois d'Arc Energy, Cabot Oil & Gas and Southwestern Energy. We also added to several existing positions with an onshore natural gas focus. The Fund's holdings in the oilfield services, contract drilling, integrated oil, and coal industries also performed well.(3) Oilfield services and contract drilling (2) In the SOI, oil and gas production holdings are in the energy minerals sector. (3) In the SOI, oilfield services and contract drilling holdings are in the industrial services sector, while integrated oil and coal holdings are in the energy minerals sector. 28 | Semiannual Report benefited from increased drilling and development activity as companies ramped up efforts to increase production. Strong demand for rigs and services led to increased utilization and pricing strength across most business lines. In addition, several offshore drilling rigs were damaged or lost during the hurricane season, leading to diminished supply, increased utilization, and a rapid rise in daily rates charged for drilling wells. Generally, we added to our onshore drilling company positions including a new holding, Bronco Drilling, while realizing some profits from the Fund's offshore drillers. We initiated eight oilfield services positions, all of which we expected to benefit from increased drilling and development spending by oil and natural gas production companies. Furthermore, several of these companies possess proprietary products or are employing unique strategies in their pursuit of growth. We also added to several existing positions with a focus on companies we thought would benefit from increased land drilling activity, hurricane-related repair work, and capital spending for oilfield equipment. We decreased the Fund's weighting in the integrated oil group as a result of our focus on U.S. onshore-oriented companies we expected to benefit from high natural gas prices.(3) In addition to trimming several holdings, we also sold our Royal Dutch Shell position given what we considered were the company's lackluster prospects for growth. In the non-energy minerals sector, the metals and mining group's performance varied widely as base and precious metals mining companies significantly outpaced those in the manufacturing and processing side of the business such as steel and aluminum. Cia Vale do Rio Doce or CVRD (iron ore), Zinifex (zinc), Freeport McMoRan Copper & Gold, and Xstrata (diversified mining) each appreciated more than 30% for the period and contributed to Fund returns. We reduced the Fund's weighting in steel and aluminum by selling our Wheeling Pittsburgh position and reducing our holdings in Alcoa. We increased our gold sector holdings by purchasing Newcrest Mining and Newmont Mining, and adding to existing holdings. The Fund's base metals companies also performed well during the period due to continued strong demand growth, tight supplies and rising prices. Copper, for instance, reached an all-time high, and iron ore prices also posted a sharp rise in 2005. We added to the Fund's exposure in both metals by initiating a position in Southern Copper (formerly Southern Peru Copper), and adding to our holdings in CVRD. TOP 10 EQUITY HOLDINGS Franklin Natural Resources Fund 10/31/05 - ----------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - ----------------------------------------------------- ExxonMobil Corp. 3.6% ENERGY MINERALS, U.S. - ----------------------------------------------------- ConocoPhillips 3.2% ENERGY MINERALS, U.S. - ----------------------------------------------------- BP PLC, ADR 2.9% ENERGY MINERALS, U.K. - ----------------------------------------------------- Chevron Corp. 2.9% ENERGY MINERALS, U.S. - ----------------------------------------------------- Newfield Exploration Co. 2.9% ENERGY MINERALS, U.S. - ----------------------------------------------------- Peabody Energy Corp. 2.7% ENERGY MINERALS, U.S. - ----------------------------------------------------- National-Oilwell Varco Inc. 2.6% INDUSTRIAL SERVICES, U.S. - ----------------------------------------------------- Occidental Petroleum Corp. 2.5% ENERGY MINERALS, U.S. - ----------------------------------------------------- Devon Energy Corp. 2.4% ENERGY MINERALS, U.S. - ----------------------------------------------------- Total SA, B, ADR 2.3% ENERGY MINERALS, FRANCE - ----------------------------------------------------- Semiannual Report | 29 GEOGRAPHIC BREAKDOWN Franklin Natural Resources Fund Based on Total Net Assets as of 10/31/05 [THE FOLLOWING TABLE WAS DEPICTED AS A BAR CHART IN THE PRINTED MATERIAL.] North America 86.0% Europe 7.4% Latin America 2.3% Australia & New Zealand 1.1% Cayman Islands 1.0% Jersey Islands 0.5% Short-Term Investments & Other Net Assets 1.7% Our process industries holdings underperformed the other sectors and detracted from Fund returns. However, we were able to blunt the impact by selling several positions, and reducing the weighting in several other holdings. Strong demand and rising feedstock prices appeared set to put a significant strain on the economy and, more importantly, on companies in this sector. Thus, we sought to reduce the Fund's exposure by selling positions in Bowater, E.I. du Pont de Nemour, Nova Chemicals and Smurfit-Stone Container, while also reducing positions in Cabot, Lyondell Chemical and Minerals Technologies. Thank you for your continued participation in Franklin Natural Resources Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ Frederick G. Fromm Frederick G. Fromm, CFA Portfolio Manager Franklin Natural Resources Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2005, 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 ADVISER 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. 30 | Semiannual Report PERFORMANCE SUMMARY AS OF 10/31/05 FRANKLIN NATURAL RESOURCES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION
- --------------------------------------------------------------------------------------------------- CLASS A (SYMBOL: FRNRX) CHANGE 10/31/05 4/30/05 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$6.25 $30.57 $24.32 - --------------------------------------------------------------------------------------------------- CLASS C (SYMBOL: N/A) CHANGE 10/31/05 9/1/05 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$1.03 $30.53 $31.56 - --------------------------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FNRAX) CHANGE 10/31/05 4/30/05 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$6.56 $31.91 $25.35 - ---------------------------------------------------------------------------------------------------
PERFORMANCE(1) CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE. CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- --------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------------------- Cumulative Total Return(2) +25.70% +38.70% +91.35% +263.00% - --------------------------------------------------------------------------------------------------- Average Annual Total Return(3) +18.49% +30.75% +12.51% +13.09% - --------------------------------------------------------------------------------------------------- Value of $10,000 Investment(4) $11,849 $13,075 $18,032 $34,224 - --------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(5) +41.32% +12.69% +13.52% - --------------------------------------------------------------------------------------------------- CLASS C INCEPTION (9/1/05) - --------------------------------------------------------------------------------------------------- Cumulative Total Return(2) -3.30% - --------------------------------------------------------------------------------------------------- Aggregate Total Return(6) -4.26% - --------------------------------------------------------------------------------------------------- Value of $10,000 Investment(4) $9,574 - --------------------------------------------------------------------------------------------------- Aggregate Total Return (9/30/05)(6) +3.59% - --------------------------------------------------------------------------------------------------- ADVISOR CLASS(7) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------------------- Cumulative Total Return(2) +25.88% +39.16% +95.04% +290.04% - --------------------------------------------------------------------------------------------------- Average Annual Total Return(3) +25.88% +39.16% +14.29% +14.58% - --------------------------------------------------------------------------------------------------- Value of $10,000 Investment(4) $12,588 $13,916 $19,504 $39,004 - --------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(5) +50.37% +14.46% +15.01% - ---------------------------------------------------------------------------------------------------
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. Semiannual Report | 31 PERFORMANCE SUMMARY (CONTINUED) ENDNOTES INVESTING IN A NONDIVERSIFIED FUND CONCENTRATING IN THE NATURAL RESOURCES SECTOR INVOLVES SPECIAL RISKS, INCLUDING THOSE RELATED TO INCREASED SUSCEPTIBILITY TO ADVERSE ECONOMIC AND REGULATORY DEVELOPMENTS AFFECTING THE SECTOR IN WHICH IT INVESTS. THE FUND MAY ALSO INVEST IN FOREIGN COMPANIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. SMALLER-COMPANY STOCKS CAN ALSO INVOLVE SPECIAL RISKS ASSOCIATED WITH SMALLER REVENUES AND MARKET SHARE, AND MORE LIMITED PRODUCT LINES, AND CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM. 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 C: 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) Past expense reductions by the Fund's manager increased the Fund's total returns. If the manager had not taken this action, the Fund's total returns would have been lower. (2) Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. (3) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. (4) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. (5) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (6) Aggregate total return represents the change in value of an investment over the period indicated and includes any applicable maximum sales charge. Because the Fund has existed for less than one year, average annual total returns are not provided. (7) 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 +149.47% and +10.90%. 32 | Semiannual Report YOUR FUND'S EXPENSES FRANKLIN NATURAL RESOURCES 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 below 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. Semiannual Report | 33 YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 4/30/05 VALUE 10/31/05 PERIOD* 4/30/05-10/31/05 - --------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,257.00 $ 5.86 - --------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,020.01 $ 5.24 - --------------------------------------------------------------------------------------------------------- CLASS C - --------------------------------------------------------------------------------------------------------- Actual (9/1/05-10/31/05) $ 1,000 $ 967.00 $ 2.76 - --------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,016.74 $ 8.54 - --------------------------------------------------------------------------------------------------------- ADVISOR CLASS - --------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,258.80 $ 3.87 - --------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,021.78 $ 3.47 - ---------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 1.03%; C: 1.68%; and Advisor: 0.68%), multiplied by the average account value over the period, multiplied by 184/365 for Class A and Advisor Class (Actual and Hypothetical) and Class C (Hypothetical) to reflect the one-half year period. For actual Class C expenses, the multiplier is 61/365 to reflect the number of days since inception. 34 | Semiannual Report FRANKLIN TECHNOLOGY FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Technology Fund seeks capital appreciation by investing at least 80% of its net assets in securities of companies expected to benefit from the development, advancement and use of technology. - -------------------------------------------------------------------------------- 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 semiannual report for Franklin Technology Fund covers the period ended October 31, 2005. PERFORMANCE OVERVIEW Franklin Technology Fund - Class A delivered a +10.37% cumulative total return for the six months under review. The Fund underperformed its benchmarks, the NASDAQ Composite Index and the Merrill Lynch (ML) 100 Technology Index, which returned +10.78% and +13.66% for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 39. TECHNOLOGY SECTOR OVERVIEW Although technology end-markets experienced modest growth during the reporting period, emerging technologies have the potential to create superior growth for several well-positioned companies. New technology trends generating pockets of exciting growth include 3G (third-generation wireless) networks, GPS (global positioning system), VoIP (voice over Internet protocol), WLAN (wireless local area network), Gigabit Ethernet (faster networking protocol), NAND (not and) flash-memory (more efficient memory), sub-2.5" HDDs (hard disk drives), high-definition TV, flat-panel TVs, (1) Source: Standard & Poor's Micropal. The NASDAQ Composite Index measures all domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. The ML 100 Technology Index is an equal-dollar weighted index of 100 stocks designed to measure the performance of a cross section of large, actively traded technology stocks and American Depositary Receipts. The index was developed with a base value of 200 as of 1/30/98. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 71. Semiannual Report | 35 PORTFOLIO BREAKDOWN Franklin Technology Fund Based on Total Net Assets as of 10/31/05 [THE FOLLOWING TABLE WAS DEPICTED AS A BAR CHART IN THE PRINTED MATERIAL.] SemiConductors 19.8% Packaged Software 14.4% Telecommunications Equipment 9.2% Internet Software & Services 6.8% Electronic Equipment & Instruments 6.2% Information Technology Services 5.8% Computer Processing Hardware 5.2% Data Processing Services 4.9% Computer Peripherals 4.8% Computer Communications 4.7% Electronic Production Equipment 3.8% Recreational Products 2.1% Specialty Telecommunications 1.8% Electronic Components 1.5% Other 2.4% Short-Term Investment & Other Net Assets 6.6% MPEG-4 compression (for DVDs), offshore IT (information technology) services, Internet commerce and advertising, 3-D software simulation, storage virtualization, two-factor authentication security, and biometric identification. Furthermore, consumers have proven resilient in their discretionary spending, and corporate balance sheets were cash-rich. Telecommunication service providers raced to offer enhanced services, requiring them to spend significantly on the latest-generation technology equipment. Inventory levels throughout the technology supply chain were lean relative to historical standards. INVESTMENT STRATEGY We use a fundamental, research-driven approach, focusing primarily on individual securities to choose companies we believe are positioned for rapid revenue, earnings or asset growth. We look for companies with distinct and sustainable competitive advantages such as a particular marketing niche, proven technology, strong management and industry leadership. MANAGER'S DISCUSSION Three meaningful contributors to Fund performance during the period were Google, Apple Computer, and American Science and Engineering. Google operates one of the most popular and powerful search engines, and generates revenue through ads that are targeted by keywords. Google stock appreciated 69% in the six-month period. Desktop and laptop computers form the bulk of Apple Computer's business, but the company now also manufactures music-related products such as the iPod digital music player and online music store iTunes, the Xserve server, the Airport wireless networking equipment, and publishing and multimedia software. Apple shares rose 60%. American Science and Engineering produces X-ray detection systems for inspection and security applications at airports, border control sites, shipping ports, and special events. The company's shares were up 50%. 36 | Semiannual Report On the other hand, three stocks that detracted significantly from Fund returns were ZiLOG, Dell and VeriSign. Semiconductor company ZiLOG manufactures a wide variety of integrated circuits, including embedded processors and microcontrollers, used in TV remote controls and other consumer electronics, industrial controls, point-of-sale terminals, and security systems. For the six months under review, ZiLOG shares fell 38%. Dell is the world's leading direct-sale computer vendor with a full line of desktop and notebook PCs designed for consumers. The company also sells network servers, workstations, storage systems, and Ethernet switches for enterprise customers. Dell stock declined 8% in value. VeriSign provides a variety of digital commerce and communication products and services focused around three core areas: web presence and trust services, managed security and network services, and telecommunications services. VeriSign's shares lost 11% in value. We believe well-positioned technology companies addressing the latest technology trends have the potential to execute their business plans and generate meaningful revenue and earnings growth over the next 12 to 24 months. Thus, we sought to identify and hold such companies' shares in the Fund. Additionally, the uncertain geopolitical environment, inconsistent economic growth pace, record high oil prices, technology companies' lack of visibility, and investors' short-term focus should continue to generate significant volatility in technology stocks. We sought to take advantage of this volatility, and relied on our meticulous technology and company research as well as valuation discipline. TOP 10 EQUITY HOLDINGS Franklin Technology Fund 10/31/05 - ----------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - ----------------------------------------------------- Microsoft Corp. 3.0% PACKAGED SOFTWARE - ----------------------------------------------------- Analog Devices Inc. 2.9% SEMICONDUCTORS - ----------------------------------------------------- Dell Inc. 2.7% COMPUTER PROCESSING HARDWARE - ----------------------------------------------------- Google Inc., A 2.6% INTERNET SOFTWARE & SERVICES - ----------------------------------------------------- Apple Computer Inc. 2.5% COMPUTER PROCESSING HARDWARE - ----------------------------------------------------- Linear Technology Corp. 2.5% SEMICONDUCTORS - ----------------------------------------------------- EMC Corp. 2.4% COMPUTER PERIPHERALS - ----------------------------------------------------- Cognizant Technology Solutions Corp., A 2.4% INFORMATION TECHNOLOGY SERVICES - ----------------------------------------------------- Network Appliance Inc. 2.4% COMPUTER PERIPHERALS - ----------------------------------------------------- QUALCOMM Inc. 2.3% TELECOMMUNICATIONS EQUIPMENT - ----------------------------------------------------- Semiannual Report | 37 Thank you for your continued participation in Franklin Technology Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ J.P. Scandalios J.P. Scandalios [PHOTO OMITTED] /s/ Robert R. Dean Robert R. Dean, CFA Portfolio Management Team Franklin Technology Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2005, 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 ADVISER 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. 38 | Semiannual Report PERFORMANCE SUMMARY AS OF 10/31/05 FRANKLIN TECHNOLOGY FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION
- -------------------------------------------------------------------------------------------------- CLASS A (SYMBOL: FTCAX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.45 $4.79 $4.34 - -------------------------------------------------------------------------------------------------- CLASS B (SYMBOL: N/A) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.42 $4.63 $4.21 - -------------------------------------------------------------------------------------------------- CLASS C (SYMBOL: FFTCX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.42 $4.62 $4.20 - -------------------------------------------------------------------------------------------------- CLASS R (SYMBOL: FTERX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.45 $4.77 $4.32 - -------------------------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FRTCX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.47 $4.88 $4.41 - --------------------------------------------------------------------------------------------------
Semiannual Report | 39 PERFORMANCE SUMMARY (CONTINUED) PERFORMANCE(1) 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: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- --------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00) - --------------------------------------------------------------------------------------------------- Cumulative Total Return(2) +10.37% +3.01% -55.44% -52.10% - --------------------------------------------------------------------------------------------------- Average Annual Total Return(3) +4.13% -2.84% -15.94% -13.46% - --------------------------------------------------------------------------------------------------- Value of $10,000 Investment(4) $10,413 $ 9,716 $ 4,198 $4,515 - --------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(5) +4.95% -17.60% -13.36% - --------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00) - --------------------------------------------------------------------------------------------------- Cumulative Total Return(2) +9.98% +2.21% -56.81% -53.70% - --------------------------------------------------------------------------------------------------- Average Annual Total Return(3) +5.98% -1.79% -15.80% -13.22% - --------------------------------------------------------------------------------------------------- Value of $10,000 Investment(4) $10,598 $ 9,821 $ 4,233 $4,584 - --------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(5) +6.80% -17.47% -13.10% - --------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00) - --------------------------------------------------------------------------------------------------- Cumulative Total Return(2) +10.00% +2.44% -56.78% -53.80% - --------------------------------------------------------------------------------------------------- Average Annual Total Return(3) +9.00% +1.44% -15.45% -13.10% - --------------------------------------------------------------------------------------------------- Value of $10,000 Investment(4) $10,900 $10,144 $ 4,322 $4,620 - --------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(5) +9.59% -17.16% -13.01% - --------------------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02) - --------------------------------------------------------------------------------------------------- Cumulative Total Return(2) +10.42% +3.02% +66.20% -10.51% - --------------------------------------------------------------------------------------------------- Average Annual Total Return(3) +9.42% +2.02% +18.45% -2.86% - --------------------------------------------------------------------------------------------------- Value of $10,000 Investment(4) $10,942 $10,202 $16,620 $8,949 - --------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(5) +10.24% +25.56% -2.49% - --------------------------------------------------------------------------------------------------- ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00) - --------------------------------------------------------------------------------------------------- Cumulative Total Return(2) +10.66% +3.17% -54.65% -51.20% - --------------------------------------------------------------------------------------------------- Average Annual Total Return(3) +10.66% +3.17% -14.63% -12.23% - --------------------------------------------------------------------------------------------------- Value of $10,000 Investment(4) $11,066 $10,317 $ 4,535 $4,880 - --------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(5) +11.71% -16.35% -12.14% - ---------------------------------------------------------------------------------------------------
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. 40 | Semiannual Report PERFORMANCE SUMMARY (CONTINUED) ENDNOTES INVESTING IN A NONDIVERSIFIED FUND CONCENTRATING IN THE TECHNOLOGY SECTOR INVOLVES SPECIAL RISKS, INCLUDING THOSE RELATED TO INCREASED SUSCEPTIBILITY TO ADVERSE ECONOMIC AND REGULATORY DEVELOPMENTS AFFECTING THE SECTOR. TECHNOLOGY STOCKS HAVE HISTORICALLY BEEN VOLATILE IN PRICE, ESPECIALLY OVER THE SHORT TERM, DUE TO THE RAPID PACE OF PRODUCT CHANGE AND DEVELOPMENT. THE FUND'S INVESTMENTS IN SMALLER-COMPANY STOCKS ALSO INVOLVE SPECIAL RISKS, SUCH AS RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND SMALL MARKET SHARE. THE FUND MAY ALSO INVEST IN FOREIGN COMPANIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. 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) Past expense reductions by the Fund's manager and administrator increased the Fund's total returns. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. (2) Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. (3) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. (4) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. (5) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. Semiannual Report | 41 YOUR FUND'S EXPENSES FRANKLIN TECHNOLOGY 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 below 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. 42 | Semiannual 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 4/30/05 VALUE 10/31/05 PERIOD* 4/30/05-10/31/05 - ---------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,103.70 $ 9.44 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,016.23 $ 9.05 - ---------------------------------------------------------------------------------------------------------- CLASS B - ---------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,099.80 $ 12.81 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,013.01 $ 12.28 - ---------------------------------------------------------------------------------------------------------- CLASS C - ---------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,100.00 $ 12.86 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,012.96 $ 12.33 - ---------------------------------------------------------------------------------------------------------- CLASS R - ---------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,104.20 $ 10.24 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,015.48 $ 9.80 - ---------------------------------------------------------------------------------------------------------- ADVISOR CLASS - ---------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,106.60 $ 7.59 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,018.00 $ 7.27 - ----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 1.78%; B: 2.42%; C: 2.43%; R: 1.93%; and Advisor: 1.43%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. Semiannual Report | 43 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
--------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS A (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 46.05 $ 53.26 $ 37.26 $ 42.72 $ 57.78 $ 60.44 ------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ............... (0.29) (0.58) (0.55) (0.44) (0.53) (0.39) Net realized and unrealized gains (losses) .... 8.35 (6.63) 16.55 (5.02) (14.53) (2.08) ------------------------------------------------------------------------------- Total from investment operations ............... 8.06 (7.21) 16.00 (5.46) (15.06) (2.47) ------------------------------------------------------------------------------- Less distributions from net realized gains ..... -- -- -- -- -- (0.19) ------------------------------------------------------------------------------- Redemption fees ................................ --(c) --(c) -- -- -- -- Net asset value, end of period ................. $ 54.11 $ 46.05 $ 53.26 $ 37.26 $ 42.72 $ 57.78 =============================================================================== Total return(b) ................................ 17.52% (13.54)% 42.98% (12.80)% (26.06)% (4.14)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 527,263 $ 485,909 $ 683,439 $ 510,107 $ 702,189 $1,010,844 Ratios to average net assets: Expenses ...................................... 1.25%(d) 1.29% 1.28% 1.57% 1.29% 1.09% Net investment income (loss) .................. (1.11)%(d) (1.17)% (1.17)% (1.28)% (0.99)% (0.54)% Portfolio turnover rate ........................ 16.44% 34.34% 59.39% 47.36% 53.85% 46.82%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 44 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------- FRANKLIN BIOTECHNOLOGY DISCOVERY FUND SHARES/WARRANTS VALUE - ----------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS 95.5% BIOTECHNOLOGY 84.6% (a),(b)Abgenix Inc. ............................................................ 634,100 $ 6,594,640 (a),(b)Adolor Corp. ............................................................ 537,600 5,698,560 (a)Advanced Life Sciences Holdings Inc. .................................... 476,300 1,876,622 (a),(b)Affymetrix Inc. ......................................................... 57,700 2,621,311 (a)Alexion Pharmaceuticals Inc. ............................................ 101,500 2,780,085 (a),(b)Alkermes Inc. ........................................................... 653,000 10,637,370 (a)Amgen Inc. .............................................................. 633,500 47,993,960 (a),(b)Arena Pharmaceuticals Inc. .............................................. 270,400 2,812,160 (a)Biogen Idec Inc. ........................................................ 724,622 29,441,392 (a),(b)Celgene Corp. ........................................................... 372,900 20,919,690 (a)Charles River Laboratories International Inc. ........................... 57,300 2,507,448 (a),(b)Cotherix Inc. ........................................................... 197,800 2,818,650 (a)Cubist Pharmaceuticals Inc. ............................................. 613,200 12,392,772 (a)Curis Inc. .............................................................. 264,400 1,084,040 (a),(b)CV Therapeutics Inc. .................................................... 123,100 3,084,886 (a),(b)DOV Pharmaceutical Inc. ................................................. 257,000 3,991,210 (a)Encysive Pharmaceuticals Inc. ........................................... 171,200 1,797,600 (a)Exelixis Inc. ........................................................... 522,000 4,035,060 (a)Genentech Inc. .......................................................... 353,400 32,018,040 (a),(b)Genitope Corp. .......................................................... 141,100 979,234 (a)Genzyme Corp. ........................................................... 419,900 30,358,770 (a)Gilead Sciences Inc. .................................................... 704,600 33,292,350 (a),(b)Human Genome Sciences Inc. .............................................. 357,800 2,987,630 (a),(b)ICOS Corp. .............................................................. 103,900 2,803,222 (a),(b)ImClone Systems Inc. .................................................... 123,500 4,285,450 (a),(b)Incyte Corp. ............................................................ 733,600 3,660,664 (a),(b)Indevus Pharmaceuticals Inc. ............................................ 866,100 3,784,857 (a),(b)Inhibitex Inc. .......................................................... 156,900 1,525,068 (a)Inhibitex Inc., PIPES ................................................... 284,650 2,766,798 (a),(c)Inhibitex Inc., wts., 11/10/09 .......................................... 85,395 77,709 (a),(b)InterMune Inc. .......................................................... 244,800 3,329,280 (a)Invitrogen Corp. ........................................................ 150,700 9,583,013 (a),(b)Ista Pharmaceuticals Inc. ............................................... 334,400 2,066,592 (a)Keryx Biopharmaceuticals Inc. ........................................... 715,600 10,340,420 (a)Kosan Biosciences Inc. .................................................. 872,991 6,189,506 (a),(b)Medarex Inc. ............................................................ 390,100 3,409,474 (a)Medicines Co. ........................................................... 547,000 9,375,580 (a)MedImmune Inc. .......................................................... 626,917 21,929,557 (a)MGI Pharma Inc. ......................................................... 457,900 8,590,204 (a),(b)Millennium Pharmaceuticals Inc. ......................................... 514,529 4,692,504 (a)Myogen Inc. ............................................................. 109,100 2,187,455 (a),(b)Nabi Biopharmaceuticals ................................................. 536,900 6,899,165 (a),(b)Neurocrine Biosciences Inc. ............................................. 100,400 5,303,128 (a),(b)Nuvelo Inc. ............................................................. 698,216 5,865,014 (a)Onyx Pharmaceuticals Inc. ............................................... 323,400 8,308,146 (a)Orchid Biosciences Inc. ................................................. 160,300 942,564 (a),(b)OSI Pharmaceuticals Inc. ................................................ 99,400 2,316,020 (a),(b)Panacos Pharmaceuticals Inc. ............................................ 498,200 3,935,780
Semiannual Report | 45 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------- FRANKLIN BIOTECHNOLOGY DISCOVERY FUND SHARES/WARRANTS VALUE - ----------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONT.) BIOTECHNOLOGY (CONT.) (a)Protein Design Labs Inc. ................................................ 372,100 $ 10,426,242 (a)Rigel Pharmaceuticals Inc. .............................................. 114,300 2,566,035 (a),(b)Serologicals Corp. ...................................................... 133,100 2,592,788 Serono SA, B (Switzerland) .............................................. 10,386 6,720,140 (a),(b)SuperGen Inc. ........................................................... 798,600 4,512,090 (a),(b)Telik Inc. .............................................................. 611,300 9,132,822 (a)Theravance Inc. ......................................................... 281,400 6,097,938 (a),(b)Threshold Pharmaceuticals Inc. .......................................... 248,400 2,742,336 (a)Titan Pharmaceuticals Inc. .............................................. 419,600 688,144 (a),(b)Trimeris Inc. ........................................................... 280,900 3,578,666 ------------- 445,947,851 ------------- MEDICAL SPECIALTIES 1.7% (a),(b)Cypress Bioscience Inc. ................................................. 246,200 1,245,772 (a)Molecular Devices Corp. ................................................. 138,300 3,097,920 (a),(b)Nektar Therapeutics ..................................................... 307,300 4,627,938 ------------- 8,971,630 ------------- OTHER PHARMACEUTICALS 9.2% (a),(b)AtheroGenics Inc. ....................................................... 278,200 4,173,000 (a),(b)AVANIR Pharmaceuticals, A ............................................... 1,593,100 4,922,679 (a),(b)Axcan Pharma Inc. (Canada) .............................................. 461,100 5,869,803 (a),(b)Coley Pharmaceutical Group .............................................. 174,500 2,584,345 (a),(b)Favrille Inc. ........................................................... 163,900 576,928 (a)Inspire Pharmaceuticals Inc. ............................................ 705,823 4,446,685 (a),(b)Pharmion Corp. .......................................................... 340,700 6,435,823 (a)Pozen Inc. .............................................................. 770,781 7,515,115 (a),(b)Sepracor Inc. ........................................................... 215,500 12,121,875 ------------- 48,646,253 ------------- TOTAL COMMON STOCKS AND WARRANTS (COST $354,092,762)..................... 503,565,734 ------------- CONVERTIBLE PREFERRED STOCK (COST $5,065,937) 1.0% BIOTECHNOLOGY 1.0% (a),(c)Fibrogen Inc., cvt. pfd., E ............................................. 1,128,271 5,133,633 ------------- TOTAL LONG TERM INVESTMENTS (COST $359,158,699).......................... 508,699,367 ------------- SHORT TERM INVESTMENTS 20.6% MONEY FUND (COST $473,120) 0.1% (d)Franklin Institutional Fiduciary Trust Money Market Portfolio ........... 473,120 473,120 -------------
46 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN BIOTECHNOLOGY DISCOVERY FUND PRINCIPAL AMOUNT VALUE - ----------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS (CONT.) REPURCHASE AGREEMENTS 20.5% (e),(f)Bank of America LLC 4.04%, 11/01/05 (Maturity Value $14,889,342) Collateralized by U.S. Government Agency Securities, 5.00%, 6/01/35....................... $ 14,887,671 $ 14,887,671 (e),(f)Barclays Capital Inc., 4.04%, 11/01/05 (Maturity Value $10,084,263) Collateralized by U.S. Government Agency Securities, 3.625%-4.11%, 1/18/08-2/16/10........ 10,083,131 10,083,131 (e),(f)Bear Stearns & Co. Inc., 4.02% 11/01/05 (Maturity Value $14,488,235) Collateralized by (g)U.S. Treasury Bills and U.S. Government Agency Securities, 0.00%-8.25%, 11/29/05-9/11/28 ............................................................ 14,486,617 14,486,617 (e),(f)Goldman Sachs & Co., 4.03% 11/01/05 (Maturity Value $14,241,188) U.S. Government Agency Securities, 3.185%-9.00%, 10/01/06-4/01/41......................... 14,239,594 14,239,594 (e),(f)JP Morgan Securities, 4.02%, 11/01/05 (Maturity Value $16,003,574) Collateralized by (g)U.S. Government Agency Securities, 0.00%-6.50%, 1/31/06-6/14/24...... 16,001,787 16,001,787 (e),(f)Merrill Lynch Government Securities Inc., 4.02%, 11/01/05 (Maturity Value $18,570,146) Collateralized by (g)U.S. Government Agency Securities, 0.00%-8.00%, 11/01/05-5/15/30..... 18,568,073 18,568,073 (e),(f)Morgan Stanley & Company Inc., 4.04%, 11/01/05 (Maturity Value $20,118,514) Collateralized by U.S. Government Agency Securities, 5.00%-6.00%, 8/01/33-7/01/35......... 20,116,257 20,116,257 ------------- TOTAL REPURCHASE AGREEMENTS (COST $108,383,130)........................................... 108,383,130 ------------- TOTAL INVESTMENTS (COST $468,014,949) 117.1%.............................................. 617,555,617 OTHER ASSETS, LESS LIABILITIES (17.1)% ................................................... (90,292,863) ------------- NET ASSETS 100.0%......................................................................... $ 527,262,754 =============
SEE SELECTED PORTFOLIO ABBREVIATIONS ON PAGE 74. (a) Non-income producing. (b) A portion or all of the security is on loan as of October 31, 2005. See Note 1(f). (c) See Note 8 regarding restricted and illiquid securities. (d) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust Money Market Portfolio. (e) See Note 1 (c) regarding repurchase agreements. (f) Investments from cash collateral received for loaned securities. See Note 1 (f). (g) A portion of the security is traded on a discount basis with no stated coupon rate. Semiannual Report | See notes to financial statements. | 47 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS FRANKLIN GLOBAL COMMUNICATIONS FUND
--------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS A (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 7.94 $ 7.63 $ 5.92 $ 6.85 $ 10.70 $ 19.98 ------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ............... (0.01) --(e) --(f) --(g) 0.01) -- Net realized and unrealized gains (losses) .... 1.50 0.33 1.71 (0.93) (3.84) (7.56) ------------------------------------------------------------------------------- Total from investment operations ............... 1.49 0.33 1.71 (0.93) (3.85) (7.56) ------------------------------------------------------------------------------- Less distributions from: Net investment income ......................... -- (0.02) -- -- -- (0.04) Net realized gains ............................ -- -- -- -- -- (1.68) ------------------------------------------------------------------------------- Total distributions ............................ -- (0.02) -- -- -- (1.72) ------------------------------------------------------------------------------- Redemption fees ................................ --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------- Net asset value, end of period ................. $ 9.43 $ 7.94 $ 7.63 $ 5.92 $ 6.85 $ 10.70 =============================================================================== Total return(b) ................................ 18.77% 4.32% 28.89% (13.58)% (35.98)% (39.49)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 54,219 $ 49,926 $ 59,702 $ 53,722 $ 80,581 $ 159,050 Ratios to average net assets: Expenses ...................................... 1.46%(d) 1.47% 1.47% 1.67% 1.27% 1.01% Net investment income (loss) .................. (0.25)%(d) 0.04% (0.03)% (0.05)% (0.13)% 0.02% Portfolio turnover rate ........................ 71.99% 171.40% 137.83% 94.95% 81.70% 124.61%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) Actual net investment income per share is $0.003. (f) Actual net investment loss per share is $(0.002). (g) Actual net investment loss per share is $(0.003). 48 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GLOBAL COMMUNICATIONS FUND (CONTINUED)
--------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS B (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 7.59 $ 7.33 $ 5.73 $ 6.67 $ 10.50 $ 19.80 ------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ............... (0.04) (0.05) (0.05) (0.04) (0.07) (0.11) Net realized and unrealized gains (losses) .... 1.43 0.31 1.65 (0.90) (3.76) (7.47) ------------------------------------------------------------------------------- Total from investment operations ............... 1.39 0.26 1.60 (0.94) (3.83) (7.58) ------------------------------------------------------------------------------- Less distributions from: Net investment income ......................... -- -- -- -- -- (0.04) Net realized gains ............................ -- -- -- -- -- (1.68) ------------------------------------------------------------------------------- Total distributions ............................ -- -- -- -- -- (1.72) ------------------------------------------------------------------------------- Redemption fees ................................ --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------- Net asset value, end of period ................. $ 8.98 $ 7.59 $ 7.33 $ 5.73 $ 6.67 $ 10.50 =============================================================================== Total return(b) ................................ 18.31% 3.69% 27.75% (14.09)% (36.48)% (39.94)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 2,764 $ 2,663 $ 3,170 $ 2,690 $ 3,675 $ 6,106 Ratios to average net assets: Expenses ...................................... 2.21%(d) 2.21% 2.22% 2.36% 2.01% 1.77% Net investment income (loss) .................. (1.00)%(d) (0.70)% (0.78)% (0.74)% (0.87)% (0.73)% Portfolio turnover rate ........................ 71.99% 171.40% 137.83% 94.95% 81.70% 124.61%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 49 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GLOBAL COMMUNICATIONS FUND (CONTINUED)
--------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS C (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 7.60 $ 7.34 $ 5.74 $ 6.69 $ 10.53 $ 19.79 ------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ............... (0.04) (0.05) (0.05) (0.05) (0.07) (0.11) Net realized and unrealized gains (losses) .... 1.43 0.31 1.65 (0.90) (3.77) (7.47) ------------------------------------------------------------------------------- Total from investment operations ............... 1.39 0.26 1.60 (0.95) (3.84) (7.58) ------------------------------------------------------------------------------- Less distributions from net realized gains ..... -- -- -- -- -- (1.68) ------------------------------------------------------------------------------- Redemption fees ................................ --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------- Net asset value, end of period ................. $ 8.99 $ 7.60 $ 7.34 $ 5.74 $ 6.69 $ 10.53 =============================================================================== Total return(b) ................................ 18.29% 3.54% 27.87% (14.20)% (36.47)% (39.93)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 7,632 $ 7,054 $ 8,633 $ 7,377 $ 10,563 $ 20,939 Ratios to average net assets: Expenses ...................................... 2.21%(d) 2.22% 2.22% 2.47% 2.01% 1.76% Net investment income (loss) .................. (1.00)%(d) (0.71)% (0.78)% (0.85)% (0.87)% (0.73)% Portfolio turnover rate ........................ 71.99% 171.40% 137.83% 94.95% 81.70% 124.61%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 50 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------- FRANKLIN GLOBAL COMMUNICATIONS FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 99.2% ADVERTISING/MARKETING SERVICES 4.4% (a)Focus Media Holding Ltd., ADR ........................................... China 46,700 $ 1,226,342 (a)Getty Images Inc. ....................................................... United States 13,000 1,079,130 (a)Lamar Advertising Co., A ................................................ United States 11,700 522,055 -------------- 2,827,527 -------------- BROADCASTING 5.1% (a)Central European Media Enterprises Ltd., A .............................. United States 10,400 483,496 (a)Entravision Communications Corp. ........................................ United States 45,900 376,380 Grupo Televisa SA, ADR .................................................. Mexico 9,000 657,900 (a)Univision Communications Inc., A ........................................ United States 24,800 648,272 (a)XM Satellite Radio Holdings Inc., A ..................................... United States 39,800 1,147,434 -------------- 3,313,482 -------------- CABLE/SATELLITE TV 0.9% Naspers Ltd., N ......................................................... South Africa 40,300 581,885 -------------- 581,885 -------------- COMPUTER PERIPHERALS 4.1% (a)Network Appliance Inc. .................................................. United States 97,100 2,656,656 -------------- 2,656,656 -------------- COMPUTER PROCESSING HARDWARE 2.4% (a)Apple Computer Inc. ..................................................... United States 27,100 1,560,689 -------------- 1,560,689 -------------- DATA PROCESSING SERVICES 2.2% (a)Neustar Inc., A ......................................................... United States 46,300 1,416,780 -------------- 1,416,780 -------------- INTERNET SOFTWARE/SERVICES 6.7% (a)Google Inc., A .......................................................... United States 7,700 2,865,478 (a)Yahoo! Inc. ............................................................. United States 39,100 1,445,527 -------------- 4,311,005 -------------- MAJOR TELECOMMUNICATIONS 15.5% Alltel Corp. ............................................................ United States 28,500 1,763,010 BellSouth Corp. ......................................................... United States 36,000 936,720 PT Telekomunikasi Indonesia, B .......................................... Indonesia 1,646,400 813,238 SBC Communications Inc. ................................................. United States 66,100 1,576,485 Sprint Nextel Corp. ..................................................... United States 13,716 319,720 Telecom Corp. of New Zealand Ltd. ....................................... New Zealand 162,536 663,263 Telus Corp. ............................................................. Canada 50,600 1,907,620 Verizon Communications Inc. ............................................. United States 64,300 2,026,093 -------------- 10,006,149 --------------
