-----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, KZrIm1Ma4eyTkLpYoffKG+X4MeKMHmAd1M+QNFQFaM4il0m7A8xKbNRnBb907K/9 pjMprYq2fgBczOtJDr2C6Q== 0000872625-08-000011.txt : 20080701 0000872625-08-000011.hdr.sgml : 20080701 20080701123818 ACCESSION NUMBER: 0000872625-08-000011 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20080430 FILED AS OF DATE: 20080701 DATE AS OF CHANGE: 20080701 EFFECTIVENESS DATE: 20080701 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-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-06243 FILM NUMBER: 08928645 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 0000872625 S000006878 FRANKLIN GROWTH OPPORTUNITIES FUND C000018615 CLASS A FGRAX C000018616 CLASS B FKABX C000018617 CLASS C FKACX C000018618 ADVISOR CLASS FRAAX C000018619 CLASS R FKARX 0000872625 S000006879 FRANKLIN STRATEGIC INCOME FUND C000018620 CLASS A FRSTX C000018621 CLASS B FKSBX C000018622 CLASS C FSGCX C000018623 ADVISOR CLASS FKSAX C000018624 CLASS R FKSRX 0000872625 S000006880 FRANKLIN TECHNOLOGY FUND C000018625 CLASS B C000018626 CLASS A FTCAX C000018627 CLASS C FFTCX C000018628 ADVISOR CLASS FRTCX C000018629 CLASS R FTERX 0000872625 S000006882 FRANKLIN BIOTECHNOLOGY DISCOVERY FUND C000018631 CLASS A FBDIX 0000872625 S000006884 FRANKLIN FLEX CAP GROWTH FUND C000018636 CLASS A FKCGX C000018637 CLASS B FKCBX C000018638 CLASS C FCIIX C000018639 CLASS R FRCGX C000018640 ADVISOR CLASS FKCAX 0000872625 S000006885 FRANKLIN GLOBAL COMMUNICATIONS FUND C000018641 CLASS B C000018642 CLASS A FRGUX C000018643 CLASS C FRUTX 0000872625 S000006886 FRANKLIN GLOBAL HEALTH CARE FUND C000018644 CLASS A FKGHX C000018645 CLASS B FGHBX C000018646 CLASS C FGIIX 0000872625 S000006887 FRANKLIN NATURAL RESOURCES FUND C000018647 CLASS C C000018648 CLASS A FRNRX C000018649 ADVISOR CLASS FNRAX 0000872625 S000006888 FRANKLIN SMALL-MID CAP GROWTH FUND C000018650 CLASS A FRSGX C000018651 CLASS B FBSMX C000018652 CLASS C FRSIX C000018653 ADVISOR CLASS FSGAX C000018654 CLASS R FSMRX 0000872625 S000006889 FRANKLIN SMALL CAP GROWTH FUND II C000018655 CLASS A FSGRX C000018656 CLASS B FBSGX C000018657 CLASS C FCSGX C000018658 ADVISOR CLASS FSSAX C000018659 CLASS R FSSRX 0000872625 S000019837 Franklin Focused Core Equity Fund C000055670 A C000055671 C C000055672 R C000055673 Advisor N-CSR 1 ncsr.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-06243 --------- 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: 4/30/08 ------- ITEM 1. REPORTS TO STOCKHOLDERS. (GRAPHIC) APRIL 30, 2008 Franklin Flex Cap Growth Fund Franklin Growth Opportunities Fund (formerly, Franklin Aggressive Growth Fund) Franklin Small Cap Growth Fund (formerly, Franklin Small Cap Growth Fund II) Franklin Small-Mid Cap Growth Fund ANNUAL REPORT AND SHAREHOLDER LETTER GROWTH 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. (FRANKLIN TEMPLETON INVESTMENTS LOGO) FRANKLIN TEMPLETON INVESTMENTS FRANKLIN - Templeton - Mutual Series Annual Report Economic and Market Overview During the 12 months ended April 30, 2008, the U.S. economy slowed. The housing downturn negatively affected the overall economy by fourth quarter 2007 as credit conditions worsened and the pace of consumer spending declined. Gross domestic product (GDP) growth decelerated sharply from 4.9% in the third quarter of 2007 and registered annualized rates of 0.6% in the fourth quarter of 2007 and an estimated 0.9% in the first quarter of 2008. A weaker U.S. dollar compared with many foreign currencies over the past year contributed to increased exports, which along with inventory buildup, helped the fragile economy in the first quarter. The unemployment rate increased from 4.5% at the beginning of the period to 5.0% in April 2008.(1) Continued deterioration in consumer confidence, home prices and the job market, as well as rising mortgage and fuel costs, plagued the economy. Volatile oil prices reached a historical high in April, topping $119 per barrel, before retreating to $113 by period-end. For the 12 months ended April 30, 2008, the core Consumer Price Index (CPI), which excludes food and energy costs, rose 2.3%, which was higher than its 10-year average rate.(1) Faced with a deepening housing contraction and stressed financial markets, the Federal Reserve Board made several cuts to the federal funds target rate during the period, including 225 basis points so far in 2008. For the 12-month period, the federal funds target rate fell 325 basis points from 5.25% to 2.00%. As investors fled riskier, poorer-performing assets, U.S. Treasuries rallied, and the 10-year Treasury note yield fell from 4.63% at the beginning of the period to 3.77% on April 30, 2008. Stock markets were volatile during the period partly due to investor concerns about slowing economic growth. Overall, the blue chip stocks of the Dow Jones Industrial Average had a 12-month total return of +0.47%, while the broader Standard & Poor's 500 Index (S&P 500) had a -4.68% return, and (1.) Source: Bureau of Labor Statistics. Annual Report | 3 the technology-heavy NASDAQ Composite Index had a -3.74% return.(2