Semiannual Report | 51 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------- FRANKLIN GLOBAL COMMUNICATIONS FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) MEDIA CONGLOMERATES 2.9% Viacom Inc., B .......................................................... United States 29,800 $ 922,906 Walt Disney Co. ......................................................... United States 39,700 967,489 -------------- 1,890,395 -------------- MOVIES/ENTERTAINMENT 3.7% (a)Outdoor Channel Holdings Inc. ........................................... United States 36,800 592,480 (a)Pixar ................................................................... United States 35,600 1,805,988 -------------- 2,398,468 -------------- PACKAGED SOFTWARE 1.7% Autodesk Inc. ........................................................... United States 24,800 1,119,224 -------------- 1,119,224 -------------- SEMICONDUCTORS 2.4% (a)Broadcom Corp., A ....................................................... United States 21,800 925,628 (a)Marvell Technology Group Ltd. ........................................... Bermuda 12,900 598,689 -------------- 1,524,317 -------------- SPECIALTY TELECOMMUNICATIONS 8.8% (a)American Tower Corp., A ................................................. United States 139,235 3,320,755 (a)Crown Castle International Corp. ........................................ United States 47,638 1,168,084 Orascom Telecom, GDR .................................................... Egypt 7,300 358,100 (a)Syniverse Holdings Inc. ................................................. United States 14,300 258,830 (a)Time Warner Telecom Inc., A ............................................. United States 72,600 608,388 -------------- 5,714,157 -------------- TELECOMMUNICATIONS EQUIPMENT 13.6% (a)Comverse Technology Inc. ................................................ United States 27,100 680,210 (a)Corning Inc. ............................................................ United States 51,600 1,036,644 Harris Corp. ............................................................ United States 39,700 1,631,670 Nokia Corp., ADR ........................................................ Finland 119,100 2,003,262 QUALCOMM Inc. ........................................................... United States 62,600 2,488,976 (a)Research in Motion Ltd. ................................................. Canada 4,900 301,301 (a)ViaSat Inc. ............................................................. United States 25,000 619,750 -------------- 8,761,813 -------------- WIRELESS COMMUNICATIONS 24.8% America Movil SA de CV, L, ADR .......................................... Mexico 184,700 4,848,375 (a)Europolitan Holdings AB ................................................. Sweden 134,100 833,395 (a)Nextel Partners Inc., A ................................................. United States 75,300 1,893,795 (a)NII Holdings Inc. ....................................................... United States 33,500 2,777,820 PT Indosat Tbk, ADR ..................................................... Indonesia 12,300 296,430 Rogers Communications Inc., B ........................................... Canada 73,800 2,911,144 (a)SBA Communications Corp. ................................................ United States 83,000 1,225,910 (a)UbiquiTel Inc. .......................................................... United States 75,400 651,456 Vodafone Group PLC, ADR ................................................. United Kingdom 22,700 596,102 -------------- 16,034,427 --------------
52 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------- FRANKLIN GLOBAL COMMUNICATIONS FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) TOTAL COMMON STOCKS (COST $49,852,544)................................... $ 64,116,974 -------------- CONVERTIBLE PREFERRED STOCK (COST $1,249,994) 0.0% TELECOMMUNICATIONS EQUIPMENT 0.0% (a),(b)Kestrel Solutions, cvt. pfd., D ......................................... United States 95,932 -- -------------- TOTAL LONG TERM INVESTMENTS (COST $51,102,538)........................... 64,116,974 -------------- SHORT TERM INVESTMENTS (COST $1,085,857) 1.7% MONEY FUND 1.7% (c)Franklin Institutional Fiduciary Trust Money Market Portfolio ........... United States 1,085,857 1,085,857 -------------- TOTAL INVESTMENTS (COST $52,188,395) 100.9%.............................. 65,202,831 OTHER ASSETS, LESS LIABILITIES (0.9)% ................................... (588,358) -------------- NET ASSETS 100.0%........................................................ $ 64,614,473 ==============
SEE SELECTED PORTFOLIO ABBREVIATIONS ON PAGE 74. (a) Non-income producing. (b) See Note 8 regarding restricted and illiquid securities. (c) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust Money Market Portfolio. Semiannual Report | See notes to financial statements. | 53 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS FRANKLIN GLOBAL HEALTH CARE FUND
--------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS A (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 20.36 $ 19.86 $ 15.53 $ 20.80 $ 23.29 $ 20.29 ------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ............... (0.06) (0.08) (0.10) (0.09) (0.15) (0.10) Net realized and unrealized gains (losses) .... 1.27 0.58 4.43 (4.62) (2.30) 4.71 ------------------------------------------------------------------------------- Total from investment operations ............... 1.21 0.50 4.33 (4.71) (2.45) 4.61 ------------------------------------------------------------------------------- Less distributions from: Net investment income ......................... -- -- -- -- -- (0.11) Net realized gains ............................ -- -- -- (0.56) (0.04) (1.50) ------------------------------------------------------------------------------- Total distributions ............................ -- -- -- (0.56) (0.04) (1.61) ------------------------------------------------------------------------------- Redemption fees ................................ --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------- Net asset value, end of period ................. $ 21.57 $ 20.36 $ 19.86 $ 15.53 $ 20.80 $ 23.29 =============================================================================== Total return(b) ................................ 5.94% 2.52% 27.88% (22.56)% (10.53)% 22.00% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 95,506 $ 86,934 $ 91,314 $ 73,991 $ 110,062 $ 131,063 Ratios to average net assets: Expenses ...................................... 1.26%(d) 1.32% 1.36% 1.44% 1.22% 1.17% Net investment income (loss) .................. (0.51)%(d) (0.42)% (0.52)% (0.54)% (0.65)% (0.40)% Portfolio turnover rate ........................ 21.73% 77.50% 82.63% 137.37% 120.47% 131.79%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 54 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GLOBAL HEALTH CARE FUND (CONTINUED)
--------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS B (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 19.44 $ 19.10 $ 15.04 $ 20.33 $ 22.93 $ 20.09 ------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ............... (0.13) (0.22) (0.23) (0.20) (0.31) (0.29) Net realized and unrealized gains (losses) .... 1.20 0.56 4.29 (4.53) (2.25) 4.67 ------------------------------------------------------------------------------- Total from investment operations ............... 1.07 0.34 4.06 (4.73) (2.56) 4.38 ------------------------------------------------------------------------------- Less distributions from: Net investment income ......................... -- -- -- -- -- (0.04) Net realized gains ............................ -- -- -- (0.56) (0.04) (1.50) ------------------------------------------------------------------------------- Total distributions ............................ -- -- -- (0.56) (0.04) (1.54) ------------------------------------------------------------------------------- Redemption fees ................................ --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------- Net asset value, end of period ................. $ 20.51 $ 19.44 $ 19.10 $ 15.04 $ 20.33 $ 22.93 =============================================================================== Total return(b) ................................ 5.50% 1.78% 26.91% (23.10)% (11.22)% 21.06% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 13,785 $ 12,060 $ 13,054 $ 8,892 $ 13,021 $ 12,873 Ratios to average net assets: Expenses ...................................... 2.01%(d) 2.06% 2.11% 2.18% 1.97% 1.92% Net investment income (loss) .................. (1.26)%(d) (1.16)% (1.27)% (1.28)% (1.40)% (1.17)% Portfolio turnover rate ........................ 21.73% 77.50% 82.63% 137.37% 120.47% 131.79%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 55 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GLOBAL HEALTH CARE FUND (CONTINUED)
------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS C (UNAUDITED) 2005 2004 2003 2002 2001 ------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 19.24 $ 18.92 $ 14.90 $ 20.15 $ 22.72 $ 19.89 ------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ............... (0.13) (0.22) (0.22) (0.20) (0.30) (0.28) Net realized and unrealized gains (losses) .... 1.20 0.54 4.24 (4.49) (2.23) 4.61 ------------------------------------------------------------------------------- Total from investment operations ............... 1.07 0.32 4.02 (4.69) (2.53) 4.33 ------------------------------------------------------------------------------- Less distributions from net realized gains ..... -- -- -- (0.56) (0.04) (1.50) ------------------------------------------------------------------------------- Redemption fees ................................ --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------- Net asset value, end of period ................. $ 20.31 $ 19.24 $ 18.92 $ 14.90 $ 20.15 $ 22.72 =============================================================================== Total return(b) ................................ 5.56% 1.69% 26.98% (23.16)% (11.19)% 21.05% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 25,885 $ 22,021 $ 23,850 $ 18,700 $ 28,538 $ 32,212 Ratios to average net assets: Expenses ...................................... 2.01%(d) 2.07% 2.11% 2.19% 1.96% 1.92% Net investment income (loss) .................. (1.26)%(d) (1.17)% (1.27)% (1.29)% (1.39)% (1.15)% Portfolio turnover rate ........................ 21.73% 77.50% 82.63% 137.37% 120.47% 131.79%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 56 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------- FRANKLIN GLOBAL HEALTH CARE FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 93.6% BIOTECHNOLOGY 13.5% (a)Advanced Life Sciences Holdings Inc. .................................... United States 113,000 $ 445,220 (a)Amgen Inc. .............................................................. United States 57,700 4,371,352 (a)Angiotech Pharmaceuticals Inc. .......................................... United States 50,900 682,060 (a)Biogen Idec Inc. ........................................................ United States 38,200 1,552,066 (a)Celgene Corp. ........................................................... United States 24,600 1,380,060 (a)Charles River Laboratories International Inc. ........................... United States 15,800 691,408 (a)Indevus Pharmaceuticals Inc. ............................................ United States 233,600 1,020,832 (a)Invitrogen Corp. ........................................................ United States 23,900 1,519,801 (a)Keryx Biopharmaceuticals Inc. ........................................... United States 99,300 1,434,885 (a)Medicines Co. ........................................................... United States 40,900 701,026 (a)MGI Pharma Inc. ......................................................... United States 36,000 675,360 (a)Onyx Pharmaceuticals Inc. ............................................... United States 29,800 765,562 (a)Panacos Pharmaceuticals Inc. ............................................ United States 66,900 528,510 (a)Protein Design Labs Inc. ................................................ United States 34,200 958,284 (a)Rigel Pharmaceuticals Inc. .............................................. United States 29,400 660,030 (a)Telik Inc. .............................................................. United States 53,400 797,796 (a)Threshold Pharmaceuticals Inc. .......................................... United States 2,500 27,600 -------------- 18,211,852 -------------- ELECTRICAL PRODUCTS 0.6% (a)Greatbatch Inc. ......................................................... United States 32,100 836,526 -------------- ELECTRONIC EQUIPMENT/INSTRUMENTS 1.0% (a)Thermo Electron Corp. ................................................... United States 45,100 1,361,569 -------------- GENERIC PHARMACEUTICALS 1.4% (a)Andrx Group ............................................................. United States 17,500 270,725 (a)Impax Laboratories Inc. ................................................. United States 53,200 563,920 (a)Watson Pharmaceuticals Inc. ............................................. United States 32,300 1,116,288 -------------- 1,950,933 -------------- HOSPITAL/NURSING MANAGEMENT 4.8% (a)Community Health Systems Inc. ........................................... United States 71,200 2,642,232 (a)Genesis HealthCare Corp. ................................................ United States 17,150 695,947 (a)LifePoint Hospitals Inc. ................................................ United States 47,500 1,857,250 (a)Triad Hospitals Inc. .................................................... United States 31,800 1,307,934 -------------- 6,503,363 -------------- INDUSTRIAL SPECIALTIES 0.9% Mine Safety Appliances Co. .............................................. United States 28,100 1,177,109 -------------- MAJOR PHARMACEUTICALS 27.2% Abbott Laboratories ..................................................... United States 35,600 1,532,580 Eli Lilly & Co. ......................................................... United States 50,900 2,534,311 Johnson & Johnson ....................................................... United States 110,000 6,888,200 Merck KGaA .............................................................. Germany 38,200 3,158,758 Novartis AG ............................................................. Switzerland 84,200 4,530,253 Pfizer Inc. ............................................................. United States 103,860 2,257,917 Roche Holding AG ........................................................ Switzerland 43,000 6,425,230
Semiannual Report | 57 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------- FRANKLIN GLOBAL HEALTH CARE FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) MAJOR PHARMACEUTICALS (CONT.) Sanofi-Aventis .......................................................... France 17,100 $ 1,369,312 Schering-Plough Corp. ................................................... United States 195,300 3,972,402 Wyeth ................................................................... United States 91,800 4,090,608 -------------- 36,759,571 -------------- MANAGED HEALTH CARE 14.8% Aetna Inc. .............................................................. United States 36,200 3,205,872 (a)Caremark Rx Inc. ........................................................ United States 62,400 3,269,760 (a)Centene Corp. ........................................................... United States 25,700 517,855 (a)Coventry Health Care Inc. ............................................... United States 45,000 2,429,550 (a)Health Net Inc., A ...................................................... United States 28,400 1,330,256 (a)Molina Healthcare Inc. .................................................. United States 11,400 234,270 (a)PacifiCare Health Systems Inc. .......................................... United States 18,300 1,507,188 (a)Sierra Health Services Inc. ............................................. United States 23,900 1,792,500 (a)WellPoint Inc. .......................................................... United States 76,400 5,705,552 -------------- 19,992,803 -------------- MEDICAL DISTRIBUTORS 1.4% Cardinal Health Inc. .................................................... United States 21,900 1,368,969 (a)MWI Veterinary Supply Inc. .............................................. United States 21,200 475,304 -------------- 1,844,273 -------------- MEDICAL SPECIALTIES 12.8% (a)Adams Respiratory Therapeutics Inc. ..................................... United States 19,300 721,820 (a)Atricure Inc. ........................................................... United States 53,200 645,848 Baxter International Inc. ............................................... United States 35,200 1,345,696 Beckman Coulter Inc. .................................................... United States 22,100 1,088,646 (a)Boston Scientific Corp. ................................................. United States 28,200 708,384 (a)Cytyc Corp. ............................................................. United States 34,700 879,645 DENTSPLY International Inc. ............................................. United States 40,900 2,255,226 (a)Digene Corp. ............................................................ United States 39,000 1,177,800 (a)Fisher Scientific International Inc. .................................... United States 32,784 1,852,296 Hillenbrand Industries Inc. ............................................. United States 21,400 985,898 (a)INAMED Corp. ............................................................ United States 17,500 1,244,250 (a)Kinetic Concepts Inc. ................................................... United States 17,000 610,300 (a)Molecular Devices Corp. ................................................. United States 57,600 1,290,240 (a)Symmetry Medical Inc. ................................................... United States 23,700 524,718 (a)Waters Corp. ............................................................ United States 24,200 876,040 (a)Zimmer Holdings Inc. .................................................... United States 17,000 1,084,090 -------------- 17,290,897 -------------- MEDICAL/NURSING SERVICES 3.3% (a)DaVita Inc. ............................................................. United States 34,400 1,691,792 (a),(b)Diagnosticos da America, ADR, 144A ...................................... Brazil 21,400 1,040,634 (a)Kindred Healthcare Inc. ................................................. United States 37,900 1,061,200 (a)LHC Group Inc. .......................................................... United States 43,900 711,180 -------------- 4,504,806 --------------
58 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------- FRANKLIN GLOBAL HEALTH CARE FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) OTHER PHARMACEUTICALS 5.2% (a)Coley Pharmaceutical Group .............................................. United States 42,700 $ 632,387 (a)Connetics Corp. ......................................................... United States 44,600 581,584 (a)Endo Pharmaceuticals Holdings Inc. ...................................... United States 25,900 697,228 (a)Forest Laboratories Inc. ................................................ United States 37,500 1,421,625 Medicis Pharmaceutical Corp., A ......................................... United States 14,800 436,600 (a)Pharmion Corp. .......................................................... United States 25,100 474,139 (a)Pozen Inc. .............................................................. United States 97,200 947,700 Shire Pharmaceuticals Group PLC, ADR .................................... United Kingdom 52,500 1,881,600 -------------- 7,072,863 -------------- PACKAGED SOFTWARE 0.3% (a)Intralase Corp. ......................................................... United States 27,400 423,604 -------------- SERVICES TO THE HEALTH INDUSTRY 6.4% (a)Emageon Inc. ............................................................ United States 21,200 277,932 (a)HealthSouth Corp. ....................................................... United States 209,100 853,128 (a)Medco Health Solutions Inc. ............................................. United States 16,352 923,888 Omnicare Inc. ........................................................... United States 43,200 2,337,120 Pharmaceutical Product Development Inc. ................................. United States 71,400 4,103,358 (a)WebMD Health Corp., A ................................................... United States 6,500 169,780 -------------- 8,665,206 -------------- TOTAL COMMON STOCKS (COST $104,443,595).................................. 126,595,375 -------------- CONVERTIBLE PREFERRED STOCK (COST $1,500,004) 0.6% MEDICAL SPECIALTIES 0.6% (a),(c)Masimo Corp., cvt. pfd., F .............................................. United States 136,364 750,002 -------------- TOTAL LONG TERM INVESTMENTS (COST $105,943,599).......................... 127,345,377 -------------- SHORT TERM INVESTMENTS (COST $8,031,866) 5.9% MONEY FUND 5.9% (d)Franklin Institutional Fiduciary Trust Money Market Portfolio ........... 8,031,866 8,031,866 -------------- TOTAL INVESTMENTS (COST $113,975,465) 100.1%............................. 135,377,243 OTHER ASSETS, LESS LIABILITIES (0.1)% ................................... (200,857) -------------- NET ASSETS 100.0%........................................................ $ 135,176,386 ==============
SEE SELECTED PORTFOLIO ABBREVIATIONS ON PAGE 74. (a) Non-income producing. (b) 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 Trust's Board of Trustees. At October 31, 2005, the value of these securities was $1,040,634, representing 0.77% of net assets. (c) See Note 8 regarding restricted and illiquid securities. (d) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust Money Market Portfolio. Semiannual Report | See notes to financial statements. | 59 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS FRANKLIN NATURAL RESOURCES FUND
--------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS A (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 24.32 $ 18.80 $ 13.60 $ 16.96 $ 19.36 $ 15.74 ------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ............... 0.04 0.04 (0.04) 0.01 0.04 0.12 Net realized and unrealized gains (losses) .... 6.21 5.48 5.26 (3.33) (2.08) 3.58 ------------------------------------------------------------------------------- Total from investment operations ............... 6.25 5.52 5.22 (3.32) (2.04) 3.70 ------------------------------------------------------------------------------- Less distributions from: Net investment income ......................... -- -- (0.02) (0.04) (0.08) (0.08) Net realized gains ............................ -- -- -- -- (0.28) -- ------------------------------------------------------------------------------- Total distributions ............................ -- -- (0.02) (0.04) (0.36) (0.08) ------------------------------------------------------------------------------- Redemption fees ................................ --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------- Net asset value, end of period ................. $ 30.57 $ 24.32 $ 18.80 $ 13.60 $ 16.96 $ 19.36 =============================================================================== Total return(b) ................................ 25.70% 29.36% 38.36% (19.62)% (10.12)% 23.55% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 308,886 $ 211,327 $ 102,725 $ 39,515 $ 58,085 $ 58,721 Ratios to average net assets: Expenses ...................................... 1.03%(d) 1.08% 1.27% 1.34% 1.31% 1.26% Expenses net of waiver and payments by affiliate ................................. 1.03%(d) 1.08% 1.27% 1.34% 1.21% 1.01% Net investment income (loss) ................... 0.25%(d) 0.17% (0.24)% 0.04% 0.30% 0.69% Portfolio turnover rate ........................ 32.47% 29.89% 59.53% 44.97% 100.37% 54.42%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 60 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN NATURAL RESOURCES FUND (CONTINUED) ------------------- PERIOD ENDED OCTOBER 31, 2005(c) CLASS C (UNAUDITED) ------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................. $ 31.56 ------------------- Income from investment operations: Net investment income (loss)(a) ..................... (0.04) Net realized and unrealized gains (losses) .......... (0.99)(d) ------------------- Total from investment operations ..................... (1.03) ------------------- Redemption fees ...................................... --(e) ------------------- Net asset value, end of period ....................... $ 30.53 =================== Total return(b) ...................................... (3.30)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .................... $ 2,519 Ratios to average net assets: Expenses ............................................ 1.68%(f) Net investment income (loss) ........................ (0.40)%(f) Portfolio turnover rate .............................. 32.47% (a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) For the period September 1, 2005 (effective date) to October 31, 2005. (d) The amount shown for a share outstanding throughout the period does not correlate with the aggregate net gains on investments for that period, because of the timing of sales and repurchase of the Fund shares in relation to fluctuating market value of the investments of the Fund. (e) Amount is less than $0.01 per share. (f) Annualized. Semiannual Report | See notes to financial statements. | 61 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN NATURAL RESOURCES FUND (CONTINUED)
--------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, ADVISOR CLASS (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 25.35 $ 19.53 $ 14.11 $ 17.57 $ 19.99 $ 16.24 ------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ...................... 0.10 0.13 0.02 0.05 0.10 0.19 Net realized and unrealized gains (losses) .... 6.46 5.69 5.45 (3.41) (2.14) 3.70 ------------------------------------------------------------------------------- Total from investment operations ............... 6.56 5.82 5.47 (3.36) (2.04) 3.89 ------------------------------------------------------------------------------- Less distributions from: Net investment income ......................... -- -- (0.05) (0.10) (0.10) (0.14) Net realized gains ............................ -- -- -- -- (0.28) -- ------------------------------------------------------------------------------- Total distributions ............................ -- -- (0.05) (0.10) (0.38) (0.14) ------------------------------------------------------------------------------- Redemption fees ................................ --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------- Net asset value, end of period ................. $ 31.91 $ 25.35 $ 19.53 $ 14.11 $ 17.57 $ 19.99 =============================================================================== Total return(b) ................................ 25.88% 29.80% 38.83% (19.18)% (9.87)% 24.06% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 35,373 $ 33,048 $ 11,185 $ 460 $ 13,683 $ 13,992 Ratios to average net assets: Expenses ...................................... 0.68%(d) 0.73% 0.92% 1.03% 0.96% 0.91% Expenses net of waiver and payments by affiliate .................................. 0.68%(d) 0.73% 0.92% 1.03% 0.86% 0.66% Net investment income ......................... 0.60%(d) 0.52% 0.11% 0.35% 0.63% 1.03% Portfolio turnover rate ........................ 32.47% 29.89% 59.53% 44.97% 100.37% 54.42%
(a) Based on average daily shares outstanding. (b) Total return is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 62 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------- FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 96.8% ENERGY MINERALS 45.6% (a)Alpha Natural Resources Inc. ............................................ United States 114,000 $ 2,707,500 Apache Corp. ............................................................ United States 68,000 4,340,440 (a)Bill Barrett Corp. ...................................................... United States 76,000 2,419,080 (a)Bois d'Arc Energy Inc. .................................................. United States 100,000 1,446,000 BP PLC, ADR ............................................................. United Kingdom 153,000 10,159,200 Burlington Resources Inc. ............................................... United States 65,000 4,694,300 Cabot Oil & Gas Corp., A ................................................ United States 40,000 1,831,600 Chesapeake Energy Corp. ................................................. United States 194,000 6,227,400 Chevron Corp. ........................................................... United States 177,504 10,130,140 ConocoPhillips .......................................................... United States 172,000 11,245,360 Devon Energy Corp. ...................................................... United States 140,000 8,453,200 EnCana Corp. ............................................................ Canada 33,000 1,513,380 ExxonMobil Corp. ........................................................ United States 222,000 12,463,080 Foundation Coal Holdings Inc. ........................................... United States 95,000 3,562,500 (a)KCS Energy Inc. ......................................................... United States 240,000 5,788,800 Kerr-McGee Corp. ........................................................ United States 29,861 2,539,379 (a)Newfield Exploration Co. ................................................ United States 221,000 10,017,930 Noble Energy Inc. ....................................................... United States 173,000 6,928,650 (a),(b)Novatek OAO, GDR, 144A .................................................. Russia 10,000 222,400 Occidental Petroleum Corp. .............................................. United States 112,000 8,834,560 (a)Parallel Petroleum Corp. ................................................ United States 310,000 4,101,300 Peabody Energy Corp. .................................................... United States 118,000 9,222,880 Petroleo Brasileiro SA, ADR ............................................. Brazil 43,000 2,747,700 (a)Southwestern Energy Co. ................................................. United States 36,000 2,611,440 Talisman Energy Inc. .................................................... Canada 77,000 3,410,330 Total SA, B, ADR ........................................................ France 63,000 7,939,260 Valero Energy Corp. ..................................................... United States 46,000 4,841,040 (a)Venture Production ...................................................... United Kingdom 100,000 839,678 XTO Energy Inc. ......................................................... United States 156,000 6,779,760 -------------- 158,018,287 -------------- INDUSTRIAL SERVICES 32.2% Baker Hughes Inc. ....................................................... United States 78,000 4,286,880 (a)Bronco Drilling Co. Inc. ................................................ United States 35,000 848,400 (a)Cal Dive International Inc. ............................................. United States 127,000 7,815,580 (a)Dresser-Rand Group Inc. ................................................. United States 65,000 1,410,500 ENSCO International Inc. ................................................ United States 111,000 5,060,490 (a)Flotek Industries Inc. .................................................. United States 80,800 1,777,600 (a)FMC Technologies Inc. ................................................... United States 162,000 5,906,520 (a)Global Industries Ltd. .................................................. United States 200,000 2,542,000 GlobalSantaFe Corp. ..................................................... Cayman Islands 77,000 3,430,350 (a)Grant Prideco Inc. ...................................................... United States 161,000 6,261,290 (a)Grey Wolf Inc. .......................................................... United States 420,000 3,225,600 (a)Gulfmark Offshore Inc. .................................................. United States 75,000 2,140,500 Halliburton Co. ......................................................... United States 107,000 6,323,700 (a)Hornbeck Offshore Services Inc. ......................................... United States 75,000 2,415,750 (a)Nabors Industries Ltd. .................................................. Bermuda 88,000 6,039,440
Semiannual Report | 63 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------- FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) INDUSTRIAL SERVICES (CONT.) (a)National-Oilwell Varco Inc. ............................................. United States 143,000 $ 8,933,210 (a)Newpark Resources Inc. .................................................. United States 225,000 1,822,500 Noble Corp. ............................................................. United States 80,000 5,150,400 (a)Oil States International Inc. ........................................... United States 72,000 2,383,200 Patterson UTI Energy Inc. ............................................... United States 107,000 3,651,910 (a)Petroleum Helicopters Inc. .............................................. United States 50,000 1,518,000 (a)Pioneer Drilling Co. .................................................... United States 160,000 2,740,800 Rowan Cos. Inc. ......................................................... United States 150,000 4,948,500 Smith International Inc. ................................................ United States 154,000 4,989,600 (a)Superior Energy Services Inc. ........................................... United States 155,000 3,158,900 (a)Superior Well Services Inc. ............................................. United States 63,100 1,474,647 Technip SA, ADR ......................................................... France 46,000 2,501,940 Tidewater Inc. .......................................................... United States 54,500 2,504,820 (a)Weatherford International Ltd. .......................................... Bermuda 69,000 4,319,400 Western Gas Resources Inc. .............................................. United States 47,000 2,035,100 -------------- 111,617,527 -------------- NON-ENERGY MINERALS 9.4% Alcoa Inc. .............................................................. United States 75,000 1,821,750 Barrick Gold Corp. ...................................................... Canada 130,000 3,282,500 (a)Centerra Gold Inc. ...................................................... Canada 22,600 433,309 (a),(b)Centerra Gold Inc., 144A ................................................ Canada 44,400 851,280 Freeport McMoRan Copper & Gold Inc., B .................................. United States 83,000 4,101,860 (a)Gammon Lake Resources Inc. .............................................. Canada 221,500 1,721,226 (a)Meridian Gold Inc. ...................................................... United States 126,000 2,366,280 Newcrest Mining Ltd. .................................................... Australia 100,000 1,361,450 Newmont Mining Corp. .................................................... United States 45,000 1,917,000 Placer Dome Inc. ........................................................ Canada 168,000 3,351,600 Southern Copper Corp. ................................................... United States 48,000 2,646,720 United States Steel Corp. ............................................... United States 35,000 1,278,550 (a),(c)UrAsia Energy Ltd. ...................................................... Canada 1,900,000 2,894,993 Xstrata AG .............................................................. Switzerland 95,000 2,174,841 Zinifex Ltd. ............................................................ Australia 675,000 2,453,976 -------------- 32,657,335 -------------- PROCESS INDUSTRIES 6.4% Bunge Ltd. .............................................................. United States 103,000 5,349,820 Cabot Corp. ............................................................. United States 78,000 2,660,580 Dow Chemical Co. ........................................................ United States 115,000 5,273,900 (a)Headwaters Inc. ......................................................... United States 155,000 4,935,200 Lyondell Chemical Co. ................................................... United States 61,000 1,634,800 Minerals Technologies Inc. .............................................. United States 42,000 2,245,320 (a),(d)Solutia Inc. ............................................................ United States 137,000 71,240 -------------- 22,170,860 -------------- PRODUCER MANUFACTURING 1.0% Gibraltar Industries Inc. ............................................... United States 86,000 1,741,500 (a)Terex Corp. ............................................................. United States 34,000 1,868,979 -------------- 3,610,479 --------------
64 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------- FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) TRANSPORTATION 2.2% (a)Aries Maritime Transport Ltd. ........................................... Bermuda 185,000 $ 2,575,200 Arlington Tankers Ltd. .................................................. Bermuda 62,700 1,396,330 (a)Double Hull Tankers Inc. ................................................ Jersey Islands 150,000 1,774,500 Top Tankers Inc. ........................................................ Greece 127,000 1,635,760 -------------- 7,381,790 -------------- TOTAL COMMON STOCKS (COST $237,183,086) ................................. 335,456,278 -------------- PREFERRED STOCKS 1.5% ENERGY MINERALS 0.2% Petroleo Brasileiro SA, ADR, pfd. ....................................... Brazil 13,000 745,810 -------------- NON-ENERGY MINERALS 1.3% Cia Vale do Rio Doce, ADR, pfd., A ...................................... Brazil 122,000 4,501,800 -------------- TOTAL PREFERRED STOCKS (COST $3,645,206) ................................ 5,247,610 -------------- TOTAL LONG TERM INVESTMENTS (COST $240,828,292) ......................... 340,703,888 -------------- SHORT TERM INVESTMENTS (COST $2,121,626) 0.6% MONEY FUND 0.6% (e)Franklin Institutional Fiduciary Trust Money Market Portfolio ........... United States 2,121,626 2,121,626 -------------- TOTAL INVESTMENTS (COST $242,949,918) 98.9% ............................. 342,825,514 OTHER ASSETS, LESS LIABILITIES 1.1% ..................................... 3,952,926 -------------- NET ASSETS 100.0% ....................................................... $ 346,778,440 ==============
SEE SELECTED PORTFOLIO ABBREVIATIONS ON PAGE 74. (a) Non-income producing. (b) 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 Trust's Board of Trustees. At October 31, 2005, the value of these securities was $1,073,680, representing 0.31% of net assets. (c) See Note 8 regarding restricted and illiquid securities. (d) See Note 9 regarding other considerations. (e) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust Money Market Portfolio. Semiannual Report | See notes to financial statements. | 65 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS FRANKLIN TECHNOLOGY FUND
---------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS A (UNAUDITED) 2005 2004 2003 2002 2001(e) ---------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 4.34 $ 4.25 $ 3.19 $ 4.37 $ 6.41 $ 10.00 ------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ............... (0.03) (0.05) (0.05) (0.05) (0.05) (0.08) Net realized and unrealized gains (losses) .... 0.48 0.14 1.11 (1.13) (1.99) (3.51) ------------------------------------------------------------------------------- Total from investment operations ............... 0.45 0.09 1.06 (1.18) (2.04) (3.59) ------------------------------------------------------------------------------- Redemption fees ................................ --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------- Net asset value, end of period ................. $ 4.79 $ 4.34 $ 4.25 $ 3.19 $ 4.37 $ 6.41 =============================================================================== Total return(b) ................................ 10.37% 2.12% 33.23% (27.00)% (31.72)% (36.00)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 27,907 $ 27,626 $ 28,636 $ 20,018 $ 26,246 $ 33,598 Ratios to average net assets: Expenses ...................................... 1.78%(d) 1.73% 1.72% 2.01% 1.69% 1.68% Expenses net of waiver and payments by affiliate ................................. 1.78%(d) 1.73% 1.72% 2.01% 1.66% 1.40% Net investment income (loss) .................. (1.32)%(d) (1.02)% (1.48)% (1.81)% (1.01)% (0.88)% Portfolio turnover rate ........................ 41.23% 68.39% 141.34% 182.71% 141.03% 198.78%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the year May 1, 2000 (commencement of operations) to April 30, 2001. 66 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TECHNOLOGY FUND (CONTINUED)
---------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS B (UNAUDITED) 2005 2004 2003 2002 2001(e) ---------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 4.21 $ 4.15 $ 3.14 $ 4.32 $ 6.37 $ 10.00 ------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ............... (0.05) (0.08) (0.17) (0.15) (0.08) (0.13) Net realized and unrealized gain (losses) ..... 0.47 0.14 1.18 (1.03) (1.97) (3.50) ------------------------------------------------------------------------------- Total from investment operations ............... 0.42 0.06 1.01 (1.18) (2.05) (3.63) ------------------------------------------------------------------------------- Redemption fees ................................ --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------- Net asset value, end of period ................. $ 4.63 $ 4.21 $ 4.15 $ 3.14 $ 4.32 $ 6.37 =============================================================================== Total return(b) ................................ 9.98% 1.45% 32.17% (27.31)% (32.18)% (36.30)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 4,211 $ 4,221 $ 4,788 $ 2,922 $ 4,189 $ 5,877 Ratios to average net assets: Expenses ...................................... 2.42%(d) 2.40% 2.35% 2.66% 2.33% 2.31% Expenses net of waiver and payments by affiliate ................................. 2.42%(d) 2.40% 2.35% 2.66% 2.30% 2.03% Net investment income (loss) .................. (1.96)%(d) (1.69)% (2.11)% (2.46)% (1.62)% (1.51)% Portfolio turnover rate ........................ 41.23% 68.39% 141.34% 182.71% 141.03% 198.78%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the year May 1, 2000 (commencement of operations) to April 30, 2001. Semiannual Report | See notes to financial statements. | 67 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TECHNOLOGY FUND (CONTINUED)
---------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS C (UNAUDITED) 2005 2004 2003 2002 2001(e) ---------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 4.20 $ 4.14 $ 3.13 $ 4.30 $ 6.36 $ 10.00 ------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ............... (0.05) (0.08) (0.14) (0.12) (0.08) (0.13) Net realized and unrealized gains (losses) .... 0.47 0.14 1.15 (1.05) (1.98) (3.51) ------------------------------------------------------------------------------- Total from investment operations ............... 0.42 0.06 1.01 (1.17) (2.06) (3.64) ------------------------------------------------------------------------------- Redemption fees ................................ --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------- Net asset value, end of period ................. $ 4.62 $ 4.20 $ 4.14 $ 3.13 $ 4.30 $ 6.36 =============================================================================== Total return(b) ................................ 10.00% 1.45% 32.27% (27.21)% (32.39)% (36.40)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 8,527 $ 8,502 $ 10,949 $ 8,545 $ 10,169 $ 13,471 Ratios to average net assets: Expenses ...................................... 2.43%(d) 2.42% 2.37% 2.66% 2.32% 2.32% Expenses net of waiver and payments by affiliate ................................. 2.43%(d) 2.42% 2.37% 2.66% 2.29% 2.04% Net investment income (loss) .................. (1.97)%(d) (1.71)% (2.13)% (2.46)% (1.64)% (1.53)% Portfolio turnover rate ........................ 41.23% 68.39% 141.34% 182.71% 141.03% 198.78%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the year May 1, 2000 (commencement of operations) to April 30, 2001. 68 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TECHNOLOGY FUND (CONTINUED)
--------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS R (UNAUDITED) 2005 2004 2003 2002(e) --------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 4.32 $ 4.24 $ 3.19 $ 4.36 $ 5.33 ------------------------------------------------------------------ Income from investment operations: Net investment income (loss)(a) ............... (0.04) (0.05) (0.06) (0.06) (0.03) Net realized and unrealized gains (losses) .... 0.49 0.13 1.11 (1.11) (0.94) ------------------------------------------------------------------ Total from investment operations ............... 0.45 0.08 1.05 (1.17) (0.97) ------------------------------------------------------------------ Redemption fees ................................ --(c) --(c) -- -- -- ------------------------------------------------------------------ Net asset value, end of period ................. $ 4.77 $ 4.32 $ 4.24 $ 3.19 $ 4.36 ================================================================== Total return(b) ................................ 10.42% 1.89% 33.33% (27.06)% (18.20)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 2,934 $ 2,701 $ 1,582 $ 380 $ 18 Ratios to average net assets: Expenses ...................................... 1.93%(d) 1.92% 1.87% 2.17% 1.73%(d) Expenses net of waiver and payments by affiliate ................................. 1.93%(d) 1.92% 1.87% 2.17% 1.70%(d) Net investment income (loss) .................. (1.47)%(d) (1.21)% (1.63)% (1.97)% (1.83)%(d) Portfolio turnover rate ........................ 41.23% 68.39% 141.34% 182.71% 141.03%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the period January 2, 2002 (commencement of operations) to April 30, 2002. Semiannual Report | See notes to financial statements. | 69 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TECHNOLOGY FUND (CONTINUED)
---------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, ADVISOR CLASS (UNAUDITED) 2005 2004 2003 2002 2001(e) ---------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 4.41 $ 4.31 $ 3.22 $ 4.39 $ 6.43 $ 10.00 ------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ............... (0.02) (0.03) (0.05) (0.01) (0.04) (0.05) Net realized and unrealized gains (losses) .... 0.49 0.13 1.14 (1.16) (2.00) (3.52) ------------------------------------------------------------------------------- Total from investment operations ............... 0.47 0.10 1.09 (1.17) (2.04) (3.57) ------------------------------------------------------------------------------- Redemption fees ................................ --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------- Net asset value, end of period ................. $ 4.88 $ 4.41 $ 4.31 $ 3.22 $ 4.39 $ 6.43 =============================================================================== Total return(b) ................................ 10.66% 2.32% 33.85% (26.65)% (31.62)% (35.80)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 2,614 $ 2,374 $ 2,444 $ 10,438 $ 10,668 $ 11,911 Ratios to average net assets: Expenses ...................................... 1.43%(d) 1.42% 1.37% 1.67% 1.34% 1.33% Expenses net of waiver and payments by affiliate ................................. 1.43%(d) 1.42% 1.37% 1.67% 1.31% 1.05% Net investment income (loss) .................. (0.97)%(d) (0.71)% (1.13)% (1.47)% (0.67)% (0.55)% Portfolio turnover rate ........................ 41.23% 68.39% 141.34% 182.71% 141.03% 198.78%
(a) Based on average daily shares outstanding. (b) Total return is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the year May 1, 2000 (effective date) to April 30, 2001. 70 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------- FRANKLIN TECHNOLOGY FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 93.4% ADVERTISING/MARKETING SERVICES 0.5% (a)Getty Images Inc. ........................................................... United States 3,000 $ 249,029 -------------- BROADCASTING 0.5% (a)XM Satellite Radio Holdings Inc., A ......................................... United States 7,300 210,460 -------------- COMPUTER COMMUNICATIONS 4.7% (a)Avocent Corp. ............................................................... United States 14,600 447,636 (a)Cisco Systems Inc. .......................................................... United States 45,800 799,210 (a)Ixia ........................................................................ United States 20,300 256,186 (a)Juniper Networks Inc. ....................................................... United States 27,700 646,241 -------------- 2,149,273 -------------- COMPUTER PERIPHERALS 4.8% (a)EMC Corp. ................................................................... United States 80,100 1,118,196 (a)Network Appliance Inc. ...................................................... United States 40,000 1,094,400 -------------- 2,212,596 -------------- COMPUTER PROCESSING HARDWARE 5.2% (a)Apple Computer Inc. ......................................................... United States 20,200 1,163,318 (a)Dell Inc. ................................................................... United States 39,100 1,246,508 -------------- 2,409,826 -------------- DATA PROCESSING SERVICES 4.9% (a)Affiliated Computer Services Inc., A ........................................ United States 11,500 622,265 (a)Alliance Data Systems Corp. ................................................. United States 10,100 359,156 Global Payments Inc. ........................................................ United States 19,400 831,290 (a)Neustar Inc., A ............................................................. United States 14,400 440,640 -------------- 2,253,351 -------------- ELECTRONIC COMPONENTS 1.5% (a)SanDisk Corp. ............................................................... United States 11,400 671,345 -------------- ELECTRONIC EQUIPMENT/INSTRUMENTS 6.2% National Instruments Corp. .................................................. United States 29,000 693,100 Rockwell Automation Inc. .................................................... United States 14,000 744,100 Scientific-Atlanta Inc. ..................................................... United States 15,800 559,952 Tektronix Inc. .............................................................. United States 37,700 866,346 -------------- 2,863,498 -------------- ELECTRONIC PRODUCTION EQUIPMENT 3.8% Applied Materials Inc. ...................................................... United States 36,600 599,508 (a)FormFactor Inc. ............................................................. United States 30,400 748,448 (a)Varian Semiconductor Equipment Associates Inc. .............................. United States 10,400 393,328 -------------- 1,741,284 -------------- INFORMATION TECHNOLOGY SERVICES 5.8% (a)Amdocs Ltd. ................................................................. United States 30,700 812,629 (a)Cognizant Technology Solutions Corp., A ..................................... United States 24,900 1,095,102 Infosys Technologies Ltd., ADR .............................................. India 11,700 795,600 -------------- 2,703,331 --------------
Semiannual Report | 71 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------- FRANKLIN TECHNOLOGY FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) INTERNET SOFTWARE/SERVICES 6.8% (a)Google Inc., A .............................................................. United States 3,200 $ 1,190,848 (a)VeriSign Inc. ............................................................... United States 37,600 888,488 (a)Yahoo! Inc. ................................................................. United States 29,180 1,078,786 -------------- 3,158,122 -------------- MISCELLANEOUS COMMERCIAL SERVICES 0.5% (a)Ultimate Software Group Inc. ................................................ United States 13,400 227,666 -------------- MOVIES/ENTERTAINMENT 0.9% (a)Pixar ....................................................................... United States 8,400 426,132 -------------- PACKAGED SOTWARE 14.4% Adobe Systems Inc. .......................................................... United States 23,400 754,650 (a)ANSYS Inc. .................................................................. United States 6,400 238,464 Autodesk Inc. ............................................................... United States 16,000 722,080 (a)Cognos Inc. ................................................................. Canada 14,900 559,197 (a)FileNET Corp. ............................................................... United States 16,200 456,030 (a)McAfee Inc. ................................................................. United States 7,300 219,219 (a)Micromuse Inc. .............................................................. United States 31,500 225,858 Microsoft Corp. ............................................................. United States 53,200 1,367,240 (a)NAVTEQ Corp. ................................................................ United States 16,500 645,480 (a)Salesforce.com Inc. ......................................................... United States 15,500 387,345 SAP AG, ADR ................................................................. Germany 18,700 802,978 (a)Symantec Corp. .............................................................. United States 11,000 262,350 -------------- 6,640,891 -------------- RECREATIONAL PRODUCTS 2.1% (a)Activision Inc. ............................................................. United States 11,467 180,829 (a)Electronic Arts Inc. ........................................................ United States 14,200 807,695 -------------- 988,524 -------------- SEMICONDUCTORS 19.8% (a)Actel Corp. ................................................................. United States 50,700 707,265 (a)Altera Corp. ................................................................ United States 52,200 869,130 Analog Devices Inc. ......................................................... United States 38,800 1,349,463 (a)Broadcom Corp., A ........................................................... United States 11,000 467,060 (a)Integrated Device Technology Inc. ........................................... United States 48,700 481,156 Intersil Corp., A ........................................................... United States 36,300 826,188 Linear Technology Corp. ..................................................... United States 34,600 1,149,066 (a)Marvell Technology Group Ltd. ............................................... Bermuda 18,100 840,021 Maxim Integrated Products Inc. .............................................. United States 4,100 142,188 Microchip Technology Inc. ................................................... United States 32,700 986,559 (a)Power Integrations Inc. ..................................................... United States 11,600 244,876 (a)Silicon Laboratories Inc. ................................................... United States 26,800 862,156 (a)ZiLOG Inc. .................................................................. United States 88,800 244,200 -------------- 9,169,328 --------------
72 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------- FRANKLIN TECHNOLOGY FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) SPECIALTY TELECOMMUNICATIONS 1.8% (a)American Tower Corp., A ..................................................... United States 34,300 $ 818,054 -------------- TELECOMMUNICATIONS EQUIPMENT 9.2% (a)Comverse Technology Inc. .................................................... United States 9,400 235,940 (a)Corning Inc. ................................................................ United States 41,700 837,753 Harris Corp. ................................................................ United States 15,000 616,500 (a)Microtune Inc. .............................................................. United States 47,900 184,894 Nokia Corp., ADR ............................................................ Finland 37,300 627,386 QUALCOMM Inc. ............................................................... United States 27,200 1,081,472 (a)SiRF Technology Holdings Inc. ............................................... United States 4,900 126,371 (a)ViaSat Inc. ................................................................. United States 21,700 537,943 -------------- 4,248,259 -------------- TOTAL COMMON STOCKS (COST $35,109,050) ...................................... 43,140,969 -------------- SHORT TERM INVESTMENTS (COST $3,101,519) 6.7% MONEY FUND 6.7% (b)Franklin Institutional Fiduciary Trust Money Market Portfolio ............... United States 3,101,519 3,101,519 -------------- TOTAL INVESTMENTS (COST $38,210,569) 100.1% ................................. 46,242,488 OTHER ASSETS, LESS LIABILITIES (0.1)% ....................................... (49,840) -------------- NET ASSETS 100.0% ........................................................... $ 46,192,648 ==============
SEE SELECTED PORTFOLIO ABBREVIATIONS ON PAGE 74. (a) Non-income producing. (b) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust Money Market Portfolio. Semiannual Report | See notes to financial statements. | 73 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED) SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt GDR - Global Depository Receipt PIPES - Private Investment in Public Equity Securities 74 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES October 31, 2005 (unaudited)
----------------------------------------------------- FRANKLIN FRANKLIN GLOBAL FRANKLIN BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH DISCOVERY FUND FUND CARE FUND ----------------------------------------------------- Assets: Investments in securities: Cost - Unaffiliated issuers ............................................. $ 359,158,699 $ 51,102,538 $ 105,943,599 Cost - Sweep Money Fund (Note 7) ........................................ 473,120 1,085,857 8,031,866 Cost - Repurchase Agreements ............................................ 108,383,130 -- -- ----------------------------------------------------- Total cost of investments ............................................... $ 468,014,949 $ 52,188,395 $ 113,975,465 ===================================================== Value - Unaffiliated issuers(a) ......................................... $ 508,699,367 $ 64,116,974 $ 127,345,377 Value - Sweep Money Fund (Note 7) ....................................... 473,120 1,085,857 8,031,866 Value - Repurchase Agreements ........................................... 108,383,130 -- -- ----------------------------------------------------- Total value of investments .............................................. 617,555,617 65,202,831 135,377,243 ----------------------------------------------------- Cash ..................................................................... -- 305,915 -- Receivables: Investment securities sold .............................................. 22,086,545 202,698 -- Capital shares sold ..................................................... 305,331 41,662 678,710 Dividends and interest .................................................. 38,015 23,163 130,026 Cash on deposit with broker for securities sold short .................... 394,338 -- -- ----------------------------------------------------- Total assets ........................................................ 640,379,846 65,776,269 136,185,979 ----------------------------------------------------- Liabilities: Payables: Investment securities purchased ......................................... 2,876,194 858,593 360,155 Capital shares redeemed ................................................. 1,197,548 201,984 460,580 Affiliates .............................................................. 585,255 91,004 172,891 Funds advanced by custodian .............................................. 31,280 -- -- Payable upon return of securities loaned ................................. 108,383,130 -- -- Accrued expenses and other liabilities ................................... 43,685 10,215 15,967 ----------------------------------------------------- Total liabilities ................................................... 113,117,092 1,161,796 1,009,593 ----------------------------------------------------- Net assets, at value .............................................. $ 527,262,754 $ 64,614,473 $ 135,176,386 ===================================================== Net assets consist of: Paid-in capital .......................................................... $ 797,400,611 $ 173,064,705 $ 135,194,875 Undistributed net investment income (loss) ............................... (2,977,437) 396,819 (488,643) Net unrealized appreciation (depreciation) ............................... 149,539,599 13,010,921 21,399,728 Accumulated net realized gain (loss) ..................................... (416,700,019) (121,857,972) (20,929,574) ----------------------------------------------------- Net assets, at value .............................................. $ 527,262,754 $ 64,614,473 $ 135,176,386 =====================================================
(a) The Franklin Biotechnology Discovery Fund includes $108,071,083 of securities loaned. Semiannual Report | See notes to financial statements. | 75 FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) October 31, 2005 (unaudited)
----------------------------------------------------- FRANKLIN FRANKLIN GLOBAL FRANKLIN BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH DISCOVERY FUND FUND CARE FUND ----------------------------------------------------- CLASS A: Net assets, at value ..................................................... $ 527,262,754 $ 54,219,211 $ 95,506,120 ===================================================== Shares outstanding ....................................................... 9,743,623 5,749,634 4,428,719 ===================================================== Net asset value per share(a) ............................................. $ 54.11 $ 9.43 $ 21.57 ===================================================== Maximum offering price per share (net asset value per share / 94.25%) .... $ 57.41 $ 10.01 $ 22.89 ===================================================== CLASS B: Net assets, at value ..................................................... -- $ 2,763,576 $ 13,784,827 ===================================================== Shares outstanding ....................................................... -- 307,894 672,045 ===================================================== Net asset value and maximum offering price per share(a) .................. -- $ 8.98 $ 20.51 ===================================================== CLASS C: Net assets, at value ..................................................... -- $ 7,631,686 $ 25,885,439 ===================================================== Shares outstanding ....................................................... -- 848,813 1,274,608 ===================================================== Net asset value and maximum offering price per share(a) .................. -- $ 8.99 $ 20.31 =====================================================
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. 76 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) October 31, 2005 (unaudited)
---------------------------------- FRANKLIN FRANKLIN NATURAL TECHNOLOGY RESOURCES FUND FUND ---------------------------------- Assets: Investments in securities: Cost - Unaffiliated issuers ............................................. $ 240,828,292 $ 35,109,050 Cost - Sweep Money Fund (Note 7) ........................................ 2,121,626 3,101,519 ---------------------------------- Total cost of investments ............................................... $ 242,949,918 $ 38,210,569 ================================== Value - Unaffiliated issuers ............................................ $ 340,703,888 $ 43,140,969 Value - Sweep Money Fund (Note 7) ....................................... 2,121,626 3,101,519 ---------------------------------- Total value of investments .............................................. 342,825,514 46,242,488 Receivables: Investment securities sold .............................................. 2,151,169 666,526 Capital shares sold ..................................................... 2,612,692 11,378 Dividends and interest .................................................. 249,958 5,363 ---------------------------------- Total assets ........................................................... 347,839,333 46,925,755 ---------------------------------- Liabilities: Payables: Investment securities purchased ......................................... 151,957 380,618 Capital shares redeemed ................................................. 671,192 273,320 Affiliates .............................................................. 237,000 78,313 Funds advanced by custodian .............................................. -- 386 Accrued expenses and other liabilities ................................... 744 470 ---------------------------------- Total liabilities ...................................................... 1,060,893 733,107 ---------------------------------- Net assets, at value .............................................. $ 346,778,440 $ 46,192,648 ================================== Net assets consist of: Paid-in capital .......................................................... $ 234,774,640 $ 93,868,081 Undistributed net investment income (loss) ............................... 877,935 (354,120) Net unrealized appreciation (depreciation) ............................... 99,874,100 8,031,919 Accumulated net realized gain (loss) ..................................... 11,251,765 (55,353,232) ---------------------------------- Net assets, at value .............................................. $ 346,778,440 $ 46,192,648 ==================================
Semiannual Report | See notes to financial statements. | 77 FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) October 31, 2005 (unaudited)
---------------------------------- FRANKLIN FRANKLIN NATURAL TECHNOLOGY RESOURCES FUND FUND ---------------------------------- CLASS A: Net assets, at value ..................................................... $ 308,886,341 $ 27,907,110 ================================== Shares outstanding ....................................................... 10,104,242 5,823,939 ================================== Net asset value per share(a) ............................................. $ 30.57 $ 4.79 ================================== Maximum offering price per share (net asset value per share / 94.25%) .... $ 32.44 $ 5.08 ================================== CLASS B: Net assets, at value ..................................................... -- $ 4,210,745 ================================== Shares outstanding ....................................................... -- 909,198 ================================== Net asset value and maximum offering price per share(a) .................. -- $ 4.63 ================================== CLASS C: Net assets, at value ..................................................... $ 2,519,032 $ 8,527,137 ================================== Shares outstanding ....................................................... 82,517 1,847,140 ================================== Net asset value and maximum offering price per share(a) .................. $ 30.53 $ 4.62 ================================== CLASS R: Net assets, at value ..................................................... -- $ 2,933,886 ================================== Shares outstanding ....................................................... -- 615,498 ================================== Net asset value and maximum offering price per share(a) .................. -- $ 4.77 ================================== ADVISOR CLASS: Net assets, at value ..................................................... $ 35,373,067 $ 2,613,770 ================================== Shares outstanding ....................................................... 1,108,491 536,078 ================================== Net asset value and maximum offering price per share(a) .................. $ 31.91 $ 4.88 ==================================
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. 78 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the six months ended October 31, 2005 (unaudited)
---------------------------------------------------- FRANKLIN FRANKLIN GLOBAL FRANKLIN BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH DISCOVERY FUND FUND CARE FUND ---------------------------------------------------- Investment income: Dividends (net of foreign taxes)(a) Unaffiliated issuers .................................................... $ -- $ 387,399 $ 402,561 Sweep Money Fund (Note 7) ............................................... 279,496 -- 97,722 Income from securities loaned - net ...................................... 102,443 -- -- ---------------------------------------------------- Total investment income ............................................. 381,939 387,399 500,283 ---------------------------------------------------- Expenses: Management fees (Note 3a) ................................................ 1,305,231 198,188 386,563 Administrative fees (Note 3b) ............................................ 378,993 -- -- Distribution fees (Note 3c) Class A ................................................................. 634,795 66,906 118,907 Class B ................................................................. -- 13,978 67,469 Class C ................................................................. -- 37,578 126,708 Transfer agent fees (Note 3e) ............................................ 885,544 144,142 237,177 Custodian fees (Note 4) .................................................. 3,519 3,459 3,401 Reports to shareholders .................................................. 116,140 9,938 15,828 Registration and filing fees ............................................. 11,302 15,295 17,922 Professional fees ........................................................ 11,035 12,692 11,921 Trustees' fees and expenses .............................................. 3,717 384 600 Other .................................................................... 9,312 1,997 2,472 ---------------------------------------------------- Total expenses ...................................................... 3,359,588 504,557 988,968 Expense reductions (Note 4) ......................................... (212) -- (42) ---------------------------------------------------- Net expenses ...................................................... 3,359,376 504,557 988,926 ---------------------------------------------------- Net investment income (loss) .................................... (2,977,437) (117,158) (488,643) ---------------------------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ............................................................. 23,146,036 3,130,379 1,492,610 Foreign currency transactions ........................................... (49) (5,328) 1,677 ---------------------------------------------------- Net realized gain (loss) ............................................ 23,145,987 3,125,051 1,494,287 ---------------------------------------------------- Net change in unrealized appreciation (depreciation) on: Investments ............................................................. 63,497,442 7,715,160 6,044,288 Translation of assets and liabilities denominated in foreign currencies . (902) (3,515) (3,050) ---------------------------------------------------- Net change in unrealized appreciation (depreciation) ................ 63,496,540 7,711,645 6,041,238 ---------------------------------------------------- Net realized and unrealized gain (loss) ................................... 86,642,527 10,836,696 7,535,525 ---------------------------------------------------- Net increase (decrease) in net assets resulting from operations ........... $ 83,665,090 $ 10,719,538 $ 7,046,882 ==================================================== (a)Foreign taxes withheld on dividends .................................... $ -- $ 20,377 $ 3,158
Semiannual Report | See notes to financial statements. | 79 FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) for the six months ended October 31, 2005 (unaudited)
---------------------------------- FRANKLIN FRANKLIN NATURAL TECHNOLOGY RESOURCES FUND FUND ---------------------------------- Investment income: Dividends (net of foreign taxes)(a) Unaffiliated issuers .................................................... $ 1,887,254 $ 60,194 Sweep Money Fund (Note 7) ............................................... 126,298 49,719 Interest ................................................................. 151 -- ---------------------------------- Total investment income ............................................. 2,013,703 109,913 ---------------------------------- Expenses: Management fees (Note 3a) ................................................ 818,088 125,581 Administrative fees (Note 3b) ............................................ -- 47,749 Distribution fees (Note 3c) Class A ................................................................. 484,256 50,946 Class B ................................................................. -- 21,479 Class C ................................................................. 2,364 44,000 Class R ................................................................. -- 7,223 Transfer agent fees (Note 3e) ............................................ 165,959 128,357 Custodian fees (Note 4) .................................................. 3,502 486 Reports to shareholders .................................................. 12,194 8,288 Registration and filing fees ............................................. 48,544 20,184 Professional fees ........................................................ 9,358 9,026 Trustees' fees and expenses .............................................. 1,390 378 Other .................................................................... 3,632 361 ---------------------------------- Total expenses ...................................................... 1,549,287 464,058 Expense reductions (Note 4) ......................................... (103) (25) ---------------------------------- Net expenses ...................................................... 1,549,184 464,033 ---------------------------------- Net investment income (loss) .................................... 464,519 (354,120) ---------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from Investments ............................................................. 9,035,800 865,828 Foreign currency transactions ........................................... (1,923) -- ---------------------------------- Net realized gain (loss) ............................................ 9,033,877 865,828 ---------------------------------- Net change in unrealized appreciation (depreciation) on: Investments ............................................................. 54,757,005 4,040,627 Translation of assets and liabilities denominated in foreign currencies . (1,792) -- ---------------------------------- Net change in unrealized appreciation (depreciation) ............... 54,755,213 4,040,627 ---------------------------------- Net realized and unrealized gain (loss) ................................... 63,789,090 4,906,455 ---------------------------------- Net increase (decrease) in net assets resulting from operations ........... $ 64,253,609 $ 4,552,335 ================================== (a)Foreign taxes withheld on dividends .................................... $ 40,521 $ 974
80 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
---------------------------------------------------------------------------- FRANKLIN BIOTECHNOLOGY FRANKLIN GLOBAL DISCOVERY FUND COMMUNICATIONS FUND ---------------------------------------------------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED OCTOBER 31, 2005 YEAR ENDED (UNAUDITED) APRIL 30, 2005 (UNAUDITED) APRIL 30, 2005 ---------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ................... $ (2,977,437) $ (6,914,107) $ (117,158) $ (54,431) Net realized gain (loss) from investments and foreign currency transactions ................. 23,145,987 40,259,228 3,125,051 2,808,119 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ............................ 63,496,540 (118,757,838) 7,711,645 264,281 ---------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ............... 83,665,090 (85,412,717) 10,719,538 3,017,969 ---------------------------------------------------------------------------- Distributions to shareholders from: Net investment income: Class A ....................................... -- -- -- (148,066) ---------------------------------------------------------------------------- Total distributions to shareholders ............. -- -- -- (148,066) ---------------------------------------------------------------------------- Capital share transactions: (Note 2) Class A ....................................... (42,312,402) (112,120,808) (4,721,163) (12,208,050) Class B ....................................... -- -- (363,423) (625,354) Class C ....................................... -- -- (663,532) (1,901,429) ---------------------------------------------------------------------------- Total capital share transactions ................ (42,312,402) (112,120,808) (5,748,118) (14,734,833) ---------------------------------------------------------------------------- Redemption fees ................................. 1,551 3,285 104 3,190 ---------------------------------------------------------------------------- Net increase (decrease) in net assets ......... 41,354,239 (197,530,240) 4,971,524 (11,861,740) Net assets: Beginning of period ............................. 485,908,515 683,438,755 59,642,949 71,504,689 ---------------------------------------------------------------------------- End of period ................................... $ 527,262,754 $ 485,908,515 $ 64,614,473 $ 59,642,949 ============================================================================ Undistributed net investment income (loss) included in net assets: End of period .................................. $ (2,977,437) $ -- $ 396,819 $ 513,977 ============================================================================
Semiannual Report | See notes to financial statements. | 81 FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
---------------------------------------------------------------------------- FRANKLIN FRANKLIN GLOBAL HEALTH CARE FUND NATURAL RESOURCES FUND ---------------------------------------------------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED OCTOBER 31, 2005 YEAR ENDED (UNAUDITED) APRIL 30, 2005 (UNAUDITED) APRIL 30, 2005 ---------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ................... $ (488,643) $ (779,345) $ 464,519 $ 391,987 Net realized gain (loss) from investments and foreign currency transactions ................. 1,494,287 7,249,631 9,033,877 6,541,264 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ............................ 6,041,238 (4,228,640) 54,755,213 31,973,568 ---------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ............... 7,046,882 2,241,646 64,253,609 38,906,819 ---------------------------------------------------------------------------- Capital share transactions: (Note 2) Class A ....................................... 3,419,582 (6,127,324) 41,635,414 75,035,763 Class B ....................................... 1,055,899 (1,175,029) -- -- Class C ....................................... 2,632,323 (2,143,550) 2,599,953 -- Advisor Class ................................. -- -- (6,088,636) 16,518,180 ---------------------------------------------------------------------------- Total capital share transactions ................ 7,107,804 (9,445,903) 38,146,731 91,553,943 ---------------------------------------------------------------------------- Redemption fees ................................. 7,244 142 2,946 4,241 ---------------------------------------------------------------------------- Net increase (decrease) in net assets ......... 14,161,930 (7,204,115) 102,403,286 130,465,003 Net assets: Beginning of period ............................. 121,014,456 128,218,571 244,375,154 113,910,151 ---------------------------------------------------------------------------- End of period ................................... $ 135,176,386 $ 121,014,456 $ 346,778,440 $ 244,375,154 ============================================================================ Undistributed net investment income (loss) included in net assets: End of period ................................... $ (488,643) $ -- $ 877,935 $ 413,416 ============================================================================
82 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
------------------------------------ FRANKLIN TECHNOLOGY FUND ------------------------------------ SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED (UNAUDITED) APRIL 30, 2005 ------------------------------------ Increase (decrease) in net assets: Operations: Net investment income (loss) ........................................................... $ (354,120) $ (603,793) Net realized gain (loss) from investments and foreign currency transactions ............ 865,828 4,580,294 Net change in unrealized appreciation (depreciation) on investments .................... 4,040,627 (2,970,973) ------------------------------------ Net increase (decrease) in net assets resulting from operations .................... 4,552,335 1,005,528 ------------------------------------ Capital share transactions: (Note 2) Class A ................................................................................ (2,521,676) (1,666,662) Class B ................................................................................ (422,124) (657,057) Class C ................................................................................ (792,018) (2,694,512) Class R ................................................................................ (42,730) 1,172,031 Advisor Class .......................................................................... (7,893) (135,295) ------------------------------------ Total capital share transactions ........................................................ (3,786,441) (3,981,495) ------------------------------------ Redemption fees ......................................................................... 2,679 874 ------------------------------------ Net increase (decrease) in net assets .............................................. 768,573 (2,975,093) Net assets: Beginning of period ..................................................................... 45,424,075 48,399,168 ------------------------------------ End of period ........................................................................... $ 46,192,648 $ 45,424,075 ==================================== Undistributed net investment income (loss) included in net assets: End of period ........................................................................... $ (354,120) $ -- ====================================
Semiannual Report | See notes to financial statements. | 83 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Strategic Series (the Trust) is registered under the Investment Company Act of 1940 as an open-end investment company, consisting of twelve separate series. All funds included in this report (the Funds) are non-diversified. The financial statements of the remaining funds in the series are presented separately. 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. 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 Trust has 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 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. 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 Trust's Board of Trustees. 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 Trust's Board of Trustees. 84 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION (CONTINUED) 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 Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. REPURCHASE AGREEMENTS Certain Funds may enter into repurchase agreements, which 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 fund, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. Repurchase agreements are valued at cost. At October 31, 2005, all repurchase agreements held by the funds had been entered into on that date. D. FOREIGN CURRENCY CONTRACTS When the Funds purchase or sell foreign securities it 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 Statement 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 Statement of Assets and Liabilities. E. SECURITIES SOLD SHORT The Franklin Biotechnology Discovery Fund is engaged in selling securities short, which obligates the fund to replace a borrowed security with the same security at current market value. The fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the fund replaces the borrowed security. The fund realizes a gain if the price of the security declines between those dates. Gains are limited to the price at which the fund sold the security short, while losses are potentially unlimited in size. Semiannual Report | 85 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. SECURITIES SOLD SHORT (CONTINUED) The fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale and the fund must maintain a deposit with broker consisting of cash and securities having a value equal to a specified percentage of the value of the securities sold short. The fund is obligated to pay the counterparty any dividends or interest due on securities sold short. Such dividends and interest are recorded as an expense to the fund. F. SECURITIES LENDING The Franklin Biotechnology Discovery Fund loans securities to certain brokers through a securities lending agent for which they receive cash and securities collateral against the loaned securities in an amount initially equal to at least 102% of the market value of the loaned securities. The cash collateral is invested in short-term instruments as noted in the Statements of Investments. The securities received as collateral are held in a segregated account with the fund's custodian on the fund's behalf. The fund receives interest income from the investment of cash collateral and interest income from the securities held as collateral, adjusted by lender fees and broker rebates. At October 31, 2005, the market value of securities on loan was $108,071,083, for which the funds' custodian held cash collateral valued at $108,383,130, and securities collateral valued at $25,446,000. The fund bears the risk of loss with respect to the investment of the cash collateral and the securities loaned. The securities lending agent has agreed to indemnify the fund in the case of default of any securities borrower. G. INCOME TAXES No provision has been made for U.S. income taxes because each Fund's policy is to continue 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. Foreign securities held by the Funds may be subject to foreign taxation. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Funds invest. 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. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with generally accepted accounting principles. 86 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) 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 will reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. 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. 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. Semiannual Report | 87 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) K. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. However, based on experience, the Trust expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST The classes of shares offered within each of the Funds are indicated below. Effective March 1, 2005, Class B shares are only offered to existing Class B shareholders in the form of reinvested distributions and certain exchanges from other Franklin Templeton Class B shares. Effective September 1, 2005, the Franklin Natural Resources Fund began offering a new class of shares, Class C. 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 C CLASS A, CLASS B, CLASS C, CLASS A CLASS A, CLASS B & CLASS C & ADVISOR CLASS CLASS R & ADVISOR CLASS - ----------------------------------------------------------------------------------------------------------- Franklin Biotechnology Franklin Global Franklin Natural Franklin Technology Fund Discovery Fund Communications Fund Resources Fund Franklin Global Health Care Fund
88 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) At October 31, 2005, there were an unlimited number of shares authorized ($0.01 par value). Transactions in the Funds' shares were as follows:
------------------------------------------------------------ FRANKLIN BIOTECHNOLOGY FRANKLIN GLOBAL DISCOVERY FUND COMMUNICATIONS FUND ------------------------------------------------------------ SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------ CLASS A SHARES: Six months ended October 31, 2005 Shares sold ........................ 607,848 $ 32,441,290 187,628 $ 1,671,152 Shares redeemed .................... (1,416,585) (74,753,692) (722,901) (6,392,315) ------------------------------------------------------------ Net increase (decrease) ............ (808,737) $ (42,312,402) (535,273) $ (4,721,163) ============================================================ Year ended April 30, 2005 Shares sold ........................ 1,153,641 $ 58,011,226 497,779 $ 4,042,716 Shares issued in reinvestment of distributions .................. -- -- 15,319 133,888 Shares redeemed .................... (3,433,002) (170,132,034) (2,050,478) (16,384,654) ------------------------------------------------------------ Net increase (decrease) ............ (2,279,361) $(112,120,808) (1,537,380) $ (12,208,050) ============================================================ CLASS B SHARES: Six months ended October 31, 2005 Shares sold ........................ 11,871 $ 98,561 Shares redeemed .................... (54,860) (461,984) --------------------------- Net increase (decrease) ............ (42,989) $ (363,423) =========================== Year ended April 30, 2005 Shares sold ........................ 37,081 $ 288,026 Shares redeemed..................... (118,762) (913,380) --------------------------- Net increase (decrease)............. (81,681) $ (625,354) =========================== CLASS C SHARES: Six months ended October 31, 2005 Shares sold ........................ 35,942 $ 306,970 Shares redeemed .................... (115,022) (970,502) --------------------------- Net increase (decrease) ............ (79,080) $ (663,532) =========================== Year ended April 30, 2005 Shares sold ........................ 113,267 $ 884,766 Shares redeemed..................... (361,379) (2,786,195) --------------------------- Net increase (decrease)............. (248,112) $ (1,901,429) ===========================
Semiannual Report | 89 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
------------------------------------------------------------ FRANKLIN GLOBAL FRANKLIN NATURAL HEALTH CARE FUND RESOURCES FUND ------------------------------------------------------------ SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------ CLASS A SHARES: Six months ended October 31, 2005 Shares sold ........................ 612,198 $ 13,234,255 3,427,903 $ 99,870,068 Shares redeemed .................... (453,787) (9,814,673) (2,011,530) (58,234,654) ------------------------------------------------------------ Net increase (decrease) ............ 158,411 $ 3,419,582 1,416,373 $ 41,635,414 ============================================================ Year ended April 30, 2005 Shares sold ........................ 883,349 $ 17,635,790 5,510,177 $ 125,718,131 Shares redeemed..................... (1,210,752) (23,763,114) (2,284,982) (50,682,368) ------------------------------------------------------------ Net increase (decrease)............. (327,403) $ (6,127,324) 3,225,195 $ 75,035,763 ============================================================ CLASS B SHARES: Six months ended October 31, 2005 Shares sold ........................ 107,312 $ 2,212,866 Shares redeemed .................... (55,751) (1,156,967) ---------------------------- Net increase (decrease) ............ 51,561 $ 1,055,899 ============================ Year ended April 30, 2005 Shares sold ........................ 131,458 $ 2,491,368 Shares redeemed..................... (194,486) (3,666,397) ---------------------------- Net increase (decrease)............. (63,028) $ (1,175,029) ============================ CLASS C SHARES: Six months ended October 31, 2005 Shares sold ........................ 266,369 $ 5,414,775 90,294 $ 2,828,714 Shares redeemed .................... (136,032) (2,782,452) (7,777) (228,761) ------------------------------------------------------------ Net increase (decrease) ............ 130,337 $ 2,632,323 82,517 $ 2,599,953 ============================================================ Year ended April 30, 2005 Shares sold ........................ 243,449 $ 4,581,653 Shares redeemed..................... (359,987) (6,725,203) ---------------------------- Net increase (decrease)............. (116,538) $ (2,143,550) ============================ ADVISOR CLASS SHARES: Six months ended October 31, 2005 Shares sold ........................ 52,068 $ 1,619,851 Shares redeemed .................... (247,432) (7,708,487) --------------------------- Net increase (decrease) ............ (195,364) $ (6,088,636) =========================== Year ended April 30, 2005 Shares sold ........................ 803,805 $ 18,310,689 Shares redeemed..................... (72,677) (1,792,509) --------------------------- Net increase (decrease)............. 731,128 $ 16,518,180 ===========================
(a) For the period September 1, 2005 (effective date) to October 31, 2005 for the Franklin Natural Resources Fund. 90 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED) --------------------------- FRANKLIN TECHNOLOGY FUND --------------------------- SHARES AMOUNT --------------------------- CLASS A SHARES: Six months ended October 31, 2005 Shares sold ................................... 785,641 $ 3,722,104 Shares redeemed ............................... (1,321,081) (6,243,780) --------------------------- Net increase (decrease) ....................... (535,440) $ (2,521,676) =========================== Year ended April 30, 2005 Shares sold ................................... 1,922,287 $ 8,791,126 Shares redeemed ............................... (2,298,247) (10,457,788) --------------------------- Net increase (decrease) ....................... (375,960) $ (1,666,662) =========================== CLASS B SHARES: Six months ended October 31, 2005 Shares sold ................................... 14,420 $ 66,619 Shares redeemed ............................... (107,416) (488,743) --------------------------- Net increase (decrease) ....................... (92,996) $ (422,124) =========================== Year ended April 30, 2005 Shares sold ................................... 137,586 $ 611,532 Shares redeemed ............................... (288,949) (1,268,589) --------------------------- Net increase (decrease) ....................... (151,363) $ (657,057) =========================== CLASS C SHARES: Six months ended October 31, 2005 Shares sold ................................... 151,894 $ 696,323 Shares redeemed ............................... (329,559) (1,488,341) --------------------------- Net increase (decrease) ....................... (177,665) $ (792,018) =========================== Year ended April 30, 2005 Shares sold ................................... 384,862 $ 1,740,352 Shares redeemed ............................... (1,005,688) (4,434,864) --------------------------- Net increase (decrease) ....................... (620,826) $ (2,694,512) --------------------------- CLASS R SHARES: Six months ended October 31, 2005 Shares sold ................................... 140,691 $ 659,677 Shares redeemed ............................... (149,859) (702,407) --------------------------- Net increase (decrease) ....................... (9,168) $ (42,730) =========================== Year ended April 30, 2005 Shares sold ................................... 401,559 $ 1,850,641 Shares redeemed ............................... (150,407) (678,610) --------------------------- Net increase (decrease) ....................... 251,152 $ 1,172,031 =========================== ADVISOR CLASS SHARES: Six months ended October 31, 2005 Shares sold ................................... 31,822 $ 154,350 Shares redeemed ............................... (33,571) (162,243) --------------------------- Net increase (decrease) ....................... (1,749) $ (7,893) =========================== Year ended April 30, 2005 Shares sold ................................... 84,885 $ 384,145 Shares redeemed ............................... (114,073) (519,440) --------------------------- Net increase (decrease) ....................... (29,188) $ (135,295) =========================== Semiannual Report | 91 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Funds are also officers and/or directors of the following subsidiaries: - -------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION - -------------------------------------------------------------------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent A. MANAGEMENT FEES All funds, except the Franklin Technology Fund, pay an investment management fee to Advisers based on the average daily 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% In excess of $15 billion The Franklin Technology Fund pays an investment management fee to Advisers based on the average daily net assets of the fund as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.550% Up to and including $500 million 0.450% Over $500 million, up to and including $1 billion 0.400% Over $1 billion, up to and including $1.5 billion 0.350% Over $1.5 billion, up to and including $6.5 billion 0.325% Over $6.5 billion, up to and including $11.5 billion 0.300% Over $11.5 billion, up to and including $16.5 billion 0.290% Over $16.5 billion, up to and including $19 billion 0.280% Over $19 billion, up to and including $21.5 billion 0.270% In excess of $21.5 billion B. ADMINISTRATIVE FEES The Franklin Biotechnology Discovery Fund pays an administrative fee to FT Services based on the average daily net assets of the fund as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.150% Up to and including $200 million 0.135% Over $200 million, up to and including $700 million 0.100% Over $700 million, up to and including $1.2 billion 0.075% In excess of $1.2 billion 92 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) B. ADMINISTRATIVE FEES (CONTINUED) The Franklin Technology Fund pays an administrative fee to FT Services of 0.20% per year of the average daily net assets of the fund. Under an agreement with Advisers, FT Services provides administrative services to the Franklin Global Communications Fund, the Franklin Global Health Care Fund, and the Franklin Natural Resources Fund. The fee is paid by Advisers based on average daily net assets of each of the funds, and is not an additional expense of the funds. C. DISTRIBUTION FEES The Trusts' Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds' Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the 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 GLOBAL FRANKLIN FRANKLIN FRANKLIN BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH NATURAL TECHNOLOGY DISCOVERY FUND FUND CARE FUND RESOURCES FUND FUND ------------------------------------------------------------------------------- Class A............. 0.35% 0.25% 0.25% 0.35% 0.35%
Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. The Franklin Biotechnology Discovery Fund reimburses Distributors up to 0.35% when the Fund is open to new investors and up to 0.25% when the fund is closed to new investors. This fund was re-opened to new investors on September 1, 2001, and will remain open until net assets reach $2 billion. 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 their average daily net assets of each class as follows:
---------------------------------------------------------------- FRANKLIN GLOBAL FRANKLIN FRANKLIN FRANKLIN COMMUNICATIONS GLOBAL HEALTH NATURAL TECHNOLOGY FUND CARE FUND RESOURCES FUND FUND ---------------------------------------------------------------- Class B............. 1.00% 1.00% -- 1.00% Class C............. 1.00% 1.00% 100% 1.00% Class R............. -- -- -- 0.50%
Semiannual Report | 93 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the period:
------------------------------------------------ FRANKLIN FRANKLIN GLOBAL FRANKLIN BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH DISCOVERY FUND FUND CARE FUND ------------------------------------------------ Net sales charge received(a) ...................... $ 59,990 $ 5,059 $ 29,665 Contingent deferred sales charges retained ........ $ 292 $ 4,225 $ 13,972
--------------------------- FRANKLIN FRANKLIN NATURAL TECHNOLOGY RESOURCES FUND FUND --------------------------- Net sales charge received(a) ...................... $ 294,632 $ 7,377 Contingent deferred sales charges retained ........ $ 1,652 $ 6,679 (a) Net of commissions paid to unaffiliated broker/dealers. E. TRANSFER AGENT FEE The Funds paid transfer agent fees as noted in the Statement of Operations of which the following amounts were retained by Investor Services:
------------------------------------------------------------------------------ FRANKLIN FRANKLIN GLOBAL FRANKLIN FRANKLIN FRANKLIN BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH NATURAL TECHNOLOGY DISCOVERY FUND FUND CARE FUND RESOURCES FUND FUND ------------------------------------------------------------------------------ Transfer agent fees..... $598,244 $106,272 $179,760 $147,362 $97,115
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 period ended October 31, 2005, the custodian fees were reduced as noted in the Statement of Operations. 94 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. INCOME TAXES At April 30, 2005, the Funds had tax basis capital losses, which may be carried over to offset future capital gains, if any. At April 30, 2005, the capital loss carryforwards were as follows:
------------------------------------------------- FRANKLIN FRANKLIN GLOBAL FRANKLIN BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH DISCOVERY FUND FUND CARE FUND ------------------------------------------------- Capital loss carryovers expiring in: 2010.......................................... $ 118,188,055 $ 72,312,078 $ -- 2011.......................................... 238,490,545 52,123,016 6,216,240 2012.......................................... 72,400,540 -- 15,108,743 ------------------------------------------------- $ 429,079,140 $ 124,435,094 $ 21,324,983 =================================================
-------------------------------- FRANKLIN NATURAL FRANKLIN RESOURCES TECHNOLOGY FUND FUND -------------------------------- Capital loss carryovers expiring in: 2010.......................................... $ -- $ 27,180,872 2011.......................................... -- 28,445,452 2012.......................................... -- -- -------------------------------- $ -- $ 55,626,324 ================================ For tax purposes, 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 April 30, 2005, the Franklin Global Communications Fund deferred realized currency losses of $15,302. At October 31, 2005, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
------------------------------------------------- FRANKLIN FRANKLIN GLOBAL FRANKLIN BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH DISCOVERY FUND FUND CARE FUND ------------------------------------------------- Cost of investments ........................... $ 477,236,150 $ 52,617,156 $ 114,495,246 ================================================= Unrealized appreciation ....................... $ 170,569,737 $ 14,334,286 $ 27,716,471 Unrealized depreciation ....................... (30,250,270) (1,748,611) (6,834,474) ------------------------------------------------- Net unrealized appreciation (depreciation)..... $ 140,319,467 $ 12,585,675 $ 20,881,997 =================================================
------------------------------ FRANKLIN FRANKLIN NATURAL TECHNOLOGY RESOURCES FUND FUND ------------------------------ Cost of investments............................ $ 244,280,547 $ 38,812,777 ============================== Unrealized appreciation........................ $ 99,816,709 $ 8,819,716 Unrealized depreciation........................ (1,271,742) (1,390,005) ------------------------------ Net unrealized appreciation (depreciation)..... $ 98,544,967 $ 7,429,711 ============================== Semiannual Report | 95 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. INCOME TAXES (CONTINUED) Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, passive foreign investment company shares and net operating losses. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, and passive foreign investment company shares. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the period ended October 31, 2005, were as follows:
-------------------------------------------------------------------------------- FRANKLIN FRANKLIN GLOBAL FRANKLIN FRANKLIN FRANKLIN BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH NATURAL TECHNOLOGY DISCOVERY FUND FUND CARE FUND RESOURCES FUND FUND -------------------------------------------------------------------------------- Purchases ............ $ 84,342,627 $ 44,910,504 $ 32,806,603 $ 142,905,955 $ 18,099,771 Sales ................ $ 136,938,471 $ 50,290,232 $ 27,383,117 $ 98,601,805 $ 20,838,646
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. 96 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 8. RESTRICTED AND ILLIQUID SECURITIES At October 31, 2005, investments in securities included issues that are restricted and illiquid. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration under the Securities Act of 1933, unless the sale is pursuant to an exemption under the 1933 Act. The Funds have registration rights for all restricted securities held at period end. The issuer generally incurs all registration costs. A security may be considered illiquid if it lacks a readily available market or if its valuation has not changed for a certain period of time. At October 31, 2005, the funds held investments in restricted and illiquid securities, valued in accordance with procedures approved by the Trust's Board of Trustees as reflecting fair value, as follows:
- --------------------------------------------------------------------------------------------------------- SHARES/ ACQUISITION WARRANTS ISSUER DATE COST VALUE - --------------------------------------------------------------------------------------------------------- FRANKLIN BIOTECHNOLOGY DISCOVERY FUND 1,128,271 Fibrogen Inc., cvt. pfd., E .................. 5/19/00 $ 5,065,937 $ 5,133,633 85,395 Inhibitex Inc., wts., 11/10/09................ 11/05/04 10,674 77,709 ------------ TOTAL RESTRICTED AND ILLIQUID SECURITIES (0.99% of Net Assets) $ 5,211,342 ============ FRANKLIN GLOBAL COMMUNICATIONS FUND 95,932 Kestrel Solutions, cvt. pfd., D .............. 1/21/00 $ 1,249,994 $ -- ============ TOTAL RESTRICTED AND ILLIQUID SECURITIES (0.00% of Net Assets) FRANKLIN GLOBAL HEALTH CARE FUND 136,364 Masimo Corp., cvt. pfd., F ................... 5/15/00 $ 1,500,004 $ 750,002 ============ TOTAL RESTRICTED AND ILLIQUID SECURITIES (0.55% of Net Assets) FRANKLIN NATURAL RESOURCES FUND 1,900,000 UrAsia Energy Ltd. ........................... 10/21/05 $ 2,877,940 $ 2,894,993 ============ TOTAL RESTRICTED AND ILLIQUID SECURITIES (0.84% of Net Assets)
9. OTHER CONSIDERATIONS Directors or employees of Advisers, as Franklin Natural Resources Fund's Investment Manager, may serve as members of various bondholders' steering committees, on credit committees, or may represent the Fund in certain corporate restructuring negotiations. At October 31, 2005, such individuals serve in one or more of these capacities for Solutia Inc. As a result of this involvement, Advisers may be in possession of certain material non-public information. If the Fund's Investment Manager, while in possession of such information, seeks to sell any of its holdings in these securities it will comply with all applicable federal securities laws. Semiannual Report | 97 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 10. 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 a plan for distribution of the respective settlement monies. The CAGO approved the distribution plan under the CAGO Settlement and, in accordance with the terms and conditions of that settlement, the monies were disbursed to the relevant funds in March, 2005. The SEC has not yet approved the distribution plan pertaining to the December 13, 2004 SEC Order. When approved, disbursements of settlement monies will be made promptly to the relevant funds, in accordance with the terms and conditions of that order. The IDC continues to develop the plan of distribution under the August 2, 2004 SEC Order that resolved the SEC's market timing investigation. 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 Trust, it is committed to making the Trust or its shareholders whole, as appropriate. 98 | Semiannual Report FRANKLIN STRATEGIC SERIES SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Trust has established Proxy Voting Policies and Procedures ("Policies") that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. Semiannual Report | 99 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 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 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 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 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 Arizona California(7) Colorado Connecticut Florida(7) Georgia Kentucky Louisiana Maryland Massachusetts(6) Michigan(6) Minnesota(6) Missouri New Jersey New York(7) North Carolina Ohio(7) Oregon Pennsylvania Tennessee 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. 09/05 Not part of the semiannual report [LOGO](R) FRANKLIN TEMPLETON One Franklin Parkway INVESTMENTS San Mateo, CA 94403-1906 |_| WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. SEMIANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN STRATEGIC SERIES INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. 1-800/DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES 1-800/632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FSS2 S2005 12/05 [GRAPHIC OMITTED] - -------------------------------------------------------------------------------- OCTOBER 31, 2005 - -------------------------------------------------------------------------------- A Series of Franklin Strategic Series - -------------------------------------------------------------------------------- SEMIANNUAL REPORT AND SHAREHOLDER LETTER BLEND - -------------------------------------------------------------------------------- WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? FRANKLIN BLUE CHIP FUND Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. - -------------------------------------------------------------------------------- [LOGO] 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 semiannual report CONTENTS SHAREHOLDER LETTER ........................................................ 1 SEMIANNUAL REPORT Franklin Blue Chip Fund ................................................... 4 Performance Summary ....................................................... 8 Your Fund's Expenses ...................................................... 11 Financial Highlights and Statement of Investments ......................... 13 Financial Statements ...................................................... 20 Notes to Financial Statements ............................................. 24 Shareholder Information ................................................... 32 - -------------------------------------------------------------------------------- SEMIANNUAL REPORT FRANKLIN BLUE CHIP FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Blue Chip Fund seeks long-term capital appreciation by investing substantially in equity securities of blue chip companies, which are well-established companies with strong financial records relative to other companies in their respective 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 semiannual report for Franklin Blue Chip Fund covers the period ended October 31, 2005. PERFORMANCE OVERVIEW Franklin Blue Chip Fund - Class A posted a +5.09% cumulative total return for the six months under review. The Fund slightly underperformed its benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which posted a +5.26% total return for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 8. ECONOMIC AND MARKET OVERVIEW During the six months ended October 31, 2005, domestic economic expansion was driven by strength across most industries, sectors and regions. Gross domestic product (GDP) rose during the period, benefiting primarily from increased personal consumption, business investment and federal spending. Slower export growth combined with greater demand for imported goods and materials fueled a widening trade gap. The U.S. dollar rallied in 2005 driven largely by rising short-term domestic interest rates, and strong economic growth in the U.S. relative to many of its major trading partners. Oil prices increased substantially during the period largely due to potential long-term supply limitations and strong growth in global demand, especially from China and India. Despite rising commodity prices, inflation remained relatively contained for the 12 months ended October 31, 2005, as measured by the 2.1% rise for the core Consumer Price Index (CPI).(2) With this inflation picture, the Federal Reserve Board raised the federal funds target rate from 2.75% (1) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for their 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. Core CPI excludes food and energy costs. 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 17. 4 | Semiannual Report to 3.75%, and said it would continue to undertake appropriate monetary policy action at a measured pace. Compared with the rise in short-term interest rates, long-term interest rates remained relatively stable, supporting overall robust housing and commercial real estate activity, which contributed to economic growth. Many businesses enjoyed their widest profit margins on record, propelled largely by productivity gains. The labor market firmed as employment increased and the unemployment rate dropped from 5.2% to 5.0% during the reporting period.(2) Personal income rose, and hiring rebounded in many industries, bolstered by healthy business spending. However, late in the period consumer sentiment fell amid concerns about rising energy costs. In this environment, the blue chip stocks of the Dow Jones Industrial Average posted a six-month total return of +3.57%, while the broader S&P 500 and the technology-heavy NASDAQ Composite Index returned +5.26% and +10.78%.(3) INVESTMENT STRATEGY Our investment process begins with company-specific research to identify the best investment opportunities for long-term growth. We examine high-quality companies and focus on those we believe have a sustainable competitive advantage, a strong financial record and a market capitalization of more than $1 billion. Our team of equity analysts look for businesses with strong brands, experienced management teams, substantial research and development budgets, large and growing market shares, solid balance sheets, consistent earnings growth and sustainable competitive advantages. Finally, we assess industries and sectors that we believe offer attractive secular trends or favor able risk-reward profiles before determining final investment weightings or decisions. (3) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. 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 Based on Total Net Assets as of 10/31/05 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Finance 19.3% Electronic Technology* 11.7% Producer Manufacturing 9.6% Health Technology* 9.2% Energy Minerals 7.6% Retail Trade 6.9% Technology Services* 6.7% Consumer Non-Durables 5.9% Process Industries 3.7% Consumer Services 3.6% Distribution Services 2.6% Communications 2.0% Transportation 1.7% Utilities 1.7% Other 5.9% Short-Term Investments & Other Net Assets 1.9% * 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. Semiannual Report | 5 TOP 10 HOLDINGS 10/31/05 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- ExxonMobil Corp. 3.5% ENERGY MINERALS - -------------------------------------------------------------------------------- General Electric Co. 3.4% producer manufacturing - -------------------------------------------------------------------------------- Freddie Mac 3.2% FINANCE - -------------------------------------------------------------------------------- Citigroup Inc. 3.0% FINANCE - -------------------------------------------------------------------------------- Wal-Mart Stores Inc. 2.6% RETAIL TRADE - -------------------------------------------------------------------------------- Bank of America Corp. 2.5% FINANCE - -------------------------------------------------------------------------------- Johnson & Johnson 2.4% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- Microsoft Corp. 2.3% TECHNOLOGY SERVICES - -------------------------------------------------------------------------------- Intel Corp. 2.2% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Bunge Ltd. 2.1% PROCESS INDUSTRIES - -------------------------------------------------------------------------------- MANAGER'S DISCUSSION For the six months under review, Fund performance relative to the S&P 500 benefited from strong stock selection in the health technology, health services, retail trade and producer manufacturing sectors. In the health technology sector, biotechnology company Amgen reported a very strong second quarter helped by robust key product sales and highly effective operating expense management. Caremark RX, a health services company, won a major new contract with the state of New York, as it continued taking advantage of strong industry trends such as aging population, increased use of pharmaceuticals including generics and mail order prescriptions, to drive industry-leading sales growth. Although consumer strength showed signs of fatigue entering the fourth quarter of 2005, consumer electronics retailer Best Buy benefited substantially during the reporting period from the introduction of products such as flat screen televisions and personal audio and from high-margin services such as its Geek Squad unit. Luxury jewelry retailer Tiffany was also a stellar performer during the period, gaining from ongoing strength in its U.S. business and a long-awaited upturn in its Japanese business. In the producer manufacturing sector, Mettler-Toledo International, the world's leading manufacturer of precision instruments used in laboratory, industrial and food retailing applications, delivered accelerating sales growth during the reporting period. Stock performance reflected strong third quarter earnings with strength across all business lines and geographies. During the period under review, relative Fund performance was hindered by holdings in the finance and electronic technology sectors. Rising interest rates continued to negatively affect financial holdings during the quarter. Fifth Third Bancorp, a midwestern regional bank, produced strong loan growth, but deposit growth lagged, causing its net interest margin to shrink and the shares to decline. In the electronic technology sector, computer hardware company Dell missed sales growth targets in the second quarter and its shares tumbled. Soft demand in its U.S. federal government business and pricing pressures in its consumer business played into the weakness. We continued to maintain our disciplined investment strategy of building a broadly diversified portfolio of companies that are currently market leaders in their industry or companies that we believe have the potential to become market leaders in their industry. 6 | Semiannual Report Thank you for your continued participation in Franklin Blue Chip Fund. We look forward to serving your future investment needs. /s/ Alyssa C. Rieder [PHOTO OMITTED] Alyssa C. Rieder, CFA Portfolio Manager Franklin Blue Chip Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2005, 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 ADVISER 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. Semiannual Report | 7 PERFORMANCE SUMMARY AS OF 10/31/05 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION - -------------------------------------------------------------------------------- CLASS A (SYMBOL: FKBCX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.71 $14.66 $13.95 - -------------------------------------------------------------------------------- CLASS B (SYMBOL: FKBBX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.63 $14.12 $13.49 - -------------------------------------------------------------------------------- CLASS C (SYMBOL: FBCCX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.63 $14.16 $13.53 - -------------------------------------------------------------------------------- CLASS R (SYMBOL: FBCRX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.69 $14.57 $13.88 - -------------------------------------------------------------------------------- 8 | Semiannual Report PERFORMANCE SUMMARY (CONTINUED) PERFORMANCE(1) 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: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ------------------------------------------------------------------------------------------------------------------ CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/3/96) - ------------------------------------------------------------------------------------------------------------------ Cumulative Total Return(2) +5.09% +7.86% -14.79% +60.58% - ------------------------------------------------------------------------------------------------------------------ Average Annual Total Return(3) -0.95% +1.66% -4.29% +4.50% - ------------------------------------------------------------------------------------------------------------------ Value of $10,000 Investment(4) $9,905 $10,166 $8,031 $15,135 - ------------------------------------------------------------------------------------------------------------------ Avg. Ann. Total Return (9/30/05)(5) +2.63% -4.52% +4.64% - ------------------------------------------------------------------------------------------------------------------ CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (2/1/00) - ------------------------------------------------------------------------------------------------------------------ Cumulative Total Return(2) +4.67% +7.13% -17.64% -11.08% - ------------------------------------------------------------------------------------------------------------------ Average Annual Total Return(3) +0.67% +3.13% -4.18% -2.19% - ------------------------------------------------------------------------------------------------------------------ Value of $10,000 Investment(4) $10,067 $10,313 $8,077 $8,806 - ------------------------------------------------------------------------------------------------------------------ Avg. Ann. Total Return (9/30/05)(5) +4.04% -4.42% -2.06% - ------------------------------------------------------------------------------------------------------------------ CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (2/1/00) - ------------------------------------------------------------------------------------------------------------------ Cumulative Total Return(2) +4.66% +7.11% -17.68% -10.83% - ------------------------------------------------------------------------------------------------------------------ Average Annual Total Return(3) +3.66% +6.11% -3.82% -1.97% - ------------------------------------------------------------------------------------------------------------------ Value of $10,000 Investment(4) $10,366 $10,611 $8,232 $8,917 - ------------------------------------------------------------------------------------------------------------------ Avg. Ann. Total Return (9/30/05)(5) +7.09% -4.04% -1.83% - ------------------------------------------------------------------------------------------------------------------ CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/2/02) - ------------------------------------------------------------------------------------------------------------------ Cumulative Total Return(2) +4.97% +7.69% +36.81% +5.96% - ------------------------------------------------------------------------------------------------------------------ Average Annual Total Return(3) +3.97% +6.69% +11.01% +1.52% - ------------------------------------------------------------------------------------------------------------------ Value of $10,000 Investment(4) $10,397 $10,669 $13,681 $10,596 - ------------------------------------------------------------------------------------------------------------------ Avg. Ann. Total Return (9/30/05)(5) +7.65% +13.78% +1.80% - ------------------------------------------------------------------------------------------------------------------
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. Semiannual Report | 9 PERFORMANCE SUMMARY (CONTINUED) ENDNOTES WHILE STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, THEY TEND TO FLUCTUATE DRAMATICALLY OVER THE SHORT TERM AS A RESULT OF FACTORS AFFECTING INDIVIDUAL COMPANIES, INDUSTRIES OR THE SECURITIES MARKET AS A WHOLE. THE FUND'S PORTFOLIO INCLUDES INVESTMENTS IN TECHNOLOGY, WHICH HAS BEEN ONE OF 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. (1) The Fund's manager and administrator have agreed in advance to waive a portion of their fees and to make certain payments to reduce expenses. If the manager and administrator had not taken this action, the Fund's total return would have been lower. The manager and administrator may end this agreement at any time. (2) Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. (3) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. (4) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. (5) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. 10 | Semiannual Report YOUR FUND'S EXPENSES 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 below 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. Semiannual Report | 11 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 4/30/05 VALUE 10/31/05 PERIOD* 4/30/05-10/31/05 - ------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,050.90 $5.07 - ------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,020.27 $4.99 - ------------------------------------------------------------------------------------------------------------ CLASS B - ------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,046.70 $8.98 - ------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,016.43 $8.84 - ------------------------------------------------------------------------------------------------------------ CLASS C - ------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,046.60 $8.98 - ------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,016.43 $8.84 - ------------------------------------------------------------------------------------------------------------ CLASS R - ------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,046.70 $6.45 - ------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,018.90 $6.36 - ------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, for each class (A: 0.98%; B: 1.74%; C: 1.74%; and R: 1.25%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 12 | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS FRANKLIN BLUE CHIP FUND
-------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS A (UNAUDITED) 2005 2004 2003 2002 2001 -------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 13.95 $ 13.63 $ 11.17 $ 13.05 $ 14.80 $ 17.90 --------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ................ 0.05 0.07 (0.02) (0.02) -- 0.02 Net realized and unrealized gains (losses) ..... 0.66 0.26 2.48 (1.86) (1.75) (2.53) --------------------------------------------------------------------------- Total from investment operations ................ 0.71 0.33 2.46 (1.88) (1.75) (2.51) --------------------------------------------------------------------------- Less distributions from: Net investment income .......................... -- (0.01) -- -- -- (0.03) Net realized gains ............................. -- -- -- -- -- (0.56) --------------------------------------------------------------------------- Total distributions ............................. -- (0.01) -- -- -- (0.59) --------------------------------------------------------------------------- Redemption fees ................................. --(c) --(c) -- -- -- -- --------------------------------------------------------------------------- Net asset value, end of period .................. $ 14.66 $ 13.95 $ 13.63 $ 11.17 $ 13.05 $ 14.80 =========================================================================== Total return(b) ................................. 5.09% 2.41% 22.02% (14.41)% (11.82)% (14.22)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $152,381 $156,246 $181,987 $137,174 $146,365 $151,431 Ratios to average net assets: Expenses ....................................... 1.33%(d) 1.38% 1.41% 1.51% 1.44% 1.36% Expenses net of waiver and payments by affiliate and expense reduction ........... 0.98%(d) 1.22% 1.41% 1.51% 1.38% 1.24% Net investment income (loss) ................... 0.61%(d) 0.48% (0.12)% (0.20)% 0.02% 0.11% Portfolio turnover rate ......................... 7.58% 28.42% 55.81% 48.47% 54.85% 73.75%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 13 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN BLUE CHIP FUND (CONTINUED)
-------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS B (UNAUDITED) 2005 2004 2003 2002 2001 -------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 13.49 $ 13.26 $ 10.94 $ 12.87 $ 14.69 $ 17.87 ---------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ................. (0.01) (0.03) (0.10) (0.09) (0.09) (0.09) Net realized and unrealized gains (losses) ...... 0.64 0.26 2.42 (1.84) (1.73) (2.53) ---------------------------------------------------------------------------- Total from investment operations ................. 0.63 0.23 2.32 (1.93) (1.82) (2.62) ---------------------------------------------------------------------------- Less distributions from net realized gains ....... -- -- -- -- -- (0.56) ---------------------------------------------------------------------------- Redemption fees .................................. --(c) --(c) -- -- -- -- ---------------------------------------------------------------------------- Net asset value, end of period ................... $ 14.12 $ 13.49 $ 13.26 $ 10.94 $ 12.87 $ 14.69 ============================================================================ Total return(b) .................................. 4.67% 1.73% 21.21% (15.00)% (12.39)% (14.84)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $ 21,083 $ 23,116 $ 24,211 $ 15,182 $ 13,979 $ 10,491 Ratios to average net assets: Expenses ........................................ 2.09%(c) 2.07% 2.10% 2.15% 2.09% 2.02% Expenses net of waiver and payments by affiliate and expense reduction ............ 1.74%(c) 1.91% 2.10% 2.15% 2.03% 1.90% Net investment income (loss) .................... (0.15)%(c) (0.21)% (0.81)% (0.84)% (0.67)% (0.59)% Portfolio turnover rate .......................... 7.58% 28.42% 55.81% 48.47% 54.85% 73.75%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 14 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN BLUE CHIP FUND (CONTINUED)
-------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS C (UNAUDITED) 2005 2004 2003 2002 2001 -------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 13.53 $ 13.30 $ 10.98 $ 12.91 $ 14.74 $ 17.91 ---------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ................. (0.01) (0.03) (0.10) (0.09) (0.09) (0.09) Net realized and unrealized gains (losses) ...... 0.64 0.26 2.42 (1.84) (1.74) (2.52) ---------------------------------------------------------------------------- Total from investment operations ................. 0.63 0.23 2.32 (1.93) (1.83) (2.61) ---------------------------------------------------------------------------- Less distributions from net realized gains ....... -- -- -- -- -- (0.56) ---------------------------------------------------------------------------- Redemption fees .................................. --(c) --(c) -- -- -- -- ---------------------------------------------------------------------------- Net asset value, end of period ................... $ 14.16 $ 13.53 $ 13.30 $ 10.98 $ 12.91 $ 14.74 ============================================================================ Total return(b) .................................. 4.66% 1.73% 21.13% (14.95)% (12.42)% (14.74)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $ 33,078 $ 34,799 $ 39,348 $ 27,270 $ 27,685 $ 19,862 Ratios to average net assets: Expenses ........................................ 2.09%(d) 2.08% 2.10% 2.16% 2.09% 2.02% Expenses net of waiver and payments by affiliate and expense reduction ............ 1.74%(d) 1.92% 2.10% 2.16% 2.03% 1.90% Net investment income (loss) .................... (0.15)%(d) (0.22)% (0.81)% (0.85)% (0.68)% (0.59)% Portfolio turnover rate .......................... 7.58% 28.42% 55.81% 48.47% 54.85% 73.75%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 15 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN BLUE CHIP FUND (CONTINUED)
------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS R (UNAUDITED) 2005 2004 2003 2002(d) ------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................ $13.88 $13.58 $11.15 $ 13.04 $ 13.75 ------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) .................... 0.02 0.04 (0.04) (0.04) (0.04) Net realized and unrealized gains (losses) ......... 0.67 0.26 2.47 (1.85) (0.67) ------------------------------------------------------------------- Total from investment operations .................... 0.69 0.30 2.43 (1.89) (0.71) ------------------------------------------------------------------- Redemption fees ..................................... --(c) --(c) -- -- -- ------------------------------------------------------------------- Net asset value, end of period ...................... $14.57 $13.88 $13.58 $ 11.15 $ 13.04 =================================================================== Total return(b) ..................................... 4.97% 2.21% 21.79% (14.49)% (5.16)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................... $5,699 $5,990 $6,130 $ 2,749 $ 209 RATIOS TO AVERAGE NET ASSETS: Expenses ........................................... 1.60%(e) 1.58% 1.60% 1.66% 1.56%(e) Expenses net of waiver and payments by affiliate and expense reduction ................................ 1.25%(e) 1.42% 1.60% 1.66% 1.56%(e) Net investment income (loss) ....................... 0.34%(e) 0.28% (0.31)% (0.35)% (0.84)%(e) Portfolio turnover rate ............................. 7.58% 28.42% 55.81% 48.47% 54.85%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) For the period January 1, 2002 (effective date) to April 30, 2002. (e) Annualized. 16 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------ FRANKLIN BLUE CHIP FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS 98.1% COMMERCIAL SERVICES 1.1% Moody's Corp. ......................................................... United States 44,000 $ 2,343,440 ------------- COMMUNICATIONS 2.0% SBC Communications Inc. ............................................... United States 65,000 1,550,250 Vodafone Group PLC, ADR ............................................... United Kingdom 100,000 2,626,000 ------------- 4,176,250 ------------- CONSUMER DURABLES 0.9% D.R. Horton Inc. ...................................................... United States 65,000 1,994,850 ------------- CONSUMER NON-DURABLES 5.9% Altria Group Inc. ..................................................... United States 50,000 3,752,500 Anheuser-Busch Cos. Inc. .............................................. United States 40,000 1,650,400 The Coca-Cola Co. ..................................................... United States 80,000 3,422,400 Procter & Gamble Co. .................................................. United States 65,000 3,639,350 ------------- 12,464,650 ------------- CONSUMER SERVICES 3.6% (a)Univision Communications Inc., A ...................................... United States 65,000 1,699,100 Viacom Inc., B ........................................................ United States 90,000 2,787,300 The Walt Disney Co. ................................................... United States 130,000 3,168,100 ------------- 7,654,500 ------------- DISTRIBUTION SERVICES 2.6% Cardinal Health Inc. .................................................. United States 40,000 2,500,400 SYSCO Corp. ........................................................... United States 95,000 3,031,450 ------------- 5,531,850 ------------- ELECTRONIC TECHNOLOGY 11.7% Applied Materials Inc. ................................................ United States 90,000 1,474,200 Boeing Co. ............................................................ United States 35,000 2,262,400 (a)Cisco Systems Inc. .................................................... United States 180,000 3,141,000 (a)Dell Inc. ............................................................. United States 125,000 3,985,000 (a)EMC Corp. ............................................................. United States 120,000 1,675,200 Intel Corp. ........................................................... United States 195,000 4,582,500 KLA-Tencor Corp. ...................................................... United States 35,000 1,620,150 Linear Technology Corp. ............................................... United States 45,000 1,494,450 (a)Logitech International SA, ADR ........................................ Switzerland 65,000 2,493,400 Nokia Corp., ADR ...................................................... Finland 65,000 1,093,300 Xilinx Inc. ........................................................... United States 45,000 1,077,750 ------------- 24,899,350 ------------- ENERGY MINERALS 7.6% BP PLC, ADR ........................................................... United Kingdom 63,000 4,183,200 Devon Energy Corp. .................................................... United States 50,000 3,019,000 ExxonMobil Corp. ...................................................... United States 132,000 7,410,480 Peabody Energy Corp. .................................................. United States 20,000 1,563,200 ------------- 16,175,880 -------------
Semiannual Report | 17 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------ FRANKLIN BLUE CHIP FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONT.) FINANCE 19.3% AFLAC Inc. ............................................................ United States 50,000 $ 2,389,000 American International Group Inc. ..................................... United States 35,000 2,268,000 Bank of America Corp. ................................................. United States 120,000 5,248,800 (a)Berkshire Hathaway Inc., A ............................................ United States 40 3,436,000 Capital One Financial Corp. ........................................... United States 25,000 1,908,750 Citigroup Inc. ........................................................ United States 140,000 6,409,200 Countrywide Financial Corp. ........................................... United States 60,000 1,906,200 Fifth Third Bancorp ................................................... United States 95,000 3,816,150 Freddie Mac ........................................................... United States 109,000 6,687,150 Goldman Sachs Group Inc. .............................................. United States 10,000 1,263,700 Investors Financial Services Corp. .................................... United States 30,000 1,145,400 Wells Fargo & Co. ..................................................... United States 75,000 4,515,000 ------------- 40,993,350 ------------- HEALTH SERVICES 1.4% (a)Caremark Rx Inc. ...................................................... United States 55,000 2,882,000 ------------- HEALTH TECHNOLOGY 9.2% (a)Amgen Inc. ............................................................ United States 40,000 3,030,400 Johnson & Johnson ..................................................... United States 80,000 5,009,600 Medtronic Inc. ........................................................ United States 60,000 3,399,600 Merck & Co. Inc. ...................................................... United States 35,000 987,700 Pall Corp. ............................................................ United States 100,000 2,616,000 Pfizer Inc. ........................................................... United States 205,000 4,456,700 ------------- 19,500,000 ------------- INDUSTRIAL SERVICES 1.0% GlobalSantaFe Corp. ................................................... Cayman Islands 47,000 2,093,850 ------------- NON-ENERGY MINERALS 1.5% Alcoa Inc. ............................................................ United States 63,000 1,530,270 Freeport McMoRan Copper & Gold Inc., B ................................ United States 35,000 1,729,700 ------------- 3,259,970 ------------- PROCESS INDUSTRIES 3.7% Bunge Ltd. ............................................................ United States 87,000 4,518,780 Cabot Corp. ........................................................... United States 100,000 3,411,000 ------------- 7,929,780 ------------- PRODUCER MANUFACTURING 9.6% 3M Co. ................................................................ United States 45,000 3,419,100 General Electric Co. .................................................. United States 210,000 7,121,100 (a)Mettler-Toledo International Inc. ..................................... Switzerland 85,000 4,386,000 PACCAR Inc. ........................................................... United States 35,000 2,450,700 United Technologies Corp. ............................................. United States 60,000 3,076,800 ------------- 20,453,700 -------------
18 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------ FRANKLIN BLUE CHIP FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONT.) RETAIL TRADE 6.9% Best Buy Co. Inc. ..................................................... United States 50,000 $ 2,213,000 (a)Kohl's Corp. .......................................................... United States 45,000 2,165,850 Lowe's Cos. Inc. ...................................................... United States 42,000 2,552,340 Tiffany & Co. ......................................................... United States 55,000 2,167,000 Wal-Mart Stores Inc. .................................................. United States 115,000 5,440,650 ------------- 14,538,840 ------------- TECHNOLOGY SERVICES 6.7% First Data Corp. ...................................................... United States 55,000 2,224,750 International Business Machines Corp. ................................. United States 30,000 2,456,400 Microsoft Corp. ....................................................... United States 190,000 4,883,000 Paychex Inc. .......................................................... United States 60,000 2,325,600 (a)Yahoo! Inc. ........................................................... United States 60,000 2,218,200 ------------- 14,107,950 ------------- TRANSPORTATION 1.7% Fedex Corp. ........................................................... United States 40,000 3,677,200 ------------- UTILITIES 1.7% Entergy Corp. ......................................................... United States 50,000 3,536,000 ------------- TOTAL COMMON STOCKS (COST $185,609,546) ............................... 208,213,410 ------------- SHORT TERM INVESTMENT (COST $4,820,795) 2.3% MONEY FUND 2.3% (b)Franklin Institutional Fiduciary Trust Money Market Portfolio ......... United States 4,820,795 4,820,795 ------------- TOTAL INVESTMENTS (COST $190,430,341) 100.4% .......................... 213,034,205 OTHER ASSETS, LESS LIABILITIES (0.4)% ................................. (792,577) ------------- NET ASSETS 100.0% ..................................................... $ 212,241,628 =============
SELECTED PORTFOLIO ABBREVIATION: ADR - American Depository Receipt (a) Non-income producing. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. Semiannual Report | See notes to financial statements. | 19 FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES October 31, 2005 (unaudited) ------------- FRANKLIN BLUE CHIP FUND ------------- Assets: Investments in securities: Cost - Unaffiliated issuers ................................. $ 185,609,546 Cost - Sweep Money Fund (Note 7) ............................ 4,820,795 ------------- Total cost of investments ................................... $ 190,430,341 ============= Value - Unaffiliated issuers ................................ $ 208,213,410 Value - Sweep Money Fund (Note 7) ........................... 4,820,795 ------------- Total value of investments .................................. 213,034,205 Receivables: Capital shares sold ......................................... 287,072 Dividends ................................................... 74,563 ------------- Total assets ............................................ 213,395,840 ------------- Liabilities: Payables: Capital shares redeemed ..................................... 922,265 Affiliates .................................................. 185,032 Accrued expenses and other liabilities ....................... 46,915 ------------- Total liabilities ....................................... 1,154,212 ------------- Net assets, at value ................................... $ 212,241,628 ============= Net assets consist of: Paid-in capital .............................................. $ 206,653,793 Undistributed net investment income .......................... 1,090,306 Net unrealized appreciation (depreciation) ................... 22,603,864 Accumulated net realized gain (loss) ......................... (18,106,335) ------------- Net assets, at value ................................... $ 212,241,628 ============= 20 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) October 31, 2005 (unaudited)
------------ FRANKLIN BLUE CHIP FUND ------------ CLASS A: Net assets, at value ............................................................. $152,381,387 ============ Shares outstanding ............................................................... 10,393,475 ============ Net asset value per share(a) ..................................................... $ 14.66 ============ Maximum offering price per share (net asset value per share / 94.25%) ............ $ 15.55 ============ CLASS B: Net assets, at value ............................................................. $ 21,082,878 ============ Shares outstanding ............................................................... 1,493,178 ============ Net asset value and maximum offering price per share(a) .......................... $ 14.12 ============ CLASS C: Net assets, at value ............................................................. $ 33,077,867 ============ Shares outstanding ............................................................... 2,335,476 ============ Net asset value and maximum offering price per share(a) .......................... $ 14.16 ============ CLASS R: Net assets, at value ............................................................. $ 5,699,496 ============ Shares outstanding ............................................................... 391,227 ============ Net asset value and maximum offering price per share(a) .......................... $ 14.57 ============
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. Semiannual Report | See notes to financial statements. | 21 FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the six months ended October 31, 2005 (unaudited)
------------ FRANKLIN BLUE CHIP FUND ------------ Investment income: Dividends: Unaffiliated issuers .......................................................................... $ 1,714,832 Sweep Money Fund (Note 7) ..................................................................... 72,774 ------------ Total investment income ................................................................... 1,787,606 ------------ Expenses: Management fees (Note 3a) ...................................................................... 832,698 Distribution fees: (Note 3c) Class A ....................................................................................... 183,856 Class B ....................................................................................... 112,257 Class C ....................................................................................... 172,848 Class R ....................................................................................... 15,094 Transfer agent fees (Note 3e) .................................................................. 334,271 Custodian fees (Note 4) ........................................................................ 2,213 Reports to shareholders ........................................................................ 24,476 Registration and filing fees ................................................................... 25,681 Professional fees .............................................................................. 9,582 Trustees' fees and expenses .................................................................... 1,530 Other .......................................................................................... 4,851 ------------ Total expenses ............................................................................ 1,719,357 Expense reductions (Note 4) ............................................................... (16) Expenses waived/paid by affiliate (Note 3f) ............................................... (394,265) Net expenses ............................................................................. 1,325,076 ------------ Net investment income ................................................................... 462,530 ------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ................................................................................... 6,398,415 Foreign currency transactions ................................................................. (1,921) ------------ Net realized gain (loss) ................................................................ 6,396,494 ------------ Net change in unrealized appreciation (depreciation) on investments ............................ 4,195,535 ------------ Net realized and unrealized gain (loss) ......................................................... 10,592,029 ------------ Net increase (decrease) in net assets resulting from operations ................................. $ 11,054,559 ============
22 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------- FRANKLIN BLUE CHIP FUND ----------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED (UNAUDITED) APRIL, 30, 2005 ----------------------------------- Increase (decrease) in net assets: Operations: Net investment income .................................................................. $ 462,530 $ 749,437 Net realized gain (loss) from investments and foreign currency transactions ............ 6,396,494 8,836,704 Net change in unrealized appreciation (depreciation) on investments .................... 4,195,535 (3,233,966) -------------------------------- Net increase (decrease) in net assets resulting from operations .................... 11,054,559 6,352,175 -------------------------------- Distributions to shareholders from net investment income to Class A ..................... -- (122,189) Capital share transactions: (Note 2) Class A ............................................................................... (11,862,341) (30,691,861) Class B ............................................................................... (3,131,780) (1,556,749) Class C ............................................................................... (3,364,215) (5,210,612) Class R ............................................................................... (607,841) (296,479) -------------------------------- Total capital share transactions ........................................................ (18,966,177) (37,755,701) -------------------------------- Redemption fees ......................................................................... 1,973 951 -------------------------------- Net increase (decrease) in net assets .............................................. (7,909,645) (31,524,764) Net assets: Beginning of period ..................................................................... 220,151,273 251,676,037 -------------------------------- End of period ........................................................................... $ 212,241,628 $ 220,151,273 ================================ Undistributed net investment income included in net assets: End of period ........................................................................... $ 1,090,306 $ 627,776 ================================
Semiannual Report | See notes to financial statements. | 23 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) FRANKLIN BLUE CHIP FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Strategic Series (the Trust) is registered under the Investment Company Act of 1940 as an open-end investment company, consisting of twelve separate series. The Franklin Blue Chip Fund (the Fund) included in this report is diversified. The financial statements of the remaining funds in the series are presented separately. The following summarizes the Fund's 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. 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 Fund has 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 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. 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 Fund's Board of Trustees. 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. 24 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN BLUE CHIP FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION (CONTINUED) 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 Fund's Board of Trustees. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. INCOME TAXES No provision has been made for U.S. income taxes because the Fund's policy is to continue 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. D. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date. 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 generally accepted accounting principles. 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 will reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. 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. Semiannual Report | 25 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN BLUE CHIP FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. F. REDEMPTION FEES A short-term trading redemption fee will be imposed, with some exceptions, on any Fund shares that are redeemed or exchanged within seven calendar days following their purchase date. The redemption fee is 2% of the amount redeemed. Such fees are retained by the Fund and accounted for as an addition to paid-in capital. G. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and Trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. However, based on experience, the Trust expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST The Fund offers four classes of shares: Class A, Class B, Class C, and Class R. Effective March 1, 2005, Class B shares are only offered to existing Class B shareholders in the form of reinvested distributions and certain exchanges from other Franklin Templeton Class B shares. 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. 26 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN BLUE CHIP FUND 2. SHARES OF BENEFICIAL INTEREST (continued) At October 31, 2005, there were an unlimited number of shares authorized ($0.01 par value). Transactions in the Fund's shares were as follows:
------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED OCTOBER 31, 2005 APRIL 30, 2005 ------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------- CLASS A SHARES: Shares sold ................................... 914,535 $ 13,388,706 2,358,696 $ 32,768,179 Shares issued in reinvestment of distributions ............................ -- -- 7,193 104,440 Shares redeemed ............................... (1,722,330) (25,251,047) (4,518,199) (63,564,480) ------------------------------------------------------------- Net increase (decrease) ....................... (807,795) $(11,862,341) (2,152,310) $(30,691,861) ============================================================= CLASS B SHARES: Shares sold ................................... 45,645 $ 638,285 371,027 $ 4,990,221 Shares redeemed ............................... (266,652) (3,770,065) (482,978) (6,546,970) ------------------------------------------------------------- Net increase (decrease) ....................... (221,007) $ (3,131,780) (111,951) $ (1,556,749) ============================================================= CLASS C SHARES: Shares sold ................................... 136,278 $ 1,933,003 503,044 $ 6,774,823 Shares redeemed ............................... (373,379) (5,297,218) (889,193) (11,985,435) ------------------------------------------------------------- Net increase (decrease) ....................... (237,101) $ (3,364,215) (386,149) $ (5,210,612) ============================================================= CLASS R SHARES: Shares sold ................................... 34,604 $ 499,745 137,019 $ 1,892,609 Shares redeemed ............................... (74,966) (1,107,586) (156,884) (2,189,088) ------------------------------------------------------------- Net increase (decrease) ....................... (40,362) $ (607,841) (19,865) $ (296,479) =============================================================
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
- ----------------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION - ----------------------------------------------------------------------------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
Semiannual Report | 27 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN BLUE CHIP FUND 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.750% Up to and including $500 million 0.625% Over $500 million, up to and including $1 billion 0.500% In excess of $1 billion B. ADMINISTRATIVE FEES Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Fund. C. DISTRIBUTION FEES The Fund's Board of Trustees has adopted distribution plans for each share class pursuant to Rule 12b-1 under the 1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund reimburses Distributors up to 0.35% per year of Class A's average daily net assets for costs incurred in connection with the sale and distribution of the Fund's shares. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. Under the Fund's compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the sale and distribution of the Fund's shares up to a certain percentage per year of its average daily net assets of each class as follows: Class B....................................................... 1.00% Class C....................................................... 1.00% Class R....................................................... 0.50% D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund's shares for the period: Net sales charge receiveda.................................... $36,529 Contingent deferred sales charges retained.................... $44,904 (a) Net of commissions paid to unaffiliated broker/dealers. 28 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN BLUE CHIP FUND 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) E. TRANSFER AGENT FEES The Fund paid transfer agent fees of $334,271, of which $244,388 was retained by Investor Services. F. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS Advisers agreed in advance to voluntarily waive a portion of management fees, as noted in the Statement of Operations. Total expenses waived by Advisers are not subject to reimbursement by the Fund subsequent to the Fund's fiscal year end. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the period ended October 31, 2005, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES At April 30, 2005, the Fund had tax basis capital losses which may be carried over to offset future capital gains, if any. At April 30, 2005, the capital loss carryforwards were as follows: Capital loss carryforwards expiring in: 2010..................................................... $ 5,361,375 2011..................................................... 16,476,135 ----------- $21,837,510 =========== For tax purposes, 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 April 30, 2005, the Fund deferred realized currency losses of $850. At October 31, 2005, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows: Cost of investments..................................... $193,094,809 ============ Unrealized appreciation................................. $ 35,928,832 Unrealized depreciation................................. (15,989,436) ------------ Net unrealized appreciation (depreciation).............. $ 19,939,396 ============ Semiannual Report | 29 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN BLUE CHIP FUND 5. INCOME TAXES (CONTINUED) Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatment of foreign currency transactions. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the period ended October 31, 2005, aggregated $16,434,167 and $37,223,651, respectively. 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund 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 Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management fees paid by the Sweep Money Fund. 8. 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. 30 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN BLUE CHIP FUND 8. REGULATORY MATTERS (CONTINUED) 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 a plan for distribution of the respective settlement monies. The CAGO approved the distribution plan under the CAGO Settlement and, in accordance with the terms and conditions of that settlement, the monies were disbursed to the relevant funds in March, 2005. The SEC has not yet approved the distribution plan pertaining to the December 13, 2004 SEC Order. When approved, disbursements of settlement monies will be made promptly to the relevant funds, in accordance with the terms and conditions of that order. The IDC continues to develop the plan of distribution under the August 2, 2004 SEC Order that resolved the SEC's market timing investigation. 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 Trust, it is committed to making the Trust or its shareholders whole, as appropriate. Semiannual Report | 31 FRANKLIN STRATEGIC SERIES SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Trust has established Proxy Voting Policies and Procedures ("Policies") that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. 32 | Semiannual Report LITERATURE REQUEST LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT 1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE, WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING TONE. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton 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 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 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 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 Arizona California(7) Colorado Connecticut Florida(7) Georgia Kentucky Louisiana Maryland Massachusetts(6) Michigan(6) Minnesota(6) Missouri New Jersey New York(7) North Carolina Ohio(7) Oregon Pennsylvania Tennessee 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. 09/05 Not part of the semiannual report [LOGO](R) FRANKLIN TEMPLETON One Franklin Parkway INVESTMENTS San Mateo, CA 94403-1906 |_| WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. SEMIANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN BLUE CHIP FUND 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. 483 S2005 12/05 [GRAPHIC OMITTED] - -------------------------------------------------------------------------------- OCTOBER 31, 2005 - -------------------------------------------------------------------------------- A series of Franklin Strategic Series - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SEMIANNUAL REPORT AND SHAREHOLDER LETTER INCOME - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? FRANKLIN STRATEGIC INCOME FUND Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. - -------------------------------------------------------------------------------- [LOGO] 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 semiannual report CONTENTS SHAREHOLDER LETTER ..................................................... 1 SEMIANNUAL REPORT Franklin Strategic Income Fund ......................................... 4 Performance Summary .................................................... 10 Your Fund's Expenses ................................................... 13 Financial Highlights and Statement of Investments ...................... 15 Financial Statements ................................................... 33 Notes to Financial Statements .......................................... 37 Shareholder Information ................................................ 47 - -------------------------------------------------------------------------------- SEMIANNUAL REPORT FRANKLIN STRATEGIC INCOME FUND YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Strategic Income Fund seeks a high level of current income, with capital appreciation over the long term as a secondary objective. The Fund uses an active asset allocation process and invests at least 65% of its assets in securities of U.S. and foreign governments, U.S. and foreign high yield and investment-grade fixed income securities, mortgage- and other asset-backed securities, corporate bank loans, preferred stock, and income-producing securities convertible into common stock. This semiannual report for Franklin Strategic Income Fund covers the period ended October 31, 2005. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- PERFORMANCE OVERVIEW Franklin Strategic Income Fund - Class A posted a +1.40% cumulative total return, for the six months under review. The Fund outperformed its benchmark, the Lehman Brothers U.S. Aggregate Index, which had a +0.15% total return for the same period.(1) The Fund underperformed its peers as measured by the Lipper Multi-Sector Income Funds Classification Average's +1.57% six-month total return.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 10. (1) Source: Lehman Brothers Inc. The Lehman Brothers 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 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. (2) Source: Lipper Inc. The Lipper Multi-Sector Income Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Multi-Sector Income Funds classification in the Lipper Open-End underlying funds universe. Lipper Multi-Sector Income Funds are defined as funds that seek current income by allocating assets among different fixed income securities sectors (not primarily in one sector except for defensive purposes), including U.S. and foreign governments, with a significant portion rated below investment grade. For the six-month period ended 10/31/05, there were 116 funds in this category. Lipper calculations do not include sales charges, but include reinvestment of any income or distributions. Fund performance relative to the average may have differed if these or other factors had been considered. One cannot invest directly in a Lipper average, nor is the average 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 20. 4 | Semiannual Report ECONOMIC AND MARKET OVERVIEW The economy continued to grow at a healthy pace during the six months under review. Over the reporting period, nonfarm payroll data, as well as other indexes, showed growing employment. This along with other factors helped consumer spending increase 6.1% (not adjusted for inflation) in October 2005 compared with the same month a year earlier, which supported U.S. economic growth.(3) Business spending also rose during the reporting period, contributing to economic growth. Historically low interest rates continued to allow many companies easy access to capital, and ample cash also helped some companies to support their spending plans. Although productivity growth slowed somewhat, it would make sense for businesses to continue spending on productivity enhancing technologies to improve their business performance. Oil prices increased substantially during the period amid concerns about potential long-term supply limitations in the face of expected strong global demand growth, especially from China and India. Despite rising commodity prices, inflation remained relatively contained for the 12 months ended October 31, 2005, as measured by the 2.1% rise for the core Consumer Price Index (CPI).(4) This increase was below the core CPI's 10-year average of 2.2%.(4) The Federal Reserve Board (Fed) noted in its September statement that there would be some near-term economic effects due to the recent hurricanes. However, acknowledging the economy's strength as well as potential inflationary pressure from high energy prices, the Fed raised the federal funds target rate to 3.75% from 2.75% during the six-month period and indicated "measured" increases could follow. The 10-year Treasury note yield rose from 4.21% at the beginning of the period to 4.57% on October 31, 2005. Although core inflationary pressures appeared relatively well contained, the U.S. economy's resilience caused some concern about future pricing pressures. Some market participants also pointed to the upcoming change in the Fed chairman as another possible catalyst for the 10-year Treasury's rise, as there is some market perception that Mr. Bernanke, the nominee for the next Fed chairman, may not be as aggressive as Mr. Greenspan at raising rates as long as inflation expectations remain low. However, Mr. Bernanke is reported to share many of Mr. Greenspan's economic philosophies. Furthermore, if Mr. Bernanke is confirmed, it is likely to take some time before his own approach to dealing with inflation is apparent. (3) Source: Bureau of Economic Analysis. (4) Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. Semiannual Report | 5 DIVIDEND DISTRIBUTIONS* 5/1/05-10/31/05 - -------------------------------------------------------------------------------- DIVIDEND PER SHARE --------------------------------------------------------------------- MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS - -------------------------------------------------------------------------------- May 5.40 cents 5.04 cents 5.04 cents 5.18 cents 5.61 cents - -------------------------------------------------------------------------------- June 5.00 cents 4.66 cents 4.68 cents 4.79 cents 5.21 cents - -------------------------------------------------------------------------------- July 5.00 cents 4.66 cents 4.68 cents 4.79 cents 5.21 cents - -------------------------------------------------------------------------------- August 5.00 cents 4.66 cents 4.68 cents 4.79 cents 5.21 cents - -------------------------------------------------------------------------------- September 5.00 cents 4.65 cents 4.66 cents 4.79 cents 5.21 cents - -------------------------------------------------------------------------------- October 5.00 cents 4.65 cents 4.66 cents 4.79 cents 5.21 cents - -------------------------------------------------------------------------------- TOTAL 30.40 CENTS 28.32 CENTS 28.40 CENTS 29.13 CENTS 31.66 CENTS * All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. Looking outside the U.S., Asian economic growth accelerated during the period. Global demand for Asian goods remained favorable for the region's growth prospects. In addition, China's increased domestic consumption and strong growth conditions benefited its regional trade partners through import demand. Overall, aggregate demand among Asian economies accelerated during the reporting period. As the region's economies improved, several Asian countries raised their interest rates. Notably, China introduced greater flexibility into its monetary system when it revalued the yuan and moved from its U.S. dollar peg to a managed-float versus a basket of undisclosed global currencies. The 12-country euro zone's economic activity was more moderate than those of the U.S. and Asia as strong global demand conditions propped up external growth while domestic demand lagged. Although commodity prices exerted upward pressures on headline inflation rates, underlying inflation generally remained stable, consistent with subdued domestic economic growth conditions. As a result, the European Central Bank (ECB) left interest rates unchanged at 2.0% for the 28th consecutive month. INVESTMENT STRATEGY The Fund uses an active asset allocation strategy, investing across the fixed income market in sectors including high yield and investment grade corporate bonds, international developed and emerging market bonds, U.S. government and agency securities, mortgage- and other asset-backed securities, corporate bank loans, convertible securities and preferred stocks. In addition to our bottom-up fundamental analysis of market sectors, industries and issuers, we evaluate country risk, business cycles, yield curves, and values between and within markets as part of our portfolio construction process. 6 | Semiannual Report MANAGER'S DISCUSSION The rising interest rate environment during the six months under review dampened return performance for most fixed income sectors. In this environment, sectors with greater interest-rate sensitivity delivered total returns that were little changed from the start of the period. In many instances, coupon income was offset by price declines from the rise in interest rates. The Fund continued to hold a relatively underweighted position in the more interest-rate sensitive fixed income sectors during the period, as we found what we believed were more attractive investment opportunities in other sectors. However, as both intermediate- and longer-term rates moved higher during the reporting period, the Fund increased its exposure to the U.S. government and mortgage and other asset-backed sectors, as the yield curve began to take into account the potential for continued healthy economic growth. Relative political stability, higher oil revenues, and a supportive global economic environment buoyed the credit outlook for many developing countries. Within the more economically and equity-sensitive fixed income sectors, emerging markets sovereign debt securities provided some of the strongest returns across the entire fixed income universe As a result, yield spread levels over Treasuries continued to tighten in this sector. At period-end, our largest U.S.-dollar emerging markets country weightings were in Venezuela, Argentina, Brazil, Philippines and Ukraine. Our exposure to emerging markets debt was low at period-end relative to the past as valuations remained near historical highs. Our largest sector weighting was in high yield corporate bonds. The high yield corporate bond market rebounded after a sell-off in early May following the downtrend triggered by ratings downgrades of General Motors and Ford debt earlier in the year. Although default rates rose during the period, many of the defaults were largely centered on the automotive and airline industries. The credit fundamentals for the remainder of the corporate market continued to be generally supportive, with ample liquidity, manageable balance sheets, and a positive earnings and cash flow outlook. As a result, the sector's yield spreads tightened over the past six months. Although we remained comfortable with the sector's fundamental outlook, we trimmed our exposure to high yield bonds toward the end of the period. One of the poorest performing sectors during the period was the non-dollar government bond market. After weakening substantially during the latter half of 2004, the U.S. dollar strengthened throughout much of 2005. As a result, the Fund's holdings in non-U.S. dollar government bonds negatively impacted performance. However, non-U.S. dollar government bonds could benefit if the U.S. current account deficit continues to pressure the U.S. dollar. Therefore, at period-end, we held a significant weighting in this sector. Within our non-dollar Semiannual Report | 7 PORTFOLIO BREAKDOWN Based on Total Net Assets - ----------------------------------------------------------------------- 10/31/05 4/30/05 - ----------------------------------------------------------------------- High Yield Corporate Bonds & Preferred Stocks 33.4% 36.7% - ----------------------------------------------------------------------- Other International Bonds (non-$US) 12.5% 11.0% - ----------------------------------------------------------------------- Mortgages & Other Asset-backed Bonds 12.0% 11.1% - ----------------------------------------------------------------------- International Developed Market Bonds (non-$US) 9.7% 11.5% - ----------------------------------------------------------------------- Emerging Market Bonds ($US) 8.6% 8.9% - ----------------------------------------------------------------------- U.S. Government Bonds 7.6% 5.5% - ----------------------------------------------------------------------- Floating Rate Bank Loans 6.9% 4.7% - ----------------------------------------------------------------------- Investment Grade Corporate Bonds 5.3% 5.5% - ----------------------------------------------------------------------- Convertible Securities 1.2% 1.3% - ----------------------------------------------------------------------- Common Stocks & Warrants 0.0%* 0.0%* - ----------------------------------------------------------------------- Short-Term Investments & Other Net Assets 2.8% 3.8% - ----------------------------------------------------------------------- * Amount is less than 0.05% of total net assets. government bond holdings, we favored certain Asian markets (including Thailand, South Korea, Malaysia and Singapore), dollar-bloc countries (particularly Canada), non-euro European countries (Norway and Sweden), and select eastern European issuers (such as Poland and Slovakia). Of note, many of these non-dollar bond holdings outperformed the other major non-dollar government bond markets of Japan and of the euro region over the past six months. We increased our exposure to floating rate debt securities during the period. We found the sector attractive due to expectations of increased income in a rising short-term interest rate environment in the U.S. Floating rate debt securities are generally less sensitive to longer-term interest rate volatility, which adds to their attractiveness in our opinion. Similar to the high yield corporate sector, valuations of floating rate senior secured bank loans were somewhat expensive by historical standards. Despite this, we remained comfortable with the fundamental credit trends for these issuers, which represent the majority of our floating rate holdings. 8 | Semiannual Report Thank you for your continued participation in Franklin Strategic Income Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ Christopher J. Molumphy Christopher J. Molumphy, CFA [PHOTO OMITTED] /s/ Eric G. Takaha Eric G. Takaha, CFA Portfolio Management Team Franklin Strategic Income Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2005, 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 ADVISER 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. Semiannual Report | 9 PERFORMANCE SUMMARY AS OF 10/31/05 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION - -------------------------------------------------------------------------- CLASS A (SYMBOL: FRSTX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------- Net Asset Value (NAV) -$ 0.16 $ 10.08 $ 10.24 - -------------------------------------------------------------------------- DISTRIBUTIONS (5/1/05-10/31/05) - -------------------------------------------------------------------------- Dividend Income $ 0.3040 - -------------------------------------------------------------------------- CLASS B (SYMBOL: FKSBX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------- Net Asset Value (NAV) -$ 0.16 $ 10.11 $ 10.27 - -------------------------------------------------------------------------- DISTRIBUTIONS (5/1/05-10/31/05) - -------------------------------------------------------------------------- Dividend Income $ 0.2832 - -------------------------------------------------------------------------- CLASS C (SYMBOL: FSGCX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------- Net Asset Value (NAV) -$ 0.16 $ 10.08 $ 10.24 - -------------------------------------------------------------------------- DISTRIBUTIONS (5/1/05-10/31/05) - -------------------------------------------------------------------------- Dividend Income $ 0.2840 - -------------------------------------------------------------------------- CLASS R (SYMBOL: FKSRX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------- Net Asset Value (NAV) -$ 0.16 $ 10.06 $ 10.22 - -------------------------------------------------------------------------- DISTRIBUTIONS (5/1/05-10/31/05) - -------------------------------------------------------------------------- Dividend Income $ 0.2913 - -------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FKSAX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------- Net Asset Value (NAV) -$ 0.16 $ 10.08 $ 10.24 - -------------------------------------------------------------------------- DISTRIBUTIONS (5/1/05-10/31/05) - -------------------------------------------------------------------------- Dividend Income $ 0.3166 - -------------------------------------------------------------------------- 10 | Semiannual Report PERFORMANCE SUMMARY (CONTINUED) PERFORMANCE(1) 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: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- --------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------------- Cumulative Total Return(2) +1.40% +2.68% +51.21% +113.45% - --------------------------------------------------------------------------------------------- Average Annual Total Return(3) -2.87% -1.65% +7.69% +7.41% - --------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +0.94% +7.39% +7.57% - --------------------------------------------------------------------------------------------- Distribution Rate(5) 5.70% - --------------------------------------------------------------------------------------------- 30-Day Standardized Yield(6) 4.78% - --------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - --------------------------------------------------------------------------------------------- Cumulative Total Return(2) +1.19% +2.26% +48.09% +51.37% - --------------------------------------------------------------------------------------------- Average Annual Total Return(3) -2.75% -1.60% +7.88% +6.26% - --------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +1.15% +7.61% +6.47% - --------------------------------------------------------------------------------------------- Distribution Rate(5) 5.52% - --------------------------------------------------------------------------------------------- 30-Day Standardized Yield(6) 4.60% - --------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/98) - --------------------------------------------------------------------------------------------- Cumulative Total Return(2) +1.20% +2.28% +48.27% +51.66% - --------------------------------------------------------------------------------------------- Average Annual Total Return(3) +0.22% +1.31% +8.20% +5.71% - --------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +4.05% +7.91% +5.88% - --------------------------------------------------------------------------------------------- Distribution Rate(5) 5.55% - --------------------------------------------------------------------------------------------- 30-Day Standardized Yield(6) 4.60% - --------------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02) - --------------------------------------------------------------------------------------------- Cumulative Total Return(2) +1.28% +2.43% +41.36% +38.37% - --------------------------------------------------------------------------------------------- Average Annual Total Return(3) +0.29% +1.47% +12.23% +8.85% - --------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +4.22% +12.66% +9.27% - --------------------------------------------------------------------------------------------- Distribution Rate(5) 5.71% - --------------------------------------------------------------------------------------------- 30-Day Standardized Yield(6) 4.75% - --------------------------------------------------------------------------------------------- ADVISOR CLASS(7) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------------- Cumulative Total Return(2) +1.52% +2.93% +52.93% +116.72% - --------------------------------------------------------------------------------------------- Average Annual Total Return(3) +1.52% +2.93% +8.87% +8.04% - --------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(4) +5.72% +8.60% +8.21% - --------------------------------------------------------------------------------------------- Distribution Rate(5) 6.20% - --------------------------------------------------------------------------------------------- 30-Day Standardized Yield(6) 5.25% - ---------------------------------------------------------------------------------------------
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. Semiannual Report | 11 PERFORMANCE SUMMARY (CONTINUED) ENDNOTES BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS THE PRICE OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. HIGH YIELDS REFLECT THE HIGHER CREDIT RISKS ASSOCIATED WITH CERTAIN LOWER-RATED SECURITIES HELD IN THE PORTFOLIO. FLOATING-RATE LOAN SECURITIES AND HIGH-YIELD CORPORATE BONDS TEND TO BE RATED BELOW INVESTMENT GRADE. INVESTING IN HIGHER-YIELDING, LOWER-RATED SECURITIES INVOLVES GREATER RISK OF DEFAULT, WHICH COULD RESULT IN LOSS OF PRINCIPAL -- A RISK THAT MAY BE HEIGHTENED IN A SLOWING ECONOMY. SECURITIES WITH FLOATING INTEREST RATES GENERALLY ARE LESS SENSITIVE TO INTEREST RATE CHANGES, BUT MAY DECLINE IN VALUE IF THEIR INTEREST RATES DO NOT RISE AS MUCH AS INTEREST RATES IN GENERAL. THE RISKS OF FOREIGN SECURITIES INCLUDE CURRENCY FLUCTUATIONS AND POLITICAL UNCERTAINTY. THE FUND IS CLASSIFIED AS A NONDIVERSIFIED FUND BECAUSE IT MAY INVEST A GREATER PORTION OF ITS ASSETS IN THE SECURITIES OF ONE ISSUER THAN A DIVERSIFIED FUND. 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) Past expense reductions by the Fund's manager increased the Fund's total returns. If the Fund's manager had not taken this action, the Fund's total returns would have been lower. (2) Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. (3) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. (4) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5) Distribution rate is based on an annualization of the respective class's October dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 10/31/05. (6) Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 10/31/05. (7) Effective 9/1/99, 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 8/12/99, 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 8/11/99, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 9/1/99 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +59.36% and +7.78%. 12 | Semiannual Report YOUR FUND'S EXPENSES 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 below 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. Semiannual Report | 13 YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 4/30/05 VALUE 10/31/05 PERIOD* 4/30/05-10/31/05 - -------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,014.00 $ 4.52 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,020.72 $ 4.53 - -------------------------------------------------------------------------------------------------------- CLASS B - -------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,011.90 $ 6.54 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,018.70 $ 6.56 - -------------------------------------------------------------------------------------------------------- CLASS C - -------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,012.00 $ 6.54 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,018.70 $ 6.56 - -------------------------------------------------------------------------------------------------------- CLASS R - -------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,012.80 $ 5.78 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,019.46 $ 5.80 - -------------------------------------------------------------------------------------------------------- ADVISOR CLASS - -------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,015.20 $ 3.25 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,021.98 $ 3.26 - --------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.89%; B: 1.29%; C: 1.29%; R: 1.14%; and Advisor: 0.64%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 14 | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS FRANKLIN STRATEGIC INCOME FUND
--------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS A (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ......... $ 10.24 $ 10.09 $ 9.65 $ 9.36 $ 9.58 $ 9.84 --------------------------------------------------------------------------------- Income from investment operations: Net investment income(a)................... 0.26 0.53 0.56 0.65 0.75(f) 0.80 Net realized and unrealized gains (losses) ............................... (0.12) 0.27 0.54 0.35 (0.20)(f) (0.28) --------------------------------------------------------------------------------- Total from investment operations ............. 0.14 0.80 1.10 1.00 0.55 0.52 --------------------------------------------------------------------------------- Less distributions from net investment income .................................... (0.30) (0.65) (0.66) (0.71) (0.77) (0.78) --------------------------------------------------------------------------------- Redemption fees .............................. --(d) --(d) -- -- -- -- --------------------------------------------------------------------------------- Net asset value, end of period ............... $ 10.08 $ 10.24 $ 10.09 $ 9.65 $ 9.36 $ 9.58 ================================================================================= Total return(b) .............................. 1.40% 8.10% 11.69% 11.60% 6.00% 5.63% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............ $ 857,492 $ 696,198 $ 446,282 $ 336,607 $ 261,446 $ 245,974 Ratios to average net assets: Expenses .................................. 0.89%(e) 0.92% 0.92% 0.96% 0.95% 0.99% Expenses net of waiver and payments by affiliate and expense reduction ........ 0.89%(e) 0.91% 0.92% 0.88% 0.84% 0.75% Net investment income ..................... 4.95%(e) 5.18% 5.53% 7.30% 8.03%(f) 8.18% Portfolio turnover rate ...................... 14.86% 48.57% 66.57% 67.65% 50.64% 38.70% Portfolio turnover rate excluding mortgage dollar rolls(c) ........................... 14.32% 39.91% 52.35% 53.25% 49.88% 36.37%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) See Note 1(e) regarding mortgage dollar rolls. (d) Amount is less than $0.01 per share. (e) Annualized. (f) Effective May 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income and amortizing all premium and discount on fixed-income securities, as required. The effect of this change was as follows: Net investment income per share .................................... $ (0.01) Net realized and unrealized losses per share ....................... (0.01) Ratio of net investment income to average net assets ............... (0.13)% Per share data and ratios for prior years have not been restated to reflect this change in accounting policy. Semiannual Report | See notes to financial statements. | 15 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND (CONTINUED)
--------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS B (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ......... $ 10.27 $ 10.12 $ 9.67 $ 9.38 $ 9.61 $ 9.86 --------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) .................. 0.24 0.49 0.52 0.61 0.72(f) 0.76 Net realized and unrealized gains (losses) ............................... (0.12) 0.27 0.55 0.35 (0.21)(f) (0.27) --------------------------------------------------------------------------------- Total from investment operations ............. 0.12 0.76 1.07 0.96 0.51 0.49 --------------------------------------------------------------------------------- Less distributions from net investment income .................................... (0.28) (0.61) (0.62) (0.67) (0.74) (0.74) --------------------------------------------------------------------------------- Redemption fees .............................. --(d) --(d) -- -- -- -- --------------------------------------------------------------------------------- Net asset value, end of period ............... $ 10.11 $ 10.27 $ 10.12 $ 9.67 $ 9.38 $ 9.61 ================================================================================= Total return(b) .............................. 1.19% 7.65% 11.33% 11.14% 5.57% 5.18% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............ $ 106,997 $ 110,502 $ 91,974 $ 61,254 $ 40,821 $ 24,631 Ratios to average net assets: Expenses .................................. 1.29%(e) 1.32% 1.32% 1.36% 1.35% 1.39% Expenses net of waiver and payments by affiliate and expense reduction ......... 1.29%(e) 1.31% 1.32% 1.28% 1.24% 1.15% Net investment income ..................... 4.55%(e) 4.78% 5.13% 6.90% 7.65%(f) 7.80% Portfolio turnover rate ...................... 14.86% 48.57% 66.57% 67.65% 50.64% 38.70% Portfolio turnover rate excluding mortgage dollar rolls(c) ........................... 14.32% 39.91% 52.35% 53.25% 49.88% 36.37%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) See Note 1(e) regarding mortgage dollar rolls. (d) Amount is less than $0.01 per share. (e) Annualized. (f) Effective May 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income and amortizing all premium and discount on fixed-income securities, as required. The effect of this change was as follows: Net investment income per share .................................... $ (0.01) Net realized and unrealized losses per share ....................... (0.01) Ratio of net investment income to average net assets ............... (0.12)% Per share data and ratios for prior years have not been restated to reflect this change in accounting policy. 16 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND (CONTINUED)
--------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS C (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ......... $ 10.24 $ 10.09 $ 9.64 $ 9.36 $ 9.58 $ 9.84 --------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) .................. 0.23 0.49 0.52 0.61 0.72(f) 0.76 Net realized and unrealized gains (losses) ............................... (0.11) 0.27 0.55 0.34 (0.20)(f) (0.28) --------------------------------------------------------------------------------- Total from investment operations ............. 0.12 0.76 1.07 0.95 0.52 0.48 --------------------------------------------------------------------------------- Less distributions from net investment income .................................... (0.28) (0.61) (0.62) (0.67) (0.74) (0.74) --------------------------------------------------------------------------------- Redemption fees .............................. --(d) --(d) -- -- -- -- --------------------------------------------------------------------------------- Net asset value, end of period ............... $ 10.08 $ 10.24 $ 10.09 $ 9.64 $ 9.36 $ 9.58 ================================================================================= Total return(b) .............................. 1.20% 7.67% 11.36% 11.18% 5.47% 5.21% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............ $ 265,205 $ 213,741 $ 151,823 $ 86,153 $ 58,851 $ 46,732 Ratios to average net assets: Expenses .................................. 1.29%(e) 1.32% 1.32% 1.36% 1.35% 1.39% Expenses net of waiver and payments by affiliate and expense reduction ........ 1.29%(e) 1.31% 1.32% 1.28% 1.24% 1.15% Net investment income ..................... 4.55%(e) 4.78% 5.13% 6.90% 7.64%(f) 7.79% Portfolio turnover rate ...................... 14.86% 48.57% 66.57% 67.65% 50.64% 38.70% Portfolio turnover rate excluding mortgage dollar rolls(c) ........................... 14.32% 39.91% 52.35% 53.25% 49.88% 36.37%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) See Note 1(e) regarding mortgage dollar rolls. (d) Amount is less than $0.01 per share. (e) Annualized. (f) Effective May 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income and amortizing all premium and discount on fixed-income securities, as required. The effect of this change was as follows: Net investment income per share . .................................. $ (0.01) Net realized and unrealized losses per share ....................... (0.01) Ratio of net investment income to average net assets . ............. (0.13)% Per share data and ratios for prior years have not been restated to reflect this change in accounting policy. Semiannual Report | See notes to financial statements. | 17 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND (CONTINUED)
--------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, CLASS R (UNAUDITED) 2005 2004 2003 2002(1) --------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ......... $ 10.22 $ 10.07 $ 9.63 $ 9.34 $ 9.39 --------------------------------------------------------------------- Income from investment operations: Net investment income(a) .................. 0.24 0.51 0.53 0.63 0.28 Net realized and unrealized gains (losses) ............................... (0.11) 0.26 0.55 0.35 (0.09) --------------------------------------------------------------------- Total from investment operations ............. 0.13 0.77 1.08 0.98 0.19 --------------------------------------------------------------------- Less distributions from net investment income .................................... (0.29) (0.62) (0.64) (0.69) (0.24) --------------------------------------------------------------------- Redemption fees .............................. --(d) --(d) -- -- -- --------------------------------------------------------------------- Net asset value, end of period ............... $ 10.06 $ 10.22 $ 10.07 $ 9.63 $ 9.34 ===================================================================== Total return(b) .............................. 1.28% 7.86% 11.45% 11.35% 2.07% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............ $ 25,683 $ 17,859 $ 7,324 $ 1,558 $ 1,239 Ratios to average net assets: Expenses .................................. 1.14%(e) 1.17% 1.17% 1.21% 1.20%(e) Expenses net of waiver and payments by affiliate and expense reduction ........ 1.14%(e) 1.16% 1.17% 1.13% 1.09%(e) Net investment income ..................... 4.70%(e) 4.93% 5.28% 7.05% 9.18%(e) Portfolio turnover rate ...................... 14.86% 48.57% 66.57% 67.65% 50.64% Portfolio turnover rate excluding mortgage dollar rolls(c) ........................... 14.32% 39.91% 52.35% 53.25% 49.88%
(a) Based on average daily shares outstanding. (b) Total return is not annualized for periods less than one year. (c) See Note 1(e) regarding mortgage dollar rolls. (d) Amount is less than $0.01 per share. (e) Annualized. (f) For the period January 1, 2002 (effective date) to April 30, 2002. 18 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND (CONTINUED)
--------------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, ADVISOR CLASS (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ......... $ 10.24 $ 10.09 $ 9.65 $ 9.36 $ 9.59 $ 9.84 --------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) .................. 0.27 0.56 0.58 0.69 0.78(f) 0.82 Net realized and unrealized gains (losses) ............................... (0.11) 0.26 0.54 0.33 (0.21)(f) (0.26) --------------------------------------------------------------------------------- Total from investment operations ............. 0.16 0.82 1.12 1.02 0.57 0.56 --------------------------------------------------------------------------------- Less distributions from net investment income .................................... (0.32) (0.67) (0.68) (0.73) (0.80) (0.81) --------------------------------------------------------------------------------- Redemption fees .............................. --(d) --(d) -- -- -- -- --------------------------------------------------------------------------------- Net asset value, end of period ............... $ 10.08 $ 10.24 $ 10.09 $ 9.65 $ 9.36 $ 9.59 ================================================================================= Total return(b) .............................. 1.52% 8.37% 11.97% 11.87% 6.27% 5.89% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............ $ 62,872 $ 60,489 $ 39,784 $ 34,224 $ 31,493 $ 25,390 Ratios to average net assets: Expenses .................................. 0.64%(e) 0.67% 0.67% 0.71% 0.70% 0.74% Expenses net of waiver and payments by affiliate and expense reduction ........ 0.64%(e) 0.66% 0.67% 0.63% 0.59% 0.50% Net investment income ..................... 5.20%(e) 5.43% 5.78% 7.55% 8.29%(f) 8.45% Portfolio turnover rate ...................... 14.86% 48.57% 66.57% 67.65% 50.64% 38.70% Portfolio turnover rate excluding mortgage dollar rolls(c) ........................... 14.32% 39.91% 52.35% 53.25% 49.88% 36.37%
(a) Based on average daily shares outstanding. (b) Total return is not annualized for periods less than one year. (c) See Note 1(e) regarding mortgage dollar rolls. (d) Amount is less than $0.01 per share. (e) Annualized. (f) Effective May 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income and amortizing all premium and discount on fixed-income securities, as required. The effect of this change was as follows: Net investment income per share . .................................. $ (0.01) Net realized and unrealized losses per share ....................... (0.01) Ratio of net investment income to average net assets ............... (0.13)% Per share data and ratios for prior years have not been restated to reflect this change in accounting policy. Semiannual Report | See notes to financial statements. | 19 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------- FRANKLIN STRATEGIC INCOME FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 0.0% (a) (b,c) Cambridge Industries Liquidating Trust Interest ..................... United States 516,372 $ 2,582 (b,c) VS Holdings ......................................................... United States 64,666 -- --------------- TOTAL COMMON STOCKS (COST $64,666)................................... 2,582 --------------- CONVERTIBLE PREFERRED STOCKS 0.8% FINANCE 0.2% Fannie Mae, 5.375%, cvt. pfd. ....................................... United States 22 2,010,693 --------------- HEALTH TECHNOLOGY 0.2% Schering-Plough Corp., 6.00%, cvt. pfd. ............................. United States 60,000 3,163,200 --------------- INDUSTRIAL SERVICES 0.2% Allied Waste Industries Inc., 6.25%, cvt. pfd. ...................... United States 47,000 2,205,710 --------------- PROCESS INDUSTRIES 0.2% Huntsman Corp., 5.00%, cvt. pfd. .................................... United States 63,800 2,795,620 --------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $10,910,879) ............... 10,175,223 --------------- ------------------- PRINCIPAL AMOUNT(g) ------------------- (d,e) SENIOR FLOATING RATE INTERESTS 6.9% COMMUNICATIONS 0.7% Alaska Communications Systems Holdings Inc., Incremental Term Loan, 6.02%, 2/01/12 ........................... United States 55,000 55,798 Term Loan, 5.92%, 2/01/12 ....................................... United States 5,120,000 5,194,240 Hawaiian Telecom Communications Inc., Term Loan B, 6.28%, 10/31/12 ........................................................ United States 4,559,000 4,615,276 --------------- 9,865,314 --------------- CONSUMER DURABLES 0.7% Sealy Mattress Co., Term Loan D, 5.62-7.25%, 4/06/12 ................ United States 4,195,540 4,238,808 (f) Stile Acquisition Corp. (Masonite), CAD Term Loan, 6.02-7.50%, 4/05/13 ......................................................... Canada 2,468,023 2,461,712 (f) Stile U.S. Acquisition Corp. (Masonite), U.S. Term Loan, 6.02-6.21%, 4/05/13 ............................................. United States 2,472,227 2,465,906 --------------- 9,166,426 --------------- CONSUMER NON-DURABLES 0.9% Constellation Brands Inc., Term Loan B, 5.44-5.75%, 12/22/11 ........ United States 3,780,181 3,825,781 (f) Eastman Kodak Co., Term Loan B, 6.25-6.61%, 10/18/12 ................ United States 3,409,412 3,398,331 (f) Jarden Corp., Term Loan B2, 5.681%, 11/15/11 ........................ United States 4,400,000 4,422,550 --------------- 11,646,662 --------------- CONSUMER SERVICES 1.7% Mission Broadcasting Inc., Term Loan B, 5.77%, 10/01/12 ............. United States 2,009,158 2,023,389 Nexstar Broadcasting Group Inc., Term Loan B, 5.77%, 10/01/12 ........................................................ United States 2,045,223 2,059,709 (f) Penn National Gaming Inc., Term Loan B, 5.89-6.22%, 10/03/12 ........................................................ United States 3,698,658 3,749,514 R.H. Donnelley Inc., Term Loan A3, 5.78-5.92%, 12/31/09 .............................. United States 499,275 502,733 Term Loan D, 5.52-5.86%, 6/30/11 ................................ United States 4,994,297 5,033,677
20 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN STRATEGIC INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - ----------------------------------------------------------------------------------------------------------------------------------- (d,e) SENIOR FLOATING RATE INTERESTS (CONT.) CONSUMER SERVICES (CONT.) Regal Cinemas Inc., Term Loan B, 6.02%, 11/10/10 .................... United States 5,053,980 $ 5,112,814 UPC Financing Partnership, Term Loan H2, 6.55%, 9/30/12 ............. Netherlands 3,700,000 3,736,038 --------------- 22,217,874 --------------- FINANCE 0.4% Fidelity National Information Services Inc., Term Loan B, 5.69%, 3/09/13 ......................................................... United States 4,795,553 4,817,603 --------------- HEALTH SERVICES 0.7% LifePoint Hospitals Inc., Term Loan B, 5.44%, 4/15/12 ............... United States 4,452,254 4,485,250 PacifiCare Health Systems Inc., Term Loan B, 5.13-5.63%, 12/13/10 ........................................................ United States 5,061,750 5,081,784 --------------- 9,567,034 --------------- INDUSTRIAL SERVICES 0.1% Epco Holding Inc., Term Loan B, 6.25-6.60%, 8/18/10 ................. United States 1,239,000 1,256,700 --------------- PROCESS INDUSTRIES 0.3% Hexion Specialty Chemicals Inc., Tranche B-1, 6.38%, 5/31/12 ..................................... United States 1,344,943 1,361,983 Tranche B-3 CL, 3.76%, 5/31/12 .................................. United States 330,435 334,621 Resolution Europe BV (Hexion), Tranche B-2, 6.56%, 5/31/12 .......... Netherlands 1,857,303 1,880,835 --------------- 3,577,439 --------------- REAL ESTATE DEVELOPMENT 0.6% Macerich Co., Interim Loan Facility, 5.66%, 3/31/06 ........................... United States 1,171,338 1,173,535 Term Loan B, 5.63%, 4/25/10 ..................................... United States 2,833,000 2,854,247 Maguire Properties Inc., Term Loan B, 5.64%, 3/15/10 ................ United States 3,412,222 3,434,060 --------------- 7,461,842 --------------- REAL ESTATE INVESTMENT TRUSTS 0.0%(a) Lion Gables Realty LP, Term Loan B, 5.63%, 9/30/06 .................. United States 582,106 585,235 --------------- RETAIL TRADE 0.5% The Jean Coutu Group (PJC) Inc., Term Loan B, 6.38-6.50%, 7/30/11 ......................................................... Canada 3,620,826 3,665,805 Neiman Marcus Group Inc., Term Loan, 6.48%, 4/06/13 ................. United States 1,300,000 1,308,450 The William Carter Co., Term Loan B, 5.65-5.81%, 7/14/12 ............ United States 2,075,063 2,102,947 --------------- 7,077,202 --------------- TECHNOLOGY SERVICES 0.3% Sungard Data Systems Inc., Term Loan, 6.28%, 2/11/13 ................ United States 4,279,275 4,304,236 --------------- TOTAL SENIOR FLOATING RATE INTERESTS (COST $91,390,997) ............. 91,543,567 --------------- BONDS 38.7% COMMERCIAL SERVICES 1.1% JohnsonDiversey Holdings Inc., senior disc. note, zero cpn. to 5/17/07, 10.67% thereafter, 5/15/13 ............................. United States 1,800,000 1,305,000 JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 .......... United States 3,500,000 3,482,500 Lamar Media Corp., senior sub. note, 7.25%, 1/01/13 ................. United States 5,000,000 5,212,500 (h) R. R. Donnelley & Sons Co., 144A, 5.50%, 5/15/15 .................... United States 5,000,000 4,850,325 --------------- 14,850,325 ---------------
Semiannual Report | 21 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN STRATEGIC INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - ----------------------------------------------------------------------------------------------------------------------------------- BONDS (CONT.) COMMUNICATIONS 4.2% Dobson Cellular Systems Inc., senior secured note, 9.875%, 11/01/12 ...... United States 5,000,000 $ 5,425,000 Inmarsat Finance PLC, senior note, 7.625%, 6/30/12 ....................... United Kingdom 2,587,000 2,629,039 Inmarsat Finance PLC, senior note, zero cpn. to 11/15/08, 1,233,750 10.375% thereafter, 11/15/12 ......................................... United Kingdom 1,500,000 (h) Intelsat Bermuda Ltd., senior note, 144A, 8.25%, 1/15/13 ................. Bermuda 6,000,000 6,015,000 MCI Inc., senior note, 6.908%, 5/01/07 ...................................................... United States 1,385,000 1,402,312 7.688%, 5/01/09 ...................................................... United States 2,000,000 2,077,500 8.735%, 5/01/14 ...................................................... United States 1,187,000 1,317,570 Millicom International Cellular SA, senior note, 10.00%, 12/01/13 ............................................................. Luxembourg 5,500,000 5,692,500 Nextel Communications Inc., senior note, D, 7.375%, 8/01/15 .............. United States 5,500,000 5,826,260 Qwest Communications International Inc., senior note, 7.50% 2/15/14 ...... United States 1,000,000 962,500 (h) 144A, 7.50%, 2/15/14 ................................................. United States 7,000,000 6,737,500 Rogers Wireless Communications Inc., senior secured note, 7.25%, 12/15/12 ...................................................... Canada 5,500,000 5,802,500 Time Warner Telecom Holdings Inc., senior note, 9.25%, 2/15/14 ........... United States 3,000,000 3,015,000 Verizon New York Inc., B, 7.375%, 4/01/32 ................................................... United States 1,000,000 1,020,458 senior deb., A, 6.875%, 4/01/12 ...................................... United States 5,500,000 5,698,242 ------------- 54,855,131 ------------- CONSUMER DURABLES 1.7% D.R. Horton Inc., senior note, 8.50%, 4/15/12 ............................ United States 6,000,000 6,465,678 General Motors Acceptance Corp., 7.25%, 3/02/11 ....................................................... United States 4,500,000 4,431,010 6.875%, 8/28/12 ...................................................... United States 2,500,000 2,411,468 General Motors Corp., senior deb., 8.25%, 7/15/23 ........................ United States 2,000,000 1,485,000 Simmons Co., senior sub. note, 7.875%, 1/15/14 ........................... United States 4,000,000 3,550,000 William Lyon Homes Inc., senior note, 7.625%, 12/15/12 ................... United States 4,500,000 4,027,500 ------------- 22,370,656 ------------- CONSUMER NON-DURABLES 1.1% Smithfield Foods Inc., senior note, 7.00%, 8/01/11 ....................................................... United States 2,800,000 2,856,000 7.75%, 5/15/13 ....................................................... United States 2,700,000 2,855,250 Spectrum Brands Inc., senior sub. note, 7.375%, 2/01/15 .................. United States 6,000,000 5,212,500 Tyson Foods Inc., senior note, 8.25%, 10/01/11 ........................... United States 3,000,000 3,386,601 ------------- 14,310,351 ------------- CONSUMER SERVICES 9.2% (i) Adelphia Communications Corp., senior note, 10.875%, 10/01/10 ............ United States 3,000,000 1,965,000 Advanstar Communications Inc., senior secured note, 4,450,000 10.75%, 8/15/10 ...................................................... United States 4,000,000 AMC Entertainment Inc., senior sub. note, 9.875%, 2/01/12 ................ United States 5,000,000 4,800,000 Boyd Gaming Corp., senior sub. note, 6.75%, 4/15/14 ...................... United States 5,500,000 5,451,875
22 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN STRATEGIC INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - ----------------------------------------------------------------------------------------------------------------------------------- BONDS (CONT.) CONSUMER SERVICES (CONT.) Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 ................ United States 2,500,000 $ 2,400,000 (h) CCH I Holdings LLC, senior disc. note, 144A, 9.92%, 4/01/14 .............. United States 750,000 487,500 (h) CCH I LLC, senior secured note, 144A, 11.00%, 10/01/15 ................... United States 750,000 682,500 CCH II LLC, senior note, 10.25%, 9/15/10 ................................. United States 5,500,000 5,541,250 Clear Channel Communications Inc., senior note, 5.75%, 1/15/13 ........... United States 6,000,000 5,812,698 Comcast Corp., 5.65%, 6/15/35 ............................................ United States 6,000,000 5,383,368 CSC Holdings Inc., senior deb., 7.625%, 7/15/18 .......................... United States 3,500,000 3,360,000 Dex Media East LLC, senior sub. note, B, 12.125%, 11/15/12 ............... United States 1,321,000 1,548,873 Dex Media West LLC, senior sub. note, 9.875%, 8/15/13 .................... United States 4,000,000 4,430,000 DIRECTV Holdings LLC, senior note, 8.375%, 3/15/13 ...................................................... United States 2,585,000 2,811,187 (h) 144A, 6.375%, 6/15/15 ................................................ United States 2,000,000 1,972,500 EchoStar DBS Corp., senior note, 6.375%, 10/01/11 ........................ United States 6,000,000 5,865,000 Emmis Operating Co., senior sub. note, 6.875%, 5/15/12 ................... United States 4,500,000 4,466,250 Harrah's Operating Co. Inc., senior note, 5.50%, 7/01/10 ................. United States 6,000,000 5,964,276 Interactive Corp., 7.00%, 1/15/13 ........................................ United States 4,500,000 4,618,485 Liberty Media Corp., senior note, 5.70%, 5/15/13 ......................... United States 6,000,000 5,442,654 (h) Lighthouse International Co. SA, senior note, 144A, 8.00%, 4/30/14 ....... Italy 4,500,000 EUR 5,684,338 LIN Television Corp., senior sub. note, 6.50%, 5/15/13 ................... United States 5,500,000 5,238,750 (h) MGM Mirage Inc., senior note, 144A, 6.625%, 7/15/15 ...................... United States 6,500,000 6,337,500 News America Inc., 5.30%, 12/15/14 ....................................... United States 6,000,000 5,886,684 Pinnacle Entertainment Inc., senior sub. note, 8.75%, 10/01/13 ........... United States 5,000,000 5,143,750 Quebecor Media Inc., senior disc. note, zero cpn. to 7/15/06, 13.75% thereafter, 7/15/11 ........................................... Canada 3,000,000 3,067,500 Royal Caribbean Cruises Ltd., senior deb., 7.25%, 3/15/18 ................ United States 6,000,000 6,270,000 Station Casinos Inc., senior note, 6.00%, 4/01/12 .......................................... United States 1,200,000 1,185,000 senior sub. note, 6.50%, 2/01/14 ..................................... United States 1,000,000 1,002,500 senior sub. note, 6.875%, 3/01/16 .................................... United States 3,800,000 3,847,500 ------------- 121,116,938 ------------- ELECTRONIC TECHNOLOGY 1.4% Flextronics International Ltd., senior sub. note, 6.50%, 5/15/13 ....................................................... Singapore 900,000 906,750 6.25%, 11/15/14 ...................................................... Singapore 4,600,000 4,485,000 L-3 Communications Corp., senior sub. note, 5.875%, 1/15/15 ...................................................... United States 5,500,000 5,252,500 (h) 144A, 6.375%, 10/15/15 ............................................... United States 500,000 496,250 Sanmina-SCI Corp., senior sub. note, 6.75%, 3/01/13 ...................... United States 4,000,000 3,760,000 Xerox Corp., senior note, 7.125%, 6/15/10 ................................ United States 4,000,000 4,180,000 ------------- 19,080,500 ------------- ENERGY MINERALS 2.2% Chesapeake Energy Corp., senior note, 6.25%, 1/15/18 ..................... United States 6,000,000 5,850,000 Kerr-McGee Corp., 6.95%, 7/01/24 ......................................... United States 5,000,000 5,142,970 (h) Markwest Energy Partners LP, senior note, 144A, 6.875%, 11/01/14 ......... United States 4,500,000 4,342,500 Peabody Energy Corp., senior note, B, 6.875%, 3/15/13 .................... United States 4,000,000 4,150,000
Semiannual Report | 23 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN STRATEGIC INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - ------------------------------------------------------------------------------------------------------------------------------------ BONDS (CONT.) ENERGY MINERALS (CONT.) Plains Exploration & Production Co., senior note, 7.125%, 6/15/14 ................................................................ United States 5,500,000 $ 5,733,750 (h) Pogo Producing Co., senior sub. note, 144A, 6.875%, 10/01/17 ............................................................... United States 3,900,000 3,880,500 ------------ 29,099,720 ------------ FINANCE 0.7% JP Morgan Chase & Co., sub. note, 5.75%, 1/02/13 .......................... United States 5,000,000 5,143,685 (h) Lazard Group LLC, 144A, 7.125%, 5/15/15 ................................... United States 4,000,000 3,901,504 ------------ 9,045,189 ------------ HEALTH SERVICES 1.8% DaVita Inc., senior sub. note, 7.25%, 3/15/15 ............................. United States 5,500,000 5,582,500 Fresenius Medical Care Capital Trust II, 7.875%, 2/01/08 .................. Germany 5,500,000 5,706,250 Tenet Healthcare Corp., senior note, 6.375%, 12/01/11 ..................... United States 5,500,000 4,826,250 United Surgical Partners International Inc., senior sub. note, 10.00%, 12/15/11 ....................................................... United States 3,000,000 3,255,000 Vanguard Health Holding Co. II LLC, senior sub. note, 9.00%, 10/01/14 ............................................................... United States 4,500,000 4,713,750 ------------ 24,083,750 ------------ INDUSTRIAL SERVICES 0.9% Allied Waste North America Inc., senior secured note, 6.50%, 11/15/10 ........................................................ United States 2,900,000 2,827,500 B, 5.75%, 2/15/11 ...................................................... United States 1,600,000 1,500,000 (h) Grant Prideco Inc., senior note, 144A, 6.125%, 8/15/15 .................... United States 3,000,000 3,022,500 Hanover Equipment Trust 01, senior secured note, B, 8.75%, 9/01/11 ................................................................ United States 4,000,000 4,260,000 ------------ 11,610,000 ------------ NON-ENERGY MINERALS 0.7% (h) Glencore Funding LLC, 144A, 6.00%, 4/15/14 ................................ Switzerland 4,000,000 3,690,452 (h) Novelis Inc., senior note, 144A, 7.25%, 2/15/15 ........................... Canada 6,000,000 5,505,000 ------------ 9,195,452 ------------ PROCESS INDUSTRIES 4.1% Abitibi-Consolidated Inc., senior note, 8.375%, 4/01/15 ................... Canada 5,500,000 5,087,500 BCP Crystal Holdings Corp., senior sub. note, 9.625%, 6/15/14 ............. United States 6,000,000 6,630,000 Crown European Holdings SA, senior secured note, 10.875%, 3/01/13 . ............................................................. France 5,000,000 5,887,500 Georgia-Pacific Corp., senior note, 9.375%, 2/01/13 ....................... United States 5,500,000 6,091,250 JSG Funding PLC, senior sub. note, 7.75%, 4/01/15 ......................... Ireland 5,000,000 4,025,000 Nalco Co., senior sub. note, 8.875%, 11/15/13 ............................. United States 6,000,000 6,157,500 Owens-Brockway Glass Container Inc., senior note, 6.75%, 12/01/14 ............................................................... United States 6,000,000 5,670,000 Rhodia SA, senior note, 10.25%, 6/01/10 ................................... France 5,500,000 5,885,000 (h) RPM UK GP, 144A, 6.70%, 11/01/15 .......................................... United States 5,000,000 4,997,960 Stone Container Corp., senior note, 8.375%, 7/01/12 ....................... United States 4,000,000 3,840,000 ------------ 54,271,710 ------------
24 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN STRATEGIC INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - ------------------------------------------------------------------------------------------------------------------------------------ BONDS (CONT.) PRODUCER MANUFACTURING 3.0% Case New Holland Inc., senior note, 9.25%, 8/01/11 ........................ United States 6,000,000 $ 6,345,000 (h) Commercial Vehicle Group Inc., senior note, 144A, 8.00%, 7/01/13 ................................................................ United States 4,500,000 4,432,500 Cummins Inc., senior note, 9.50%, 12/01/10 ................................ United States 2,000,000 2,145,000 (h) Invensys PLC, senior note, 144A, 9.875%, 3/15/11 .......................... United Kingdom 4,500,000 4,342,500 Fimep SA, senior note, 10.50%, 2/15/13 . .................................. France 4,500,000 5,118,750 Milacron Escrow Corp., senior secured note, 11.50%, 5/15/11 ............... United States 3,000,000 2,580,000 (h) Nell AF Sarl, senior note, 144A 8.375%, 8/15/15 ........................... Luxembourg 4,500,000 4,342,500 Nortek Inc., senior sub. note, 8.50%, 9/01/14 ............................. United States 5,000,000 4,800,000 TRW Automotive Inc., senior note, 9.375%, 2/15/13 ......................... United States 5,500,000 5,940,000 ------------ 40,046,250 ------------ REAL ESTATE DEVELOPMENT 0.7% EOP Operating LP, 4.75%, 3/15/14 .......................................... United States 5,000,000 4,729,130 Forest City Enterprises Inc., senior note, 7.625%, 6/01/15 ................ United States 4,000,000 4,200,000 ------------ 8,929,130 ------------ REAL ESTATE INVESTMENT TRUSTS 0.5% Host Marriott LP, senior note, 7.00%, 8/15/12 ......................................................... United States 2,000,000 2,025,000 7.125%, 11/01/13 ....................................................... United States 4,000,000 4,075,000 ------------ 6,100,000 ------------ RETAIL TRADE 0.7% (h) GSC Holdings Corp., 144A, 8.00%, 10/01/12 ................................. United States 5,000,000 4,887,500 Rite Aid Corp., senior note, 9.25%, 6/01/13 ............................... United States 5,000,000 4,675,000 ------------ 9,562,500 ------------ TECHNOLOGY SERVICES 0.7% (h) SunGard Data Systems Inc., senior note, 144A, 9.125%, 8/15/13 ..................................... United States 3,000,000 3,060,000 senior sub. note, 144A, 10.25%, 8/15/15 ................................ United States 1,800,000 1,793,250 UGS Corp., senior sub. note, 10.00%, 6/01/12 .............................. United States 4,000,000 4,390,000 ------------ 9,243,250 ------------ TRANSPORTATION 0.3% CP Ships Ltd., senior note, 10.375%, 7/15/12 .............................. Canada 3,700,000 4,199,500 ------------ UTILITIES 3.7% (h) Allegheny Energy Supply Co. LLC, 144A, 8.25%, 4/15/12 ..................... United States 5,500,000 6,105,000 Aquila Inc., senior note, 9.95%, 2/01/11 .................................. United States 4,000,000 4,430,000 (h) Calpine Corp., senior secured note, 144A, 8.50%, 7/15/10 .................. United States 7,000,000 4,935,000 (h) Dynegy Holdings Inc., senior secured note, 144A, 10.125%, 7/15/13 ................................................................ United States 5,500,000 6,077,500 El Paso Corp., senior note, 7.875%, 6/15/12 ............................... United States 3,500,000 3,587,500 El Paso Natural Gas Co., senior note, A, 7.625%, 8/01/10 .................. United States 4,500,000 4,744,917 Midwest Generation LLC, senior secured note, 8.75%, 5/01/34 ............... United States 4,000,000 4,400,000 Pacific Gas & Electric Co., first mortgage, 4.20%, 3/01/11 ................ United States 3,000,000 2,858,811 (h) Texas Genco LLC, senior note, 144A, 6.875%, 12/15/14 ...................... United States 5,500,000 5,912,500 TXU Corp., 5.55%, 11/15/14 ................................................ United States 6,000,000 5,545,320 ------------ 48,596,548 ------------ TOTAL BONDS (COST $512,969,944) ........................................ 510,566,900 ------------
Semiannual Report | 25 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN STRATEGIC INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - ------------------------------------------------------------------------------------------------------------------------------------ CONVERTIBLE BONDS 0.4% ELECTRONIC TECHNOLOGY 0.4% Fairchild Semiconductor Corp., cvt., 5.00%, 11/01/08 ....................... United States 2,000,000 $ 1,970,000 Liberty Media Corp. into Motorola, cvt., senior deb., 3.50%, 1/15/31 ................................................................. United States 3,000,000 2,925,000 ----------- TOTAL CONVERTIBLE BONDS (COST $4,533,853) .................................. 4,895,000 ----------- ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES 2.5% FINANCE 2.5% Countrywide Asset-Backed Certificates, 2004-7, AF4, 4.774%, 8/25/32 ............................................ United States 725,000 721,014 2005-11, AF4, 5.21%, 3/25/34 ............................................ United States 2,800,000 2,760,830 2005-12, 2A5, 5.245%, 1/25/36 ........................................... United States 5,000,000 4,908,811 GE Capital Commercial Mortgage Corp., 2003-CI, A4, 4.819%, 1/10/38 ................................................................. United States 1,827,831 1,781,580 JP Morgan Chase Commercial Mortgage Sec Corp., 2004-CB9, A4, 5.56%, 6/12/41 ............................................ United States 8,871,306 8,999,382 2004-LN2, A2, 5.115%, 7/15/41 ........................................... United States 807,292 796,877 (h) Keystone Owner Trust, 1997-P3, M2, 144A, 7.98%, 12/25/24 ................... United States 220,435 219,744 (h) Morgan Stanley Auto Loan Trust, 2003-HB1, D, 144A, 5.50%, 4/15/11 ................................................................. United States 409,899 407,126 Morgan Stanley Capital I, 2004-IQ7, A4, 5.57%, 6/15/38 ..................... United States 7,000,000 7,093,063 Popular ABS Mortgage Pass-Through Trust, 2005-3, AF6, 4.759%, 7/25/35 ................................................................. United States 1,500,000 1,457,267 Residential Asset Securities Corp., 1999-KS1, AI8, 6.32%, 4/25/30 ........................................... United States 281,599 280,924 2004-KS1, AI4, 4.213%, 4/25/32 .......................................... United States 750,000 740,366 Residential Funding Mortgage Securities II, 2005-HI1, A4, 4.70%, 8/25/34 ................................................................. United States 1,400,000 1,366,986 Wells Fargo Home Equity Trust, 2004-2, AI5, 4.89%, 11/25/28 ................................................................ United States 1,730,000 1,703,095 ----------- TOTAL ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (COST $34,043,064) .............................................. 33,237,065 ----------- MORTGAGE-BACKED SECURITIES 9.5% (e) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 0.1% FHLMC, 4.679%, 1/01/33 ..................................................... United States 1,020,572 1,019,444 ----------- FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 4.0% FHLMC Gold 15 Year, 4.50%, 10/01/18 - 9/01/19 .............................. United States 9,083,273 8,799,526 FHLMC Gold 15 Year, 5.00%, 12/01/17 - 9/01/19 .............................. United States 9,977,657 9,849,748 FHLMC Gold 15 Year, 5.50%, 7/01/17 - 2/01/19 ............................... United States 1,901,228 1,914,522 FHLMC Gold 15 Year, 6.50%, 4/01/11 ......................................... United States 1,762 1,817 FHLMC Gold 15 Year, 7.00%, 1/01/09 - 9/01/11 ............................... United States 3,182 3,306 FHLMC Gold 30 Year, 5.00%, 3/01/34 - 8/01/35 ............................... United States 13,129,814 12,654,387 FHLMC Gold 30 Year, 5.50%, 6/01/33 - 10/01/35 .............................. United States 10,503,457 10,377,566 FHLMC Gold 30 Year, 6.00%, 6/01/33 - 7/01/35 ............................... United States 7,737,845 7,820,251 FHLMC Gold 30 Year, 6.50%, 10/01/21 - 5/01/31 .............................. United States 678,905 699,799 FHLMC Gold 30 Year, 7.00%, 9/01/21 - 8/01/32 ............................... United States 427,115 446,518 FHLMC Gold 30 Year, 7.50%, 4/01/24 - 1/01/31 ............................... United States 82,164 86,935
26 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN STRATEGIC INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - ------------------------------------------------------------------------------------------------------------------------------------ MORTGAGE-BACKED SECURITIES (CONT.) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE (CONT.) FHLMC Gold 30 Year, 8.00%, 11/01/25 - 1/01/26 .............................. United States 2,318 $ 2,475 FHLMC Gold 30 Year, 9.00%, 12/01/24 ........................................ United States 729 802 ----------- 52,657,652 ----------- (e) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 0.3% FNMA, 4.491%, 4/01/20 ...................................................... United States 618,055 605,587 FNMA, 4.633%, 12/01/34 ..................................................... United States 3,478,184 3,437,966 ----------- 4,043,553 ----------- FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 3.7% FNMA 15 Year, 4.50%, 3/01/20 ............................................... United States 2,057,193 1,990,785 FNMA 15 Year, 5.00%, 1/01/18 - 6/01/18 ..................................... United States 3,083,425 3,045,404 FNMA 15 Year, 5.50%, 3/01/14 - 6/01/14 ..................................... United States 519,774 524,172 FNMA 15 Year, 6.00%, 4/01/13 - 10/01/16 .................................... United States 435,538 445,775 FNMA 15 Year, 6.50%, 2/01/09 - 6/01/13 ..................................... United States 52,419 54,177 FNMA 15 Year, 7.50%, 10/01/07 - 12/01/28 ................................... United States 44,030 46,447 FNMA 30 Year, 5.00%, 4/01/34 - 10/01/35 .................................... United States 3,378,136 3,257,732 (f) FNMA 30 Year, 5.50%, 9/01/33 - 9/01/35 ..................................... United States 30,698,507 30,306,871 FNMA 30 Year, 6.00%, 6/01/34 - 12/01/34 .................................... United States 5,791,087 5,844,041 FNMA 30 Year, 6.50%, 1/01/24 - 8/01/32 ..................................... United States 2,430,403 2,501,053 FNMA 30 Year, 7.00%, 1/01/26 - 7/01/32 ..................................... United States 542,282 568,098 FNMA 30 Year, 7.50%, 10/01/26 - 10/01/29 ................................... United States 69,715 73,690 FNMA 30 Year, 8.00%, 1/01/25 - 1/01/27 ..................................... United States 36,059 38,585 FNMA 30 Year, 8.50%, 7/01/25 ............................................... United States 1,923 2,092 FNMA 30 Year, 9.00%, 5/01/25 ............................................... United States 1,719 1,889 ----------- 48,700,811 ----------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 1.4% GNMA I SF 15 Year, 7.00%, 7/15/08 .......................................... United States 103,715 106,698 GNMA I SF 30 Year, 5.00%, 6/15/34 - 7/15/34 ................................ United States 2,134,286 2,083,913 GNMA I SF 30 Year, 5.50%, 2/15/33 - 9/15/34 ................................ United States 6,167,058 6,163,448 GNMA I SF 30 Year, 6.00%, 1/15/33 .......................................... United States 611,686 622,714 GNMA I SF 30 Year, 6.50%, 3/15/24 - 3/15/32 ................................ United States 594,357 617,214 GNMA I SF 30 Year, 7.00%, 11/15/27 - 5/15/28 ............................... United States 60,709 63,952 GNMA I SF 30 Year, 7.50%, 9/15/23 - 5/15/27 ................................ United States 42,249 44,842 GNMA I SF 30 Year, 8.00%, 2/15/25 - 9/15/27 ................................ United States 36,847 39,443 GNMA I SF 30 Year, 8.50%, 8/15/24 .......................................... United States 411 451 GNMA I SF 30 Year, 9.00%, 1/15/25 .......................................... United States 970 1,068 GNMA I SF 30 Year, 9.50%, 6/15/25 .......................................... United States 759 848 GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33 .............................. United States 2,929,337 2,854,896 GNMA II SF 30 Year, 5.50%, 6/20/34 ......................................... United States 1,617,566 1,613,504 GNMA II SF 30 Year, 6.00%, 11/20/34 ........................................ United States 1,612,326 1,637,812 GNMA II SF 30 Year, 6.50%, 7/20/28 - 12/20/31 .............................. United States 828,097 854,790 GNMA II SF 30 Year, 7.00%, 1/20/33 ......................................... United States 814,098 851,783 GNMA II SF 30 Year, 7.50%, 8/20/16 - 4/20/32 ............................... United States 413,058 435,832 ----------- 17,993,208 ----------- TOTAL MORTGAGE-BACKED SECURITIES (COST $126,794,518) ....................... 124,414,668 -----------
Semiannual Report | 27 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------- FRANKLIN STRATEGIC INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - ----------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT AND AGENCY SECURITIES 7.6% GOVERNMENT BONDS 7.6% FNMA, 3.00%, 8/17/07 .............................. United States 2,500,000 $ 2,431,200 3.25%, 1/15/08 .............................. United States 2,100,000 2,038,882 4.25%, 5/15/09 .............................. United States 400,000 394,763 4.375%, 3/15/13 ............................. United States 2,600,000 2,522,952 4.375%, 10/15/15 ............................ United States 1,900,000 1,817,122 5.00%, 4/15/15 .............................. United States 600,000 603,105 5.25%, 1/15/09 .............................. United States 7,100,000 7,226,756 5.50%, 3/15/11 .............................. United States 300,000 309,555 6.625%, 11/15/10 ............................ United States 1,850,000 1,998,161 FHLMC, 4.375%, 7/17/15 ............................. United States 4,300,000 4,123,029 4.875%, 11/15/13 ............................ United States 500,000 499,922 6.00%, 6/15/11 .............................. United States 4,900,000 5,183,401 U.S. Treasury Bond, 4.875%, 2/15/12 ............................. United States 4,000,000 4,080,784 6.88%, 8/15/25 .............................. United States 4,350,000 5,470,808 7.50%, 11/15/16 ............................. United States 7,600,000 9,433,204 U.S. Treasury Note, 2.375%, 8/15/06 ............................. United States 2,000,000 1,970,470 3.00%, 12/31/06 ............................. United States 2,000,000 1,969,064 3.00%, 11/15/07 ............................. United States 5,500,000 5,355,196 3.00%, 2/15/08 .............................. United States 3,500,000 3,395,140 3.125%, 5/15/07 ............................. United States 4,500,000 4,417,560 3.375%, 10/15/09 ............................ United States 500,000 480,781 3.50%, 12/15/09 ............................. United States 4,500,000 4,340,043 4.00%, 4/15/10 .............................. United States 1,100,000 1,079,289 4.00%, 11/15/12 ............................. United States 1,850,000 1,793,490 4.00%, 2/15/15 .............................. United States 1,800,000 1,721,743 4.125%, 8/15/10 ............................. United States 2,900,000 2,856,955 4.125%, 5/15/15 ............................. United States 2,600,000 2,509,814 4.25%, 8/15/13 .............................. United States 5,700,000 5,591,569 4.25%, 11/15/13 ............................. United States 7,000,000 6,857,543 4.375%, 8/15/12 ............................. United States 2,600,000 2,579,385 5.00%, 8/15/11 .............................. United States 2,100,000 2,155,127 5.625%, 5/15/08 ............................. United States 3,000,000 3,088,008 -------------- TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $102,634,300) ............................ 100,294,866 -------------- FOREIGN GOVERNMENT AND AGENCY SECURITIES 29.4% (e,j) Government of Argentina, FRN, 4.005%, 8/03/12 .. Argentina 38,678,000 30,283,441 Government of Austria, 4.00%, 7/15/09 .............................. Austria 520,000 EUR 647,970 4.65%, 1/15/18 .............................. Austria 1,500,000 EUR 2,000,240 5.00%, 7/15/12 .............................. Austria 190,000 EUR 252,730 Government of Belgium, 4.75%, 9/28/06 .............................. Belgium 260,000 EUR 318,021 5.00%, 9/28/12 .............................. Belgium 970,000 EUR 1,292,151
28 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------- FRANKLIN STRATEGIC INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - --------------------------------------------------------------------------------------------------------- FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONT.) Government of Brazil, 8.00%, 1/15/18 .............................. Brazil 4,900,000 $ 5,027,400 (e) FRN, 5.25%, 4/15/12 ..................... Brazil 6,958,952 6,791,520 (e) RG, FRN, 5.25%, 4/15/12 ................. Brazil 4,718,322 4,614,991 Government of Canada, 3.00%, 6/01/06 .............................. Canada 11,580,000 CAD 9,782,740 3.25%, 12/01/06 ............................. Canada 17,030,000 CAD 14,374,338 5.25%, 6/01/12 .............................. Canada 250,000 CAD 226,834 6.00%, 6/01/11 .............................. Canada 593,000 CAD 553,380 Government of Finland, 5.00%, 7/04/07 .............................. Finland 830,000 EUR 1,033,938 5.75%, 2/23/11 .............................. Finland 150,000 EUR 203,585 Government of France, 4.00%, 4/25/13 ........... France 2,000,000 EUR 2,519,868 Government of Germany, 3.75%, 1/04/09 .............................. Germany 1,380,000 EUR 1,701,427 4.50%, 7/04/09 .............................. Germany 1,674,000 EUR 2,119,290 Government of the Hellenic Republic, 4.65%, 4/19/07 .............................. Greece 50,000 EUR 61,650 6.50%, 10/22/19 ............................. Greece 420,000 EUR 650,617 Government of Indonesia, 10.00%, 7/15/17 ............................. Indonesia 10,200,000,000 IDR 750,704 11.00%, 10/15/14 ............................ Indonesia 4,500,000,000 IDR 366,537 13.15%, 3/15/10 ............................. Indonesia 33,725,000,000 IDR 3,268,819 13.15%, 1/15/12 ............................. Indonesia 17,300,000,000 IDR 1,632,156 14.00%, 6/15/09 ............................. Indonesia 23,150,000,000 IDR 2,311,889 14.25%, 6/15/13 ............................. Indonesia 63,035,000,000 IDR 6,237,616 14.275%, 12/15/13 ........................... Indonesia 28,415,000,000 IDR 2,808,038 Government of Italy, 5.00%, 5/01/08 .............................. Italy 337,000 EUR 425,916 4.50%, 5/01/09 .............................. Italy 230,000 EUR 290,505 Government of Korea, 3.75%, 9/10/07 .............................. South Korea 7,990,000,000 KRW 7,503,521 4.50%, 3/05/06 .............................. South Korea 5,700,000,000 KRW 5,471,569 4.50%, 9/03/06 .............................. South Korea 2,000,000,000 KRW 1,917,536 4.50%, 9/09/08 .............................. South Korea 2,675,000,000 KRW 2,532,185 4.75%, 3/12/08 .............................. South Korea 15,130,000,000 KRW 14,438,034 6.90%, 1/16/07 .............................. South Korea 1,000,000,000 KRW 983,660 Government of Malaysia, 4.032%, 9/15/09 ............................. Malaysia 14,100,000 MYR 3,815,213 4.305%, 2/27/09 ............................. Malaysia 53,510,000 MYR 14,582,361 Government of Mexico, 8.375%, 1/14/11 ............................. Mexico 3,720,000 4,229,640 (e) FRN, 4.830%, 1/13/09 .................... Mexico 2,230,000 2,266,795 Government of the Netherlands, 3.75%, 7/15/09 .............................. Netherlands 170,000 EUR 210,126 4.25%, 7/15/13 .............................. Netherlands 150,000 EUR 191,851 5.00%, 7/15/12 .............................. Netherlands 220,000 EUR 292,432 5.75%, 2/15/07 .............................. Netherlands 210,000 EUR 261,783 8.50%, 6/01/06 .............................. Netherlands 1,619,707 EUR 2,008,130
Semiannual Report | 29 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN STRATEGIC INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - ----------------------------------------------------------------------------------------------------------------------------------- FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONT.) Government of New Zealand, 6.00%, 11/15/11 ................................................. New Zealand 2,691,000 NZD $ 1,884,080 6.50%, 2/15/06 .................................................. New Zealand 1,060,000 NZD 741,232 6.50%, 4/15/13 .................................................. New Zealand 7,590,000 NZD 5,478,170 7.00%, 7/15/09 .................................................. New Zealand 13,410,000 NZD 9,653,394 Government of Norway, 6.75%, 1/15/07 ............................... Norway 143,600,000 NOK 23,080,592 Government of Peru, 7.84%, 8/12/20 .................................................. Peru 1,130,000 PEN 334,038 Series 7, 8.60%, 8/12/17 ........................................ Peru 28,805,000 PEN 9,075,751 Government of the Philippines, 9.00%, 2/15/13 .................................................. Philippines 10,430,000 11,081,875 9.875%, 3/16/10 ................................................. Philippines 1,500,000 1,666,575 Government of Poland, 5.75%, 9/23/22 .................................................. Poland 14,000,000 PLN 4,424,282 6.00%, 5/24/09 .................................................. Poland 44,600,000 PLN 13,946,220 6.25%, 10/24/15 ................................................. Poland 17,100,000 PLN 5,549,173 8.50%, 11/12/06 ................................................. Poland 8,500,000 PLN 2,670,629 8.50%, 5/12/07 .................................................. Poland 7,900,000 PLN 2,519,185 Government of Russia, Reg S, 5.00% to 3/31/07, 7.50% thereafter, 3/31/30 ......................................................... Russia 5,838,000 6,503,748 Government of Singapore, 4.00%, 3/01/07 ............................ Singapore 24,900,000 SGD 15,011,592 Government of Slovakia, 4.80%, 4/14/09 .................................................. Slovak Republic 63,500,000 SKK 2,042,306 4.90%, 2/11/14 .................................................. Slovak Republic 12,900,000 SKK 434,132 5.30%, 5/12/19 .................................................. Slovak Republic 91,900,000 SKK 3,273,532 7.50%, 3/13/12 .................................................. Slovak Republic 96,000,000 SKK 3,630,297 (k) Strip, 1/14/07 .................................................. Slovak Republic 301,600,000 SKK 8,915,579 Government of Spain, 5.00%, 7/30/12 .................................................. Spain 1,670,000 EUR 2,220,928 5.15%, 7/30/09 .................................................. Spain 590,000 EUR 763,897 Government of Sweden, 3.50%, 4/20/06 .................................................. Sweden 35,000,000 SEK 4,432,482 5.00%, 1/28/09 .................................................. Sweden 45,000,000 SEK 6,056,535 5.50%, 10/08/12 ................................................. Sweden 24,960,000 SEK 3,597,208 8.00%, 8/15/07 .................................................. Sweden 55,300,000 SEK 7,634,433 (k) Strip, 9/20/06 .................................................. Sweden 11,125,000 SEK 1,372,505 Government of Thailand, 4.125%, 2/12/08 ................................................. Thailand 51,000,000 THB 1,222,424 8.00%, 12/08/06 ................................................. Thailand 244,700,000 THB 6,262,712 8.50%, 12/08/08 ................................................. Thailand 41,000,000 THB 1,089,031
30 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN STRATEGIC INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - ----------------------------------------------------------------------------------------------------------------------------------- FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONT.) Government of Ukraine, (e) FRN, 7.343%, 8/05/09 ........................................ Ukraine 5,550,000 $ 6,004,545 (h) 144A, 6.875%, 3/04/11 ....................................... Ukraine 2,200,000 2,274,470 (h) 144A, 7.65%, 6/11/13 ........................................ Ukraine 9,290,000 9,986,750 Government of Venezuela, 9.25%, 9/15/27 .................................................. Venezuela 2,326,000 2,713,278 10.75%, 9/19/13 ................................................. Venezuela 700,000 855,750 (e) FRN, 5.194%, 4/20/11 ........................................... Venezuela 19,480,000 19,255,980 New South Wales Treasury Corp., 6.00%, 5/01/12 .................................................. Australia 640,000 AUD 487,364 6.50%, 5/01/06 .................................................. Australia 6,350,000 AUD 4,773,865 8.00%, 3/01/08 .................................................. Australia 4,910,000 AUD 3,864,932 Queensland Treasury Corp., 6.00%, 7/14/09 ......................................................... Australia 3,120,000 AUD 2,373,108 8/14/13 ......................................................... Australia 3,530,000 AUD 2,701,217 10/14/15 ........................................................ Australia 3,665,000 AUD 2,801,176 --------------- TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $371,054,518) ................................................ 387,914,119 --------------- TOTAL LONG TERM INVESTMENTS (COST $1,254,396,739) .................. 1,263,043,990 --------------- SHORT TERM INVESTMENTS 3.8% FOREIGN GOVERNMENT SECURITIES 1.4% (k) Norway Treasury Bill, 12/21/05 ..................................... Norway 13,100,000 NOK 2,007,412 (k) Thailand Treasury Bill, 5/18/06 .................................... Thailand 70,100,000 THB 1,688,124 (k) Thailand Treasury Bill, 6/01/06 .................................... Thailand 85,000,000 THB 2,046,524 (k) Thailand Treasury Bill, 7/27/06 .................................... Thailand 20,100,000 THB 478,102 (k) Thailand Treasury Bill, 9/07/06 .................................... Thailand 19,600,000 THB 465,076 (k) Thailand Treasury Bill, 10/05/06 ................................... Thailand 177,000,000 THB 4,196,697 (k) Thailand Treasury Bill, 10/12/06 ................................... Thailand 295,000,000 THB 6,973,039 --------------- TOTAL FOREIGN GOVERNMENT SECURITIES (COST $17,994,887) ............. 17,854,974 --------------- TOTAL INVESTMENTS BEFORE MONEY FUND (COST $1,272,391,626) .......... 1,280,898,964 --------------- MONEY FUND (COST $31,557,954) 2.4% (l) Franklin Institutional Fiduciary Trust Money Market Portfolio ...... United States 31,557,954 31,557,954 --------------- TOTAL INVESTMENTS (COST $1,303,949,580) 99.6% ...................... 1,312,456,918 OTHER ASSETS, LESS LIABILITIES 0.4% ................................ 5,792,136 --------------- NET ASSETS 100.0% .................................................. $ 1,318,249,054 ===============
Semiannual Report | 31 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN STRATEGIC INCOME FUND COUNTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- SELECTED PORTFOLIO ABBREVIATIONS FHLMC - Federal Home Loan Mortgage Corporation FNMA - Federal National Mortgage Association FRN - Floating Rate Notes GNMA - Government National Mortgage Association GP - Graduated Payment SF - Single Family CURRENCY ABBREVIATIONS AUD - Australian Dollar CAD - Canadian Dollar EUR - Euro IDR - Indonesian Rupiah KRW - South Korean Won MYR - Malaysian Ringgit NOK - Norwegian Krone NZD - New Zealand Dollar PEN - Peruvian Nuevo Sol PLN - Polish Zloty SEK - Swedish Krona SGD - Singapore Dollar SKK - Slovak Koruna THB - Thai Baht
(a) Rounds to less than 0.05% of net assets. (b) Non-income producing. (c) See Note 9 regarding restricted and illiquid securities. (d) See Note 1(f) regarding senior floating rate interests. (e) The coupon rate shown represents the rate at period end. (f) See Note 1(c) regarding securities purchased on a when-issued, delayed delivery or to-be-announced basis. (g) The principal amount is stated in U.S. dollars unless otherwise indicated. (h) 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 the guidelines approved by the Trust's Board of Trustees. At October 31, 2005, the value of these securities was $121,380,169, representing 9.21% of net assets. (i) Defaulted securities. See Note 8. (j) The principal amount is stated in original face, and scheduled paydowns are reflected in the market price on ex-date. (k) A portion or all of the security is traded on a discount basis with no stated coupon rate. (l) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. 32 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES October 31, 2005 (unaudited)
--------------- FRANKLIN STRATEGIC INCOME FUND --------------- Assets: Investments in securities: Cost - Unaffiliated issuers .............................................. $ 1,272,391,626 Cost - Sweep Money Fund (Note 7) ......................................... 31,557,954 --------------- Total cost of investments ................................................ $ 1,303,949,580 =============== Value - Unaffiliated issuers ............................................. $ 1,280,898,964 Value - Sweep Money Fund (Note 7) ........................................ 31,557,954 --------------- Total value of investments ............................................... 1,312,456,918 Cash ...................................................................... 1,360,126 Receivables: Investment securities sold ............................................... 9,175,103 Capital shares sold ...................................................... 6,301,336 Dividends and interest ................................................... 20,177,221 Unrealized gain on unfunded loan commitments (Note 10) ................... 120 --------------- Total assets .......................................................... 1,349,470,824 --------------- Liabilities: Payables: Investment securities purchased .......................................... 28,153,048 Capital shares redeemed .................................................. 1,987,565 Affiliates ............................................................... 1,018,667 Accrued expenses and other liabilities .................................... 62,490 --------------- Total liabilities ..................................................... 31,221,770 --------------- Net assets, at value ................................................. $ 1,318,249,054 =============== Net assets consist of: Paid-in capital ........................................................... $ 1,342,560,041 Distributions in excess of net investment income .......................... (10,030,233) Net unrealized appreciation (depreciation) ................................ 8,442,585 Accumulated net realized gain (loss) ...................................... (22,723,339) --------------- Net assets, at value ................................................. $ 1,318,249,054 ===============
Semiannual Report | See notes to financial statements. | 33 FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) October 31, 2005 (unaudited)
--------------- FRANKLIN STRATEGIC INCOME FUND --------------- CLASS A: Net assets, at value ..................................................... $ 857,491,977 =============== Shares outstanding ....................................................... 85,086,843 =============== Net asset value per share(a) ............................................. $ 10.08 =============== Maximum offering price per share (net asset value per share / 95.75%) .... $ 10.53 =============== CLASS B: Net assets, at value ..................................................... $ 106,996,574 =============== Shares outstanding ....................................................... 10,581,788 =============== Net asset value and maximum offering price per share(a) .................. $ 10.11 =============== CLASS C: Net assets, at value ..................................................... $ 265,204,935 =============== Shares outstanding ....................................................... 26,319,367 =============== Net asset value and maximum offering price per share(a) .................. $ 10.08 =============== CLASS R: Net assets, at value ..................................................... $ 25,683,270 =============== Shares outstanding ....................................................... 2,553,503 =============== Net asset value and maximum offering price per share(a) .................. $ 10.06 =============== ADVISOR CLASS: Net assets, at value ..................................................... $ 62,872,298 =============== Shares outstanding ....................................................... 6,235,383 =============== Net asset value and maximum offering price per share(a) .................. $ 10.08 ===============
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. 34 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the six months ended October 31, 2005 (unaudited)
--------------- FRANKLIN STRATEGIC INCOME FUND --------------- Investment income: Dividends: Unaffiliated issuers .................................................. $ 277,942 Sweep Money Fund (Note 7) ............................................. 344,415 Interest ................................................................. 35,429,821 --------------- Total investment income .............................................. 36,052,178 =============== Expenses: Management fees (Note 3a) ................................................ 2,862,037 Distribution fees: (Note 3c) Class A ............................................................... 990,904 Class B ............................................................... 360,289 Class C ............................................................... 793,324 Class R ............................................................... 56,219 Transfer agent fees (Note 3e) ............................................ 772,824 Custodian fees (Note 4) .................................................. 162,974 Reports to shareholders .................................................. 35,286 Registration and filing fees ............................................. 53,540 Professional fees ........................................................ 23,850 Trustees' fees and expenses .............................................. 7,210 Other .................................................................... 20,337 --------------- Total expenses ....................................................... 6,138,794 Expense reductions (Note 4) .......................................... (3,142) --------------- Net expenses ....................................................... 6,135,652 --------------- Net investment income ............................................. 29,916,526 --------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ........................................................... 5,098,045 Foreign currency transactions ......................................... (129,183) --------------- Net realized gain (loss) .......................................... 4,968,862 --------------- Net change in unrealized appreciation (depreciation) on: Investments ....................................................... (20,516,550) Translation of assets and liabilities denominated in foreign currencies ...................................................... 11,434 --------------- Net change in unrealized appreciation (depreciation) .............. (20,505,116) --------------- Net realized and unrealized gain (loss) ..................................... (15,536,254) --------------- Net increase (decrease) in net assets resulting from operations ............. $ 14,380,272 ===============
Semiannual Report | See notes to financial statements. | 35 FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
------------------------------------- FRANKLIN STRATEGIC INCOME FUND ------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED (UNAUDITED) APRIL 30, 2005 ------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ................................. $ 29,916,526 $ 44,330,115 Net realized gain (loss) from investments and foreign currency transactions ....................... 4,968,862 18,209,639 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies .......................................... (20,505,116) (3,594,895) ------------------------------------- Net increase (decrease) in net assets resulting from operations ....................... 14,380,272 58,944,859 ------------------------------------- Distributions to shareholders from: Net investment income: Class A ............................................. (22,903,447) (33,266,053) Class B ............................................. (3,033,312) (5,990,488) Class C ............................................. (6,587,838) (10,115,425) Class R ............................................. (609,137) (717,262) Advisor Class ....................................... (1,953,349) (3,121,356) ------------------------------------- Total distributions to shareholders ...................... (35,087,083) (53,210,584) ------------------------------------- Capital share transactions: (Note 2) Class A ............................................. 174,699,143 246,992,407 Class B ............................................. (1,822,547) 17,319,970 Class C ............................................. 55,668,885 60,639,562 Class R ............................................. 8,221,734 10,425,911 Advisor Class ....................................... 3,392,991 20,476,715 ------------------------------------- Total capital share transactions ......................... 240,160,206 355,854,565 ------------------------------------- Redemption fees .......................................... 6,948 12,940 ------------------------------------- Net increase (decrease) in net assets ............. 219,460,343 361,601,780 Net assets: Beginning of period ...................................... 1,098,788,711 737,186,931 ------------------------------------- End of period ............................................ $ 1,318,249,054 $ 1,098,788,711 ===================================== Distributions in excess of net investment income: End of period ............................................ $ (10,030,233) $ (4,859,676) =====================================
36 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Strategic Series (the Trust) is registered under the Investment Company Act of 1940 as an open-end investment company, consisting of twelve separate series. The Franklin Strategic Income Fund (the Fund) included in this report is non-diversified. The financial statements of the remaining funds in the series are presented separately. The following summarizes the Fund's 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. Short-term investments are valued at cost. 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 Fund 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. Senior secured corporate loans with floating or variable interest rates generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from loan dealers and other financial institutions, 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 use independent market quotations from loan dealers or financial institutions and may incorporate valuation methodologies that consider multiple bond characteristics such as dealer quotes, issuer type, coupon, maturity, weighted average maturity, interest rate spreads and yield curves, cash flow and credit risk/quality analysis 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 Semiannual Report | 37 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) 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 Fund has 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 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. 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 Trust's Board of Trustees. 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 Fund's Board of Trustees. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. 38 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, OR TBA BASIS The Fund 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 Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. D. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it 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 Statement 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 Statement of Assets and Liabilities. E. MORTGAGE DOLLAR ROLLS The Fund enters into mortgage dollar rolls, typically on a TBA basis. Dollar rolls are agreements between the Fund and a financial institution to simultaneously sell and repurchase mortgage-backed securities at a future date. Gains or losses are realized at the time of the sale and the difference between the repurchase price and sale price is recorded as an unrealized gain to the Fund. The risks of mortgage dollar roll transactions include the potential inability of the counterparty to fulfill its obligations. F. SENIOR FLOATING RATE INTERESTS Senior secured corporate loans pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to some restrictions on resale. Semiannual Report | 39 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. INCOME TAXES No provision has been made for U.S. income taxes because the Fund's policy is to continue 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. 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 generally accepted accounting principles. 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 will reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. 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. 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 Fund and accounted for as an addition to paid-in capital. 40 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) K. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and Trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. However, based on experience, the Trust expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST The Fund offers five classes of shares: Class A, Class B, Class C, Class R, and Advisor Class. Effective March 1, 2005, Class B shares are only offered to existing Class B shareholders in the form of reinvested distributions and certain exchanges from other Franklin Templeton Class B shares. 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. At October 31, 2005, there were an unlimited number of shares authorized ($0.01 par value). Transactions in the Fund's shares were as follows:
-------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED OCTOBER 31, 2005 APRIL 30, 2005 -------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------------- CLASS A SHARES: Shares sold ....................... 27,425,568 $ 280,566,194 36,478,042 $ 377,021,568 Shares issued on reinvestment of distributions ............... 1,523,601 15,579,967 2,147,867 22,035,351 Shares redeemed ................... (11,878,563) (121,447,018) (14,854,533) (152,064,512) -------------------------------------------------------------------- Net increase (decrease) ........... 17,070,606 $ 174,699,143 23,771,376 $ 246,992,407 ==================================================================== CLASS B SHARES: Shares sold ....................... 586,181 $ 6,017,188 2,842,925 $ 29,323,374 Shares issued on reinvestment of distributions ............... 185,488 1,902,986 364,252 3,744,597 Shares redeemed ................... (950,542) (9,742,721) (1,537,872) (15,748,001) -------------------------------------------------------------------- Net increase (decrease) ........... (178,873) $ (1,822,547) 1,669,305 $ 17,319,970 ==================================================================== CLASS C SHARES: Shares sold ....................... 7,168,652 $ 73,386,135 9,256,695 $ 95,767,778 Shares issued on reinvestment of distributions ............... 406,123 4,153,619 613,934 6,292,606 Shares redeemed ................... (2,138,192) (21,870,869) (4,040,894) (41,420,822) -------------------------------------------------------------------- Net increase (decrease) ........... 5,436,583 $ 55,668,885 5,829,735 $ 60,639,562 ====================================================================
Semiannual Report | 41 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED OCTOBER 31, 2005 APRIL 30, 2005 ------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------- CLASS R SHARES: Shares sold ............................ 894,743 $ 9,134,642 1,276,625 $ 13,072,419 Shares issued on reinvestment of distributions .................... 57,002 581,863 66,675 683,533 Shares redeemed ........................ (146,203) (1,494,771) (322,496) (3,330,041) ------------------------------------------------------------- Net increase (decrease) ................ 805,542 $ 8,221,734 1,020,804 $ 10,425,911 ============================================================= ADVISOR CLASS SHARES: Shares sold ............................ 1,019,419 $ 10,454,009 2,286,272 $ 23,817,431 Shares issued on reinvestment of distributions .................... 183,756 1,879,562 297,712 3,053,822 Shares redeemed ........................ (874,416) (8,940,580) (619,932) (6,394,538) ------------------------------------------------------------- Net increase (decrease) ................ 328,759 $ 3,392,991 1,964,052 $ 20,476,715 =============================================================
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:
- ------------------------------------------------------------------------------------------------------ SUBSIDIARY AFFILIATION - ------------------------------------------------------------------------------------------------------ Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer Agent
A. MANAGEMENT FEES The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund 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% In excess of $250 million
B. ADMINISTRATIVE FEES Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Fund. 42 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. DISTRIBUTION FEES The Fund's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund reimburses Distributors up to 0.25% per year of Class A's average daily net assets for costs incurred in connection with the sale and distribution of the Fund's shares. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. Under the Fund's compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the sale and distribution of the Fund's shares up to a certain percentage per year of its average daily net assets of each class as follows: Class B ..................................................... 0.65% Class C ..................................................... 0.65% Class R ..................................................... 0.50% D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund's shares for the year: Net sales charges received(a) ............................... $642,695 Contingent deferred sales charges retained .................. $140,280 (a) Net of commissions paid to unaffiliated broker/dealers. E. TRANSFER AGENT FEES The Fund paid transfer agent fees of $772,824, of which $522,057 was retained by Investor Services. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the period ended October 31, 2005, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES At April 30, 2005, the Fund had tax basis capital losses of $27,308,935 expiring on April 30, 2011 which may be carried over to offset future capital gains, if any. Semiannual Report | 43 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 5. INCOME TAXES (CONTINUED) At October 31, 2005, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows: Cost of investments .................................... $ 1,310,614,860 ================ Unrealized appreciation ................................ $ 36,599,651 Unrealized depreciation ................................ (34,757,593) ---------------- Net unrealized appreciation (depreciation) ............. $ 1,842,058 ================ Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, mortgage dollar roll, paydown losses, and bond discounts and premiums. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatment of wash sales, foreign currency transactions, mortgage dollar roll, paydown losses, and bond discounts and premiums. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the period ended October 31, 2005, aggregated $408,077,287 and $175,870,371, respectively. 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund 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 Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management fees paid by the Sweep Money Fund. 8. CREDIT RISK AND DEFAULTED SECURITIES The Fund has 52.96% 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. The Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At October 31, 2005, the value of these securities was $1,965,000, representing .15% 44 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 8. CREDIT RISK AND DEFAULTED SECURITIES (CONTINUED) 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 AND ILLIQUID SECURITIES At October 31, 2005, investments in securities included issues that are restricted and illiquid. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration under the Securities Act of 1933, unless the sale is pursuant to an exemption under the 1933 Act. The Fund has registration rights for all restricted securities held at period end. The issuer generally incurs all registration costs. A security may be considered illiquid if it lacks a readily available market or if its valuation has not changed for a certain period of time. At October 31, 2005, the Fund held investments in restricted and illiquid securities, valued in accordance with procedures approved by the Fund's Board of Trustees as reflecting fair value, as follows:
- ------------------------------------------------------------------------------------------------------ ACQUISITION SHARES ISSUER DATE COST VALUE - ------------------------------------------------------------------------------------------------------ 516,372 Cambridge Industries Liquidating Trust Interest ........ 1/9/02 $ -- $ 2,582 64,666 VS Holdings ............................................ 12/6/01 64,666 -- -------- TOTAL RESTRICTED SECURITIES (0.00%(a) of net assets) ... $ 2,582 ========
(a) Rounds to less than 0.005% of net assets. 10. UNFUNDED LOAN COMMITMENTS The Fund may enter into certain credit agreements, all or a portion of which may be unfunded. The Fund is obligated to fund these loan commitments at the borrowers' discretion. At October 31, 2005, unfunded commitments were follows: - ---------------------------------------------------------------------- UNFUNDED BORROWER COMMITMENTS - ---------------------------------------------------------------------- Eastman Kodak Co., Term Loan B2, Delayed Draw ......... $ 1,020,000 Hawaiian Telecom Communications, Inc., Term Loan A .... 1,041,176 ----------- $ 2,061,176 =========== Unfunded loan commitments are marked to market daily and any unrealized gain or loss is included in the Statement of Assets and Liabilities and Statement of Operations. Semiannual Report | 45 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 11. 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 a plan for distribution of the respective settlement monies. The CAGO approved the distribution plan under the CAGO Settlement and, in accordance with the terms and conditions of that settlement, the monies were disbursed to the relevant funds. The Fund did not participate in the CAGO Settlement. The SEC has not yet approved the distribution plan pertaining to the December 13, 2004 SEC Order. When approved, disbursements of settlement monies will be made promptly to the relevant funds, in accordance with the terms and conditions of that order. The IDC continues to develop the plan of distribution under the August 2, 2004 SEC Order that resolved the SEC's market timing investigation. 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 Trust, it is committed to making the Trust or its shareholders whole, as appropriate. 46 | Semiannual Report FRANKLIN STRATEGIC SERIES SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Trust has established Proxy Voting Policies and Procedures ("Policies") that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. Semiannual Report | 47 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 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 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 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 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 IncomeFund 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 Arizona California(7) Colorado Connecticut Florida(7) Georgia Kentucky Louisiana Maryland Massachusetts(6) Michigan(6) Minnesota(6) Missouri New Jersey New York(7) North Carolina Ohio(7) Oregon Pennsylvania Tennessee 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. 09/05 Not part of the semiannual report [LOGO](R) FRANKLIN TEMPLETON One Franklin Parkway INVESTMENTS San Mateo, CA 94403-1906 [ ] WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. SEMIANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN STRATEGIC INCOME FUND 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. 194 S2005 12/05 [GRAPHIC OMITTED] - -------------------------------------------------------------------------------- OCTOBER 31, 2005 - -------------------------------------------------------------------------------- A SERIES OF FRANKLIN STRATEGIC SERIES - -------------------------------------------------------------------------------- SEMIANNUAL REPORT AND SHAREHOLDER LETTER BLEND - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? FRANKLIN U.S. LONG-SHORT FUND Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. - -------------------------------------------------------------------------------- [LOGO](R) FRANKLIN TEMPLETON INVESTMENTS FRANKLIN o Templeton o Mutual Series FRANKLIN TEMPLETON INVESTMENTS GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups--Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services. - -------------------------------------------------------------------------------- MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS - -------------------------------------------------------------------------------- [GRAPHIC OMITTED] Not part of the semiannual report CONTENTS SHAREHOLDER LETTER ........................................................ 1 SEMIANNUAL REPORT Franklin U.S. Long-Short Fund ............................................. 4 Performance Summary ....................................................... 10 Your Fund's Expenses ...................................................... 11 Financial Highlights and Statement of Investments .................................................. 13 Financial Statements ...................................................... 20 Notes to Financial Statements ............................................. 23 Shareholder Information ................................................... 32 - -------------------------------------------------------------------------------- SEMIANNUAL REPORT FRANKLIN U.S. LONG-SHORT FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Long-Short Fund seeks long-term capital appreciation in both up and down (bull and bear) markets, with less volatility than the overall stock market. Under normal market conditions, the Fund has primarily both long and short positions in equity securities, primarily common stocks of U.S. investments. - -------------------------------------------------------------------------------- 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 semiannual report for Franklin U.S. Long-Short Fund covers the period ended October 31, 2005. PERFORMANCE OVERVIEW Franklin U.S. Long-Short Fund - Class A posted a +5.16% cumulative total return for the six months under review. The Fund slightly underperformed its benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which posted a +5.26% cumulative total return for the same period.(1) Although we underperformed the index, in addition to return, we also seek less volatility and correlation relative to the overall market. For the period under review, the Fund had 47% of the volatility of the S&P 500, as measured by standard deviation of daily returns, and a relative correlation of 43%. Since the Fund's inception, its relative volatility and correlation to the benchmark were 55% and 2%, respectively. The Fund's lower volatility and relatively low correlation figures are consistent with our investment strategy, and we believe they are indicative of the type of results expected for a fund of this nature. You can find the Fund's long-term performance data in the Performance Summary beginning on page 10. ECONOMIC AND MARKET OVERVIEW During the six months ended October 31, 2005, domestic economic expansion was driven by strength across most industries, sectors and regions. Gross domestic product (GDP) rose during the period, benefiting primarily from increased personal consumption, business investment and federal spending. Slower export growth combined with greater demand for imported goods and materials fueled (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. 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 14. 4 | Semiannual Report EQUITY EXPOSURE 10/31/05 - -------------------------------------------------------------------------------- % OF TOTAL NET ASSETS # OF POSITIONS - -------------------------------------------------------------------------------- Long Equity Securities 69.9% 72 - -------------------------------------------------------------------------------- Short Equity Securities -31.6% 37 - -------------------------------------------------------------------------------- NET EQUITY EXPOSURE 38.3% (LONG) - -------------------------------------------------------------------------------- a widening trade gap. The U.S. dollar rallied in 2005 driven largely by rising short-term domestic interest rates, and strong economic growth in the U.S. relative to many of its major trading partners. Oil prices increased substantially during the period largely due to potential long-term supply limitations and strong growth in global demand, especially from China and India. Despite rising commodity prices, inflation remained relatively contained for the 12 months ended October 31, 2005, as measured by the 2.1% rise for the core Consumer Price Index (CPI).(2) With this inflation picture, the Federal Reserve Board raised the federal funds target rate from 2.75% to 3.75%, and said it would continue to undertake appropriate monetary policy action at a measured pace. Compared with the rise in short-term interest rates, long-term interest rates remained relatively stable, supporting overall robust housing and commercial real estate activity, which contributed to economic growth. Many businesses enjoyed their widest profit margins on record, propelled largely by productivity gains. The labor market firmed as employment increased and the unemployment rate dropped from 5.2% to 5.0% during the reporting period.(2) Personal income rose, and hiring rebounded in many industries, bolstered by healthy business spending. However, late in the period consumer sentiment fell amid concerns about rising energy costs. In this environment, the blue chip stocks of the Dow Jones Industrial Average posted a six-month total return of +3.57%, while the broader S&P 500 and the technology-heavy NASDAQ Composite Index returned +5.26% and +10.78%.(3) INVESTMENT STRATEGY We select the Fund's long and short positions on a stock-by-stock basis, searching for securities with favorable risk and return profiles. For long positions, we look for growth- and value-oriented stocks of companies with strong fundamentals (2) Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. (3) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. 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. Semiannual Report | 5 TOP 10 LONG HOLDINGS 10/31/05 - ------------------------------------------------------ COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - ------------------------------------------------------ Bunge Ltd. 2.3% Process Industries - ------------------------------------------------------ Wal-Mart Stores Inc. 2.3% Retail Trade - ------------------------------------------------------ Dollar General Corp. 2.2% Retail Trade - ------------------------------------------------------ Carnival Corp. 2.0% Consumer Services - ------------------------------------------------------ J.B. Hunt Transport Services Inc. 2.0% Transportation - ------------------------------------------------------ Network Appliance Inc. 1.8% Electronic Technology - ------------------------------------------------------ CapitalSource Inc. 1.6% Finance - ------------------------------------------------------ WellPoint Inc. 1.6% Health Services - ------------------------------------------------------ Schering-Plough Corp. 1.6% Health Technology - ------------------------------------------------------ Chesapeake Energy Corp. 1.6% Energy Minerals - ------------------------------------------------------ PORTFOLIO BREAKDOWN 10/31/05 - ------------------------------------------------------ % OF TOTAL NET ASSETS - ------------------------------------------------------ Long Positions 69.9% - ------------------------------------------------------ Short Positions -31.7% - ------------------------------------------------------ Short-Term Investments 44.4% - ------------------------------------------------------ Other Net Assets, less Liabilities 17.4% - ------------------------------------------------------ or valuable assets that we believe are underappreciated by the market. For short positions, we use primarily fundamental, accounting and event-driven strategies. Additionally, we use technical analysis as a risk control measure. The Fund pursues additional goals of reduced volatility and correlation relative to the overall market. MANAGER'S DISCUSSION On October 31, 2005, the Fund's exposure was 69.9% long and 31.7% short, resulting in a 38.2% net long exposure, up from 31.2% net long exposure on April 30, 2005. The consumer discretionary, energy, and information technology sectors generally contributed positively to Fund performance during the six months under review.(4) Within the consumer discretionary sector, our positions in discounters and specialty retailers helped performance, offset by losses for our short position in electronic appliances. By period-end, we completely sold the Fund's positions in Aeropostale, Carmax, Dollar Tree Stores and Fred's. These companies appeal to lower-end consumer bases that were especially impacted by the dramatic increase in gasoline prices. Anticipating little near-term relief, we allocated the Fund toward consumer stocks we judged to be better positioned to outperform expectations despite high fuel costs. On the long side, two of our best contributors were retailers Kohl's and Zumiez, which we were able to acquire at what we believed were very attractive valuations relative to their strong growth prospects. On the short side, we successfully anticipated earnings misses and market share losses at companies like Kellwood, Dillard's, Jones Apparel Group, and Christopher & Banks, while we also took advantage of what we found to be excessive valuations and deteriorating industry trends at American Axle and Blockbuster. Certain short decisions, on the other hand, did not work out as planned; for example, the Fund was negatively impacted by its short position in Whirlpool. Within the energy sector, positions in exploration and production, oil services, and coal companies helped performance, offset by losses in our short positions in integrated oil and refining companies. The energy sector continued its strong performance during the reporting period as companies easily beat most market analysts' earnings estimates during a strong upward trend for energy commodity prices. Many of our holdings rallied past our price targets. As a result, we exited several positions on strength, including Alpha Natural Resources, Bill Barrett, Peabody Energy, Pride International, Superior Energy Services, TETRA Technologies, and Vaalco Energy. We retained exposure in natural gas-related (4) The consumer discretionary sector comprises retail trade, consumer durables and consumer non-durables; and the energy sector comprises energy minerals and industrial services in the SOI. 6 | Semiannual Report SECTOR/INDUSTRY BREAKDOWN Based on Total Net Assets as of 10/31/05 - -------------------------------------------------------------------------------- NET EQUITY LONG % SHORT % EXPOSURE % - -------------------------------------------------------------------------------- Health Technology 6.0% -0.4% 5.6% - -------------------------------------------------------------------------------- Electronic Technology 9.1% -3.7% 5.4% - -------------------------------------------------------------------------------- Consumer Durables 5.3% 0.0% 5.3% - -------------------------------------------------------------------------------- Transportation 5.5% -0.5% 5.0% - -------------------------------------------------------------------------------- Consumer Services 4.1% 0.0% 4.1% - -------------------------------------------------------------------------------- Energy Minerals 4.8% -0.8% 4.0% - -------------------------------------------------------------------------------- Industrial Services 3.6% 0.0% 3.6% - -------------------------------------------------------------------------------- Process Industries 5.8% -3.0% 2.8% - -------------------------------------------------------------------------------- Retail Trade 9.0% -6.4% 2.6% - -------------------------------------------------------------------------------- Health Services 2.4% -0.3% 2.1% - -------------------------------------------------------------------------------- Consumer Non-Durables 3.4% -2.1% 1.3% - -------------------------------------------------------------------------------- Closed-End Mutual Funds 1.3% 0.0% 1.3% - -------------------------------------------------------------------------------- Non-Energy Minerals 0.7% 0.0% 0.7% - -------------------------------------------------------------------------------- Technology Services 1.5% -1.0% 0.5% - -------------------------------------------------------------------------------- Utilities 0.9% -0.4% 0.5% - -------------------------------------------------------------------------------- Distribution Services 1.3% -1.0% 0.3% - -------------------------------------------------------------------------------- Producer Manufacturing 1.9% -3.1% -1.2% - -------------------------------------------------------------------------------- Diversified Financial Services 0.0% -2.6% -2.6% - -------------------------------------------------------------------------------- Finance 3.3% -6.4% -3.1% - -------------------------------------------------------------------------------- exploration and production companies and offshore drillers, since they have somewhat less exposure to oil price fluctuations. The Fund suffered losses from its short positions in Tesoro, Repsol, and Carrizo Oil & Gas. We covered our short positions in Tesoro and Carrizo Oil & Gas, as our reasons for shorting the stocks were related to the sustainable high commodity price environment. Within information technology, our long portfolio contributed positively to Fund performance, while our short portfolio only marginally impacted Fund performance. There was no consistent theme in terms of performance within the information technology sub-sectors. Our greatest contributor to Fund performance was an electronic technology holding, ViaSat, a company that delivers digital satellite, networking and signal processing equipment for government and commercial clients. ViaSat benefited from recent military and intelligence spending on secure communication systems. According to our analysis, ViaSat holds the potential to grow further as it rolls out consumer satellite broadband technology through its contract with WildBlue Communications, a satellite-based broadband Internet service provider for rural areas without DSL or cable Internet Semiannual Report | 7 service. Another top contributor to the Fund's total return was also in the electronic technology industry: Intersil, a silicon chip and high-speed integrated circuit maker which capitalized on its leadership position in analog and mixed-signal semiconductors in a relatively robust technology environment. On the short side, we profitably covered our positions in Teradyne and Western Digital while initiating shorts on several companies that we expect to miss consensus estimates. On the other hand, some of our positions in the health care sector hindered Fund performance during the reporting period. Gains in long positions of selected biotechnology and health technology stocks, which include major pharmaceutical companies, were offset by losses in long positions among selected biotechnology and health services stocks, and short positions in Bone Care International and Renal Care, both of which were acquired. Performance for each position was driven mostly by its particular fundamentals, and there were few macroeconomic performance drivers within the sector. To reduce stock-specific risk within the sector going forward, we reduced the Fund's absolute exposure to specific positions within the volatile biotechnology industry, and expanded the number of positions within health technology by adding to our existing investments in the typically less-volatile health technology and health services industries. The industrials sector was the only other area that produced a net loss for the Fund.(5) This can be attributed primarily to two short positions: York International, which rose as it was acquired by Johnson Controls; and Joy Global, which appreciated due to high commodity prices and higher demand for mining equipment in developing markets like China. After considering the results of our short investments in health care and industrials, we are taking extra care to evaluate merger and acquisition-related risks when considering potential new short positions. (5) The industrials sector generally comprises producer manufacturing and transportation in the SOI. 8 | Semiannual Report Thank you for your continued participation in Franklin U.S. Long-Short Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ Daniel Hennessy Daniel Hennessy, CFA Portfolio Manager [PHOTO OMITTED] /s/ Gary K. Ko Gary K. Ko, CFA Assistant Portfolio Manager Franklin U.S. Long-Short Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2005, 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 ADVISER 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. Semiannual Report | 9 PERFORMANCE SUMMARY AS OF 10/31/05 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION - -------------------------------------------------------------------------------- CLASS A (SYMBOL: FUSLX) CHANGE 10/31/05 4/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.80 $16.30 $15.50 - -------------------------------------------------------------------------------- PERFORMANCE Class A: 5.75% maximum initial sales charge. Cumulative total return excludes the sales charge. Average annual total returns and value of $10,000 investment include the maximum sales charge.
- ------------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/28/99)(1) - ------------------------------------------------------------------------------------------------------- Cumulative Total Return(2) +5.16% +3.36% -0.88% +100.85% - ------------------------------------------------------------------------------------------------------- Average Annual Total Return(3) -0.91% -2.57% -1.35% +10.44% - ------------------------------------------------------------------------------------------------------- Value of $10,000 Investment(4) $9,909 $9,743 $9,344 $18,927 - ------------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (9/30/05)(5) -2.22% -0.59% +10.61% - -------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. ENDNOTES ALTHOUGH THE FUND INTENDS TO REDUCE RISK BY HAVING BOTH LONG AND SHORT POSITIONS, IT IS POSSIBLE THE FUND'S LONG POSITIONS WILL DECLINE IN VALUE AT THE SAME TIME THE VALUE OF STOCKS SOLD SHORT INCREASES, THEREBY INCREASING THE POTENTIAL FOR LOSS. ALSO, THE FUND MAY NOT ALWAYS BE ABLE TO CLOSE OUT A SHORT POSITION AT A PARTICULAR TIME OR AT AN ACCEPTABLE PRICE. HISTORICALLY, INVESTMENTS IN SMALL-CAP STOCKS HAVE BEEN MORE VOLATILE IN PRICE THAN LARGER-CAP STOCKS, ESPECIALLY OVER THE SHORT TERM. THE FUND MAY ALSO INVEST IN FOREIGN COMPANIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. (1) Fund inception date was 5/28/99. Fund shares were first offered to the public on 5/1/00. (2) Cumulative total return represents the change in value of an investment over the periods indicated and does not include the sales charge. (3) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the maximum sales charge. Six-month return has not been annualized. (4) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include the maximum sales charge. (5) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. 10 | Semiannual Report YOUR FUND'S EXPENSES 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 below 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. Semiannual Report | 11 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 4/30/05 VALUE 10/31/05 PERIOD* 4/30/05-10/31/05 - --------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,051.60 $8.17 - --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,017.24 $8.03 - ---------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio of 1.58%, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 12 | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS FRANKLIN U.S. LONG-SHORT FUND
---------------------------------------------------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED APRIL 30, (UNAUDITED) 2005 2004 2003 2002 2001 ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................ $ 15.50 $ 15.54 $ 15.73 $ 16.29 $ 21.09 $ 17.12 ---------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) .................... 0.07 0.04 (0.14) (0.07) 0.25 0.63 Net realized and unrealized gains (losses) ......... 0.73 (0.08)(d) (0.05) --(d) (2.52) 4.52 ---------------------------------------------------------------------------- Total from investment operations .................... 0.80 (0.04) (0.19) (0.07) (2.27) 5.15 ---------------------------------------------------------------------------- Less distributions from: Net investment income .............................. -- -- -- (0.49) (0.27) (0.25) Net realized gains ................................. -- -- -- -- (2.26) (0.93) ---------------------------------------------------------------------------- Total distributions ................................. -- -- -- (0.49) (2.53) (1.18) ---------------------------------------------------------------------------- Redemption fees ..................................... --(e) --(e) -- -- -- -- ---------------------------------------------------------------------------- Net asset value, end of period ...................... $ 16.30 $ 15.50 $ 15.54 $ 15.73 $ 16.29 $ 21.09 ============================================================================ Total return(b) ..................................... 5.16% (0.26)% (1.21)% (0.48)% (11.53)% 30.61% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................... $ 58,682 $ 68,718 $112,096 $144,582 $146,044 $384,144 Ratios to average net assets:* Expenses(c) ........................................ 1.58%(f) 1.80% 2.23% 2.45% 2.01% 1.73% Expenses net of waiver and payments by affiliate and expense reduction(c) .......................... 1.58%(f) 1.75% 2.23% 2.45% 2.01% 1.73% Net investment income (loss) ....................... 0.85%(f) 0.23% (0.89)% (0.42)% 1.32% 3.06% Portfolio turnover rate ............................. 156.22% 218.52% 346.01% 258.22% 327.27% 400.19% Portfolio turnover rate excluding short sales ....... 91.09% 105.31% 217.47% 184.90% 146.05% 125.12% *Ratios to average net assets, excluding dividend expense on securities sold short: Expenses ........................................... 1.24%(f) 1.32% 1.71% 1.84% 1.60% 1.56% Expenses net of waiver and payments by affiliate and expense reduction ............................. 1.24%(f) 1.27% 1.71% 1.84% 1.60% 1.56%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Includes dividend expense on securities sold short which varies from period to period. See below for expense ratios that reflect only operating expenses. (d) The amount shown for a share outstanding throughout the period does not correlate with the aggregate net gains on investments for that period, because of the timing of sales and repurchase of the Fund shares in relation to fluctuating market value of the investments of the Fund. (e) Amount is less than $0.01 per share. (f) Annualized. Semiannual Report | See notes to financial statements. | 13 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN U.S. LONG-SHORT FUND COUNTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 69.9% CLOSED END MUTUAL FUND 1.3% (COST $786,839) Ares Capital Corp. ...................................................... United States 49,735 $ 761,940 ------------ COMMON STOCKS 68.6% CONSUMER DURABLES 5.3% (a),(b)Activision Inc. ......................................................... United States 20,580 324,547 (a),(b)Electronic Arts Inc. .................................................... United States 11,448 651,162 (a),(b)Fossil Inc. ............................................................. United States 15,747 246,598 (b)Harman International Industries Inc. .................................... United States 4,791 478,429 M.D.C. Holdings Inc. .................................................... United States 10,604 727,434 (b)Standard Pacific Corp. .................................................. United States 17,868 689,348 ------------ 3,117,518 ------------ CONSUMER NON-DURABLES 3.4% (a)NBTY Inc. ............................................................... United States 18,245 365,082 Procter & Gamble Co. .................................................... United States 6,317 353,689 Puma AG ................................................................. Germany 1,521 383,805 (a)Warnaco Group Inc. ...................................................... United States 25,811 585,394 Wm. Wrigley Jr. Co. ..................................................... United States 4,307 299,337 ------------ 1,987,307 ------------ CONSUMER SERVICES 4.1% (b)Carnival Corp. .......................................................... United States 23,477 1,166,102 Dow Jones & Co. Inc. .................................................... United States 8,674 294,135 Hilton Hotels Corp. ..................................................... United States 13,504 262,653 (a)P.F. Chang's China Bistro Inc. .......................................... United States 14,486 662,590 ------------ 2,385,480 ------------ DISTRIBUTION SERVICES 1.3% (b)Sysco Corp. ............................................................. United States 24,450 780,199 ------------ ELECTRONIC TECHNOLOGY 9.1% (a)Dell Inc. ............................................................... United States 22,228 708,629 (a),(b)FormFactor Inc. ......................................................... United States 23,996 590,781 Harris Corp. ............................................................ United States 17,456 717,441 Intersil Corp. .......................................................... United States 31,307 712,547 (a),(b)Network Appliance Inc. .................................................. United States 38,991 1,066,794 Nokia Corp., ADR ........................................................ Finland 21,181 356,264 (b)Rockwell Automation Inc. ................................................ United States 6,724 357,381 (a),(b)ViaSat Inc. ............................................................. United States 32,497 805,601 ------------ 5,315,438 ------------ ENERGY MINERALS 4.8% Apache Corp. ............................................................ United States 9,210 587,875 (b)Chesapeake Energy Corp. ................................................. United States 28,719 921,880 (a),(b)Newfield Exploration Co. ................................................ United States 17,428 790,011 (b)Total SA, B, ADR ........................................................ France 4,310 543,146 ------------ 2,842,912 ------------
14 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN U.S. LONG-SHORT FUND COUNTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) COMMON STOCKS (CONT.) FINANCE 3.3% (a)CapitalSource Inc. ...................................................... United States 44,001 $ 968,022 (a)Franklin Bank Corp. ..................................................... United States 28,629 493,850 R & G Financial Corp., B ................................................ United States 51,195 501,711 ------------ 1,963,583 ------------ HEALTH SERVICES 2.4% (a)Triad Hospitals Inc. .................................................... United States 11,018 453,170 (a),(b)WellPoint Inc. .......................................................... United States 12,600 940,968 ------------ 1,394,138 ------------ HEALTH TECHNOLOGY 6.0% (a)Charles River Laboratories International Inc. ........................... United States 7,125 311,790 (a)Cubist Pharmaceuticals Inc. ............................................. United States 14,801 299,128 Invitrogen Corp. ........................................................ United States 4,883 310,510 (a)Molecular Devices Corp. ................................................. United States 15,503 347,267 (a)Orchid Biosciences Inc. ................................................. United States 30,018 176,506 (a)Pozen Inc. .............................................................. United States 18,266 178,094 Roche Holding AG ........................................................ Switzerland 2,105 314,537 Schering-Plough Corp. ................................................... United States 45,622 927,951 (a)Serologicals Corp. ...................................................... United States 14,343 279,402 (a)Telik Inc. .............................................................. United States 11,874 177,398 (a)Threshold Pharmaceuticals Inc. .......................................... United States 18,000 198,720 ------------ 3,521,303 ------------ INDUSTRIAL SERVICES 3.6% (a),(b)Cal Dive International Inc. ............................................. United States 14,806 911,161 (a)Noble Corp. ............................................................. United States 11,292 726,979 (b)Rowan Cos. Inc. ......................................................... United States 14,145 466,644 ------------ 2,104,784 ------------ NON-ENERGY MINERALS 0.7% (b)Southern Copper Corp. ................................................... United States 7,300 402,522 ------------ PROCESS INDUSTRIES 5.8% (b)Bunge Ltd. .............................................................. United States 26,023 1,351,635 (a),(b)Cabot Microelectronics Corp. ............................................ United States 16,154 474,928 (a)Headwaters Inc. ......................................................... United States 10,141 322,889 (b)Lyondell Chemical Co. ................................................... United States 30,613 820,428 (b)RPM International Inc. .................................................. United States 21,739 404,780 ------------ 3,374,660 ------------
Semiannual Report | 15 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN U.S. LONG-SHORT FUND COUNTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONT.) COMMON STOCKS (CONT.) PRODUCER MANUFACTURING 1.9% 3M Co. .................................................................. United States 6,368 $ 483,841 Deere & Co. ............................................................. United States 10,675 647,759 ------------ 1,131,600 ------------ RETAIL TRADE 9.0% (a)The Children's Place Retail Stores Inc. ................................. United States 10,314 442,780 (b)Dollar General Corp. .................................................... United States 67,488 1,311,967 (a)Jos. A. Bank Clothiers Inc. ............................................. United States 12,069 492,536 (a)Kohl's Corp. ............................................................ United States 6,633 319,246 Target Corp. ............................................................ United States 8,565 476,985 (a),(b)Urban Outfitters Inc. ................................................... United States 17,424 493,622 (b)Wal-Mart Stores Inc. .................................................... United States 28,297 1,338,731 (a),(b)Zumiez Inc. ............................................................. United States 11,628 396,980 ------------ 5,272,847 ------------ TECHNOLOGY SERVICES 1.5% (a),(c)VeriSign Inc. ........................................................... United States 38,000 897,940 ------------ TRANSPORTATION 5.5% Dryships Inc. ........................................................... United States 37,601 565,895 (b)Fedex Corp. ............................................................. United States 6,360 584,675 (b)J.B. Hunt Transport Services Inc. ....................................... United States 59,392 1,152,799 (a)Republic Airways Holdings Inc. .......................................... United States 46,730 728,988 Top Tankers Inc. ........................................................ Greece 13,558 174,627 ------------ 3,206,984 ------------ UTILITIES 0.9% FirstEnergy Corp. ....................................................... United States 7,737 367,508 Public Service Enterprise Group Inc. .................................... United States 2,824 177,601 ------------ 545,109 ------------ TOTAL COMMON STOCKS (COST $37,820,442)................................... 40,244,324 ------------ TOTAL LONG TERM INVESTMENTS (COST $38,607,281)........................... 41,006,264 ------------ SHORT TERM INVESTMENTS 44.4% MONEY FUND (COST $14,631,877) 24.9% (d)Franklin Institutional Fiduciary Trust Money Market Portfolio ........... United States 14,631,877 14,631,877 ------------
16 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN U.S. LONG-SHORT FUND COUNTRY PRINCIPAL AMOUNT VALUE - ----------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS (CONT.) REPURCHASE AGREEMENT (COST $11,447,056) 19.5% (e)Joint Repurchase Agreement, 3.969%, 11/1/05 (Maturity Value $11,448,318) ........................................... United States $ 11,447,056 $ 11,447,056 ABN AMRO Bank, N.V., New York Branch (Maturity Value $1,113,578) Banc of America Securities LLC (Maturity Value $1,073,165) Barclays Capital Inc. (Maturity Value $1,073,165) Bear, Stearns & Co. Inc. (Maturity Value $809,968) BNP Paribas Securities Corp. (Maturity Value $1,073,165) Deutsche Bank Securities Inc. (Maturity Value $1,073,165) Greenwich Capital Markets Inc. (Maturity Value $1,113,578) Lehman Brothers Inc. (Maturity Value $858,626) Merrill Lynch Government Securities Inc. (Maturity Value $1,073,165) Morgan Stanley & Co. Inc. (Maturity Value $1,073,165) UBS Securities LLC (Maturity Value $1,113,578) Collateralized by U.S. Government Agency Securities, 1.75 - 7.25%, 12/15/05 - 5/15/10; fU.S. Government Agency Discount Notes, 11/1/05 - 11/14/05; U.S. Treasury Notes, 2.50 - 6.50%, 10/31/06 - 9/15/10 ------------ TOTAL SHORT TERM INVESTMENTS (COST $26,078,933).......................... 26,078,933 ------------ TOTAL INVESTMENTS (COST $64,686,214) 114.3%.............................. 67,085,197 OPTIONS WRITTEN (0.1)%................................................... (43,320) SECURITIES SOLD SHORT (31.6)%............................................ (18,550,402) OTHER ASSETS, LESS LIABILITIES 17.4%..................................... 10,190,274 ------------ NET ASSETS 100.0%........................................................ $ 58,681,749 ============ ---------------- CONTRACTS ---------------- (g)OPTIONS WRITTEN (PREMIUMS RECEIVED $128,060) 0.1% CALL OPTIONS 0.1% TECHNOLOGY SERVICES 0.1% Verisign Inc., Jan. 35 Calls, 1/20/07 ................................... United States 380 43,320 ------------ ---------------- SHARES ---------------- (h)SECURITIES SOLD SHORT 31.6% CONSUMER NON-DURABLES 2.1% Adidas-Salomon AG ....................................................... Germany 2,599 436,023 Kellwood Co. ............................................................ United States 36,086 790,644 ------------ 1,226,667 ------------ DISTRIBUTION SERVICES 1.0% Tech Data Corp. ......................................................... United States 16,517 572,149 ------------ DIVERSIFIED FINANCIAL SERVICES 2.6% Energy Select Sector SPDR Fund .......................................... United States 24,855 1,213,421 iShares Nasdaq Biotechnology Index Fund ................................. United States 4,391 325,988 ------------ 1,539,409 ------------
Semiannual Report | 17 FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN U.S. LONG-SHORT FUND COUNTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- (h)SECURITIES SOLD SHORT (CONT.) ELECTRONIC TECHNOLOGY 3.7% Advanced Micro Devices Inc. ............................................. United States 11,104 $ 257,835 Chartered Semiconductor Manufacturing, ADR .............................. Singapore 48,000 303,360 Lexar Media Inc. ........................................................ United States 29,592 221,940 LSI Logic Corp. ......................................................... United States 27,056 219,424 Semiconductor Holders Trust ............................................. United States 34,116 1,144,592 ------------ 2,147,151 ------------ ENERGY MINERALS 0.8% Repsol YPF SA, ADR ...................................................... Spain 16,054 478,570 ------------ FINANCE 6.4% BB&T Corp. .............................................................. United States 16,834 712,752 Glacier Bancorp Inc. .................................................... United States 16,993 500,954 Nelnet Inc., A .......................................................... United States 29,006 1,076,122 Old Second Bancorp Inc. ................................................. United States 13,980 434,359 Republic Bancorp Inc. ................................................... United States 44,016 600,818 Sky Financial Group Inc. ................................................ United States 15,236 427,827 ------------ 3,752,832 ------------ HEALTH SERVICES 0.3% Health Management Associates Inc., A .................................... United States 7,854 168,154 ------------ HEALTH TECHNOLOGY 0.4% Renovis Inc. ............................................................ United States 15,688 220,103 ------------ PROCESS INDUSTRIES 3.0% H.B. Fuller Co. ......................................................... United States 12,837 384,725 PPG Industries Inc. ..................................................... United States 10,405 623,988 A. Schulman Inc. ........................................................ United States 36,372 742,353 ------------ 1,751,066 ------------ PRODUCER MANUFACTURING 3.1% American Axle & MFG Holdings Inc. ....................................... United States 15,678 341,780 Columbus McKinnon Corp. ................................................. United States 25,272 576,707 Robbins & Meyers Inc. ................................................... United States 28,308 611,170 Superior Industries International Inc. .................................. United States 14,481 294,688 ------------ 1,824,345 ------------ RETAIL TRADE 6.4% Ann Taylor Stores Corp. ................................................. United States 15,772 382,786 Barnes & Noble Inc. ..................................................... United States 9,646 348,799 Big Lots Inc. ........................................................... United States 48,574 562,001 Circuit City Stores-Circuit City Group .................................. United States 32,533 578,762 Dillards Inc., A ........................................................ United States 44,982 931,577 Longs Drug Stores Inc. .................................................. United States 17,004 709,237 Sears Holding Corp. ..................................................... United States 2,160 259,740 ------------ 3,772,902 ------------
18 | Semiannual Report FRANKLIN STRATEGIC SERIES STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN U.S. LONG-SHORT FUND COUNTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- (h)SECURITIES SOLD SHORT (CONT.) TECHNOLOGY SERVICES 0.9% Napster Inc. ............................................................ United States 147,964 $ 535,630 ------------ TRANSPORTATION 0.5% CSX Corp. ............................................................... United States 6,788 310,958 ------------ UTILITIES 0.4% Great Plains Energy Inc. ................................................ United States 8,724 250,466 ------------ TOTAL SECURITIES SOLD SHORT (PROCEEDS $19,324,898)....................... $ 18,550,402 ============
SELECTED PORTFOLIO ABBREVIATIONS: ADR - American Depository Receipt (a) Non-income producing. (b) See Note 1(f) regarding securities segregated with broker for securities sold short. (c) A portion or all of the security is held in connection with open option contracts. (d) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. (e) See Note 1(c) regarding joint repurchase agreements. (f) A portion or all of the security is traded on a discount basis with no stated coupon rate. (g) See Note 1(e) regarding written options. (h) See Note 1(f) regarding securities sold short. Semiannual Report | See notes to financial statements. | 19 FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES October 31, 2005 (unaudited)
--------------- FRANKLIN U.S. LONG-SHORT FUND --------------- Assets: Investments in securities: Cost - Unaffiliated issuers .................................................................................. $ 38,607,281 Cost - Sweep Money Fund (Note 7) ............................................................................. 14,631,877 Cost - Repurchase agreements ................................................................................. 11,447,056 ------------- Total cost of investments .................................................................................... $ 64,686,214 ============= Value - Unaffiliated issuers (includes securities segregated with broker for securities sold short in the amount of $20,100,003) ...................................................................................... $ 41,006,264 Value - Sweep Money Fund (Note 7) ............................................................................ 14,631,877 Value - Repurchase agreements ................................................................................ 11,447,056 ------------- Total value of investments ................................................................................... 67,085,197 Receivables: Investment securities sold ................................................................................... 1,635,842 Capital shares sold .......................................................................................... 72,505 Dividends and interest ....................................................................................... 14,735 Cash on deposit with brokers for securities sold short ........................................................ 10,132,013 ------------- Total assets ............................................................................................. 78,940,292 ------------- Liabilities: Payables: Investment securities purchased .............................................................................. 1,341,203 Capital shares redeemed ...................................................................................... 238,364 Affiliates ................................................................................................... 42,127 Options written, at value (premiums received $128,060) ........................................................ 43,320 Securities sold short, at value (proceeds $19,324,898) ........................................................ 18,550,402 Accrued expenses and other liabilities ........................................................................ 43,127 ------------- Total liabilities ........................................................................................ 20,258,543 ------------- Net assets, at value .................................................................................... $ 58,681,749 ============= Net assets consist of: Paid-in capital ............................................................................................... $ 118,264,272 Undistributed net investment income ........................................................................... 477,418 Net unrealized appreciation (depreciation) .................................................................... 3,256,849 Accumulated net realized gain (loss) .......................................................................... (63,316,790) ------------- Net assets, at value .................................................................................... $ 58,681,749 ============= CLASS A: Net assets, at value .......................................................................................... $ 58,681,749 ============= Shares outstanding ............................................................................................ 3,599,705 ============= Net asset value per share(a) .................................................................................. $ 16.30 ============= Maximum offering price per share (net asset value per share / 94.25%) ......................................... $ 17.29 =============
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. 20 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the six months ended October 31, 2005 (unaudited)
----------- FRANKLIN U.S. LONG-SHORT FUND ----------- Investment income: Dividends Unaffiliated issuers ........................................................ $ 240,264 Sweep Money Fund (Note 7) ................................................... 247,554 Interest ..................................................................... 313,375 ----------- Total investment income ................................................ 801,193 ----------- Expenses: Management fees (Note 3a) .................................................... 136,408 Administrative fees (Note 3b) ................................................ 66,043 Distribution fee (Note 3c) ................................................... 67,502 Transfer agent fees (Note 3e) ................................................ 93,418 Custodian fees (Note 4) ...................................................... 909 Reports to shareholders ...................................................... 19,870 Registration and filing fees ................................................. 10,397 Professional fees ............................................................ 13,121 Trustees fees and expenses ................................................... 607 Dividends on securities sold short ........................................... 113,466 Other ........................................................................ 1,837 ----------- Total expenses .......................................................... 523,578 Expense reductions (Note 4) ............................................. (34) ----------- Net expenses ........................................................... 523,544 ----------- Net investment income ................................................. 277,649 ----------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ................................................................. 4,243,953 Foreign currency transactions ............................................... 3,609 Securities sold short ....................................................... (4,579,556) ----------- Net realized gain (loss) .............................................. (331,994) ----------- Net change in unrealized appreciation (depreciation) on: Investments ................................................................. 3,425,506 Translation of assets and liabilities denominated in foreign currencies ..... (1,715) ----------- Net change in unrealized appreciation (depreciation) .................. 3,423,791 ----------- Net realized and unrealized gain (loss) ....................................... 3,091,797 ----------- Net increase (decrease) in net assets resulting from operations ............... $ 3,369,446 ===========
Semiannual Report | See notes to financial statements. | 21 FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------- FRANKLIN U.S. LONG-SHORT FUND ----------------------------------- SIX MONTHS ENDED OCTOBER 31, 2005 YEAR ENDED (UNAUDITED) APRIL 30, 2005 ----------------------------------- Increase (decrease) in net assets: Operations: Net investment income ..................................................................... $ 277,649 $ 220,016 Net realized gain (loss) from investments, foreign currency translations and securities sold short ............................................................................... (331,994) (7,725,421) Net change in unrealized appreciation (depreciation) on investments and transaction of assets and liabilities denominated in foreign currencies ................................. 3,423,791 8,006,046 -------------------------------- Net increase (decrease) in net assets resulting from operations ....................... 3,369,446 500,641 -------------------------------- Capital share transactions (Note 2) ........................................................ (13,405,377) (43,879,181) Redemption fees ............................................................................ 1 347 -------------------------------- Net increase (decrease) in net assets ................................................. (10,035,930) (43,378,193) Net assets: Beginning of period ........................................................................ 68,717,679 112,095,872 -------------------------------- End of period .............................................................................. $ 58,681,749 $ 68,717,679 ================================ Undistributed net investment income included in net assets: End of period .............................................................................. $ 477,418 $ 199,769 ================================
22 | See notes to financial statements. | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) FRANKLIN U.S. LONG-SHORT FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Strategic Series (the Trust) is registered under the Investment Company Act of 1940 as an open-end investment company, consisting of twelve separate series. The Franklin U.S. Long-Short Fund (the Fund) included in this report is diversified. The financial statements of the remaining funds in the series are presented separately. The following summarizes the Fund's 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. 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 Trust has 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 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. 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 Trust's Board of Trustees. 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 Semiannual Report | 23 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN U.S. LONG-SHORT FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION (continued) 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 Trust's Board of Trustees. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. JOINT REPURCHASE AGREEMENT The Fund may enter into a joint repurchase agreement whereby its 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. A repurchase agreement is 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 securities marked to market daily to maintain coverage of at least 100%. Repurchase agreements are valued at cost. At October 31, 2005, all repurchase agreements held by the Fund had been entered into on that date. D. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it 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 Statement 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 Statement of Assets and Liabilities. 24 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN U.S. LONG-SHORT FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. OPTIONS The Fund may purchase or write options. Options are contracts entitling the holder to purchase or sell a specified number of shares or units of a particular security at a specified price. Options purchased are recorded as investments; options written (sold) are recorded as liabilities. Upon closing of an option, other than by exercise, which results in a cash settlement, the difference between the premium (original option value) and the settlement proceeds is realized as a gain or loss. When securities are acquired or delivered upon exercise of an option, the acquisition cost or sale proceeds are adjusted by the amount of the premium. When an option is closed, the difference between the premium and the cost to close the position is realized as a gain or loss. When an option expires, the premium is realized as a gain for options written or as a loss for options purchased. The risks include the possibility there may be an illiquid options market or the inability of the counterparties to fulfill their obligations under the contract. Writing options involves, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities. F. SECURITIES SOLD SHORT The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowed security with the same security at current market value. The Fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund realizes a gain if the price of the security declines between those dates. Gains are limited to the price at which the Fund sold the security short, while losses are potentially unlimited in size. The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale and the Fund must maintain a deposit with broker consisting of cash and securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay the counterparty any dividends or interest due on securities sold short. Such dividends and interest are recorded as an expense to the Fund. G. INCOME TAXES No provision has been made for U.S. income taxes because the Fund's policy is to continue 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. Semiannual Report | 25 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN U.S. LONG-SHORT FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Dividend income and dividends declared on securities sold short are recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with generally accepted accounting principles. 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 will reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. 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 Fund and accounted for as an addition to paid-in capital. K. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. However, based on experience, the Trust expects the risk of loss to be remote. 26 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN U.S. LONG-SHORT FUND 2. SHARES OF BENEFICIAL INTEREST At October 31, 2005, there were an unlimited number of shares authorized ($0.01 par value). Transactions in the Fund's shares were as follows:
--------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED OCTOBER 31, 2005 APRIL 30, 2005 --------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT --------------------------------------------------------------- Shares sold ................. 229,850 $ 3,720,090 963,370 $ 15,108,056 Shares redeemed ............. (1,062,713) (17,125,467) (3,742,824) (58,987,237) --------------------------------------------------------------- Net increase (decrease) ..... (832,863) $(13,405,377) (2,779,454) $(43,879,181) ===============================================================
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
- --------------------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION - --------------------------------------------------------------------------------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Alternative Strategies, LLC (Alternative Strategies) 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 The Fund pays Advisers an investment management fee comprised of a "base fee" and a "performance adjustment". The base fee is calculated at the beginning of each month using an annual rate of 1.50% of the prior month's average daily net assets. The performance adjustment is calculated at the beginning of each month based on how much the Fund's total return exceeded or lagged its benchmark, the Standard & Poors 500 Composite Stock Price Index, (the "Fund performance differential"), over the preceding twelve-month period (the performance period). A performance adjustment is applicable if the Fund performance differential exceeds 2.00%, either upwards (an increase to the base fee) or downwards (a decrease to the base fee). The performance adjustment rate is equal to 0.01% for each additional 0.05% that the Fund performance differential exceeds 2.00%. The performance adjustment amount is determined by multiplying the performance adjustment rate by the average daily net assets of the performance period. The performance adjustment rate may not exceed 1.00% annualized, either upwards or downwards. At the end of each month, an annualized investment management fee ratio is calculated (total investment management fees Semiannual Report | 27 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN U.S. LONG-SHORT FUND 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES (CONTINUED) divided by fiscal year to date average daily net assets). In accordance with the Investment Management Agreement, the investment management fee ratio may not exceed 2.50% or fall below 0.50% for the fiscal year. For the period, the total annualized management fee rate, including the performance adjustment, and fee reduction on assets invested in the Franklin Institutional Fiduciary Trust Money Market Portfolio (see Note 7), was 0.41% of average daily net assets. Prior to July 14, 2005, under a subadvisory agreement, Alternative Strategies, an affiliate of Advisers, provided subadvisory services to the Fund and received from Advisers fees based on the average daily net assets of the Fund. B. ADMINISTRATIVE FEES The Fund pays an administrative fee to FT Services of 0.20% per year of the average daily net assets. C. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plan pursuant to Rule 12b-1 under the 1940 Act. Under the Fund's Class A reimbursement distribution plans, the Fund reimburses Distributors for costs incurred in connection with the sale and distribution of the Fund's shares up to 0.35% per year of its average daily net assets. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund's shares for the period: Sales charges received(a) ................................ $7,778 Contingent deferred sales charges retained ............... $2,782 (a) Net of commissions paid to unaffiliated broker/dealers. E. TRANSFER AGENT FEES The Fund paid transfer agent fees of $93,418, of which $55,958 was retained by Investor Services. 28 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN U.S. LONG-SHORT FUND 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the period ended October 31, 2005, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES At April 30, 2005, the Fund had tax basis capital losses which may be carried over to offset future capital gains, if any. At April 30, 2005, the capital loss carryforwards were as follows: Capital loss carryforwards expiring in: 2010.................................................. $ 6,588,893 2011.................................................. 40,708,375 2012.................................................. 5,254,173 ----------- $52,551,441 =========== Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions and certain dividends on securities sold short. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, and certain dividend payments on securities sold short. At October 31, 2005, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows: Cost of investments.................................... $64,689,273 =========== Unrealized appreciation ............................. 4,188,521 Unrealized depreciation............................... (1,792,597) ----------- Net unrealized appreciation (depreciation)............. $ 2,395,924 =========== 6. INVESTMENT TRANSACTIONS Purchases and sales of investments and securities sold short (excluding short term securities) for the period ended October 31, 2005, aggregated $66,908,065 and $69,013,668, respectively. Semiannual Report | 29 FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN U.S. LONG-SHORT FUND 6. INVESTMENT TRANSACTIONS (CONTINUED) Transactions in options written during the period ended October 31, 2005, were as follows: ---------------------- NUMBER OF PREMIUMS CONTRACTS RECEIVED ---------------------- Options outstanding at April 30, 2005 ......... 380 $128,060 Options written ............................... -- -- Options expired ............................... -- -- Options exercised ............................. -- -- Options closed ................................ -- -- ---------------------- Options outstanding at October 31, 2005 ....... 380 $128,060 ====================== 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund 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 Fund 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. 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 a plan for distribution of the respective settlement monies. The CAGO approved the distribution plan under the CAGO Settlement and, in accordance with the terms and conditions of that settlement, the monies were disbursed to the relevant funds in March, 2005. The SEC has not yet approved the distribution plan pertaining to the December 13, 2004 SEC Order. When approved, disbursements of settlement monies will be made promptly to the relevant funds, in accordance with the terms and conditions of that order. The IDC continues to develop the plan of distribution under the August 2, 2004 SEC Order that resolved the SEC's market timing investigation. 30 | Semiannual Report FRANKLIN STRATEGIC SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN U.S. LONG-SHORT FUND 8. 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 Trust, it is committed to making the Trust or its shareholders whole, as appropriate. Semiannual Report | 31 FRANKLIN STRATEGIC SERIES SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Trust has established Proxy Voting Policies and Procedures ("Policies") that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. 32 | Semiannual Report LITERATURE REQUEST LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT 1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service departments. These calls can be identified by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton 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 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 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 INCOME Franklin Adjustable U.S. Government Securities Fund4 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 Arizona California(7) Colorado Connecticut Florida(7) Georgia Kentucky Louisiana Maryland Massachusetts(6) Michigan(6) Minnesota(6) Missouri New Jersey New York(7) North Carolina Ohio(7) Oregon Pennsylvania Tennessee 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. 09/05 Not part of the semiannual report [LOGO](R) FRANKLIN TEMPLETON One Franklin Parkway INVESTMENTS San Mateo, CA 94403-1906 |_| WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. SEMIANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN U.S. LONG-SHORT FUND 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. 404 S2005 12/05 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial expert is Frank W. T. LaHaye and he is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (a) (1) Code of Ethics (a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN STRATEGIC SERIES By /s/JIMMY D. GAMBILL ------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date December 19, 2005 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 December 19, 2005 By /s/GALEN G. VETTER ------------------ Galen G. Vetter Chief Financial Officer Date December 19, 2005 EX-99.CODE ETH 2 ncsr-code704.txt Exhibit (a)(1) CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Dated July 2004 - ------------------------------------------------------------------------------- FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. Covered Officers and Purpose of the Code This code of ethics (the "Code") applies to the Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers," each of whom is set forth in Exhibit A) of each investment company advised by a Franklin Resources subsidiary and that is registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") for the purpose of promoting: o Honest and ethical conduct, including the ethical resolution of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by or on behalf of the FT Funds; o Compliance with applicable laws and governmental rules and regulations; o The prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o Accountability for adherence to the Code. Each Covered Officer will be expected to adhere to a high standard of business ethics and must be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Franklin Resources, Inc. has separately adopted the CODE OF ETHICS AND BUSINESS CONDUCT ("Business Conduct"), which is applicable to all officers, directors and employees of Franklin Resources, Inc., including Covered Officers. It summarizes the values, principles and business practices that guide the employee's business conduct and also provides a set of basic principles to guide officers, directors and employees regarding the minimum ethical requirements expected of them. It supplements the values, principles and business conduct identified in the Code and other existing employee policies. Additionally, the Franklin Templeton Funds have separately adopted the CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING governing personal securities trading and other related matters. The Code for Insider Trading provides for separate requirements that apply to the Covered Officers and others, and therefore is not part of this Code. Insofar as other policies or procedures of Franklin Resources, Inc., the Funds, the Funds' adviser, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superceded by this Code to the extent that they overlap or conflict with the provisions of this Code. Please review these other documents or consult with the Legal Department if have questions regarding the applicability of these policies to you. III. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the FT Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of apposition with the FT Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the FT Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the FT Funds because of their status as "affiliated persons" of the FT Funds. The FT Funds' and the investment advisers' compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the FT Funds, the investment advisers and the fund administrator of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the FT Funds, for the adviser, the administrator, or for all three), be involved in establishing policies and implementing decisions that will have different effects on the adviser, administrator and the FT Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the FT Funds, the adviser, and the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the FT Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the FT Funds' Boards of Directors ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the FT Funds. Each Covered Officer must: o Not use his or her personal influence or personal relationships improperly to influence investment decisions orfinancial reporting by the FT Funds whereby the Covered Officer would benefit personally to the detriment of the FT Funds; o Not cause the FT Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the FT Funds; o Not retaliate against any other Covered Officer or any employee of the FT Funds or their affiliated persons for reports of potential violations that are made in good faith; o Report at least annually the following affiliations or other relationships:/ 1 o all directorships for public companies and all companies that are required to file reports with the SEC; o any direct or indirect business relationship with any independent directors of the FT Funds; o any direct or indirect business relationship with any independent public accounting firm (which are not related to the routine issues related to the firm's service as the Covered Persons accountant); and o any direct or indirect interest in any transaction with any FT Fund that will benefit the officer (not including benefits derived from the advisory, sub-advisory, distribution or service agreements with affiliates of Franklin Resources). These reports will be reviewed by the Legal Department for compliance with the Code. There are some conflict of interest situations that should always be approved in writing by Franklin Resources General Counsel or Deputy General Counsel, if material. Examples of these include/2: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100 from any person, from any corporation or association o The receipt of any entertainment from any Company with which the FT Funds has current or prospective business dealings unless such entertainment is business related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety. Notwithstanding the foregoing, the Covered Officers must obtain prior approval from the Franklin Resources General Counsel for any entertainment with a value in excess of $1000. o Any ownership interest in, or any consulting or employment relationship with, any of the FT Fund's service providers, other than an investment adviser, principal underwriter, administrator or any affiliated person thereof; - ----------------------------- 1 Reporting of these affiliations or other relationships shall be made by completing the annual Directors and Officers Questionnaire and returning the questionnaire to Franklin Resources Inc, General Counsel or Deputy General Counsel. 2 Any activity or relationship that would present a conflict for a Covered Officer may also present a conflict for the Covered Officer if a member of the Covered Officer's immediate family engages in such an activity or has such a relationship. The Cover Person should also obtain written approval by FT's General Counsel in such situations. o A direct or indirect financial interest in commissions, transaction charges or spreads paid by the FT Funds for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. Franklin Resources General Counsel or Deputy General Counsel will provide a report to the FT Funds Audit Committee of any approvals granted at the next regularly scheduled meeting. IV. Disclosure and Compliance o Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the FT Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the FT Funds to others, whether within or outside the FT Funds, including to the FT Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the FT Funds, the FT Fund's adviser and the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the FT Funds file with, or submit to, the SEC and in other public communications made by the FT Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. V. Reporting and Accountability Each Covered Officer must: o Upon becoming a covered officer affirm in writing to the Board that he or she has received, read, and understands the Code (see Exhibit B); o Annually thereafter affirm to the Board that he has complied with the requirements of the Code; and o Notify Franklin Resources' General Counsel or Deputy General Counsel promptly if he or she knows of any violation of this Code. Failure to do so is itself is a violation of this Code. Franklin Resources' General Counsel and Deputy General Counsel are responsible for applying this Code to specific situations in which questions are presented under it and have the authority to interpret this Code in any particular situation./3 However, the Independent Directors of the respective FT Funds will consider any approvals or waivers/4 sought by any Chief Executive Officers of the Funds. - ----------------- 3 Franklin Resources General Counsel and Deputy General Counsel are authorized to consult, as appropriate, with members of the Audit Committee, counsel to the FT Funds and counsel to the Independent Directors, and are encouraged to do so. 4 Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics" and "implicit waiver," which must also be disclosed, as "the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer" of the registrant. See Part X. The FT Funds will follow these procedures in investigating and enforcing this Code: o Franklin Resources General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to the Legal Department; o If, after such investigation, the General Counsel or Deputy General Counsel believes that no violation has occurred, The General Counsel is not required to take any further action; o Any matter that the General Counsel or Deputy General Counsel believes is a violation will be reported to the Independent Directors of the appropriate FT Fund; o If the Independent Directors concur that a violation has occurred, it will inform and make a recommendation to the Board of the appropriate FT Fund or Funds, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Independent Directors will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, are disclosed as provided by SEC rules./5 VI. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the FT Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the FT Funds, the FT Funds' advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The FT Code of Ethics and Policy Statement On Insider Trading, adopted by the FT Funds, FT investment advisers and FT Fund's principal underwriter pursuant to Rule 17j-1 under the Investment Company Act, the Code of Ethics and Business Conduct and more detailed policies and procedures set forth in FT's Employee Handbook are separate requirements applying to the Covered Officers and others, and are not part of this Code. VII. Amendments Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the FT Funds' Board including a majority of independent directors. VIII. Confidentiality All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the FT Funds' Board and their counsel. - --------------------- 5 See Part X. IX. Internal Use The Code is intended solely for the internal use by the FT Funds and does not constitute an admission, by or on behalf of any FT Funds, as to any fact, circumstance, or legal conclusion. X. Disclosure on Form N-CSR Item 2 of Form N-CSR requires a registered management investment company to disclose annually whether, as of the end of the period covered by the report, it has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these officers are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, it must explain why it has not done so. The registrant must also: (1) file with the SEC a copy of the code as an exhibit to its annual report; (2) post the text of the code on its Internet website and disclose, in its most recent report on Form N-CSR, its Internet address and the fact that it has posted the code on its Internet website; or (3) undertake in its most recent report on Form N-CSR to provide to any person without charge, upon request, a copy of the code and explain the manner in which such request may be made. Disclosure is also required of amendments to, or waivers (including implicit waivers) from, a provision of the code in the registrant's annual report on Form N-CSR or on its website. If the registrant intends to satisfy the requirement to disclose amendments and waivers by posting such information on its website, it will be required to disclose its Internet address and this intention. The Legal Department shall be responsible for ensuring that: o a copy of the Code is filed with the SEC as an exhibit to each Fund's annual report; and o any amendments to, or waivers (including implicit waivers) from, a provision of the Code is disclosed in the registrant's annual report on Form N-CSR. In the event that the foregoing disclosure is omitted or is determined to be incorrect, the Legal Department shall promptly file such information with the SEC as an amendment to Form N-CSR. In such an event, the Fund Chief Compliance Officer shall review the Code and propose such changes to the Code as are necessary or appropriate to prevent reoccurrences. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics August 2004 FRANKLIN GROUP OF FUNDS Edward B. Jamieson, President and Chief Executive Officer - Investment Management Charles B. Johnson, President and Chief Executive Officer - Investment Management Gregory E. Johnson, President and Chief Executive Officer - Investment Management Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management William J. Lippman, President and Chief Executive Officer - Investment Management Christopher Molumphy President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Galen G. Vetter Chief Financial Officer FRANKLIN MUTUAL SERIES FUNDS David Winters Chairman of the Board, President, Chief Executive Officer-Investment Management Jimmy D. Gambill Senior Vice President and Chief Executive Officer- Finance and Administration Galen G. Vetter Chief Financial Officer TEMPLETON GROUP OF FUNDS Jeffrey A. Everett President and Chief Executive Officer - Investment Management Martin L. Flanagan President and Chief Executive Officer - Investment Management Mark Mobius President and Chief Executive Officer - Investment Management Christopher J. Molumphy President and Chief Executive Officer - Investment Management Gary P. Motyl President and Chief Executive Officer - Investment Management Donald F. Reed President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Galen G. Vetter Chief Financial Officer EXHIBIT B ACKNOWLEDGMENT FORM JULY 2004 FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS. INSTRUCTIONS: 1. Complete all sections of this form. 2. Print the completed form, sign, and date. 3. Submit completed form to FT's General Counsel within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Murray Simpson, General Counsel, Legal SM-920/2 TELEPHONE: (650) 312-7331 Fax: (650) 312-2221 E-MAIL: Simpson, Murray (internal address); mlsimpson@frk.com (external address) - ---------------------------------------------------------------------------- COVERED OFFICER'S NAME: - ---------------------------------------------------------------------------- TITLE: - ---------------------------------------------------------------------------- DEPARTMENT: - ---------------------------------------------------------------------------- LOCATION: - ---------------------------------------------------------------------------- CERTIFICATION FOR YEAR ENDING: - ---------------------------------------------------------------------------- TO: Franklin Resources General Counsel, Legal Department I hereby acknowledge receipt of a copy of Franklin Templeton Fund's code of ethics for Principal Executive Officers and Senior Financial Officers (the "Code") that I have read and understand. I will comply fully with all provisions of the Code to the extent they apply to me during the period of my employment. I further understand and acknowledge that any violation of the Code may subject me to disciplinary action, including termination of employment - ---------------------------- ---------------------- Signature Date signed EX-99.CERT 3 gambill302.txt Exhibit (a)(2) CERTIFICATIONS I, Jimmy D. Gambill, certify that: 1. I have reviewed this report on Form N-CSR of Franklin Strategic Series; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. December 19, 2005 /S/JIMMY D. GAMBILL Chief Executive Officer - Finance and Administration I, Galen G. Vetter, certify that: 1. I have reviewed this report on Form N-CSR of Franklin Strategic Series; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. December 19, 2005 /s/GALEN G. VETTER Chief Financial Officer EX-99.906 4 gambill906.txt Exhibit (b) CERTIFICATIONS CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jimmy D. Gambill, Chief Executive Officer of the Franklin Strategic Series. (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 10/31/05 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: December 19, 2005 /s/JIMMY D. GAMBILL Chief Executive Officer - Finance and Administration CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Galen G. Vetter, Chief Financial Officer of the Franklin Strategic Series. (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 10/31/05 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: December 19, 2005 /s/GALEN G. VETTER Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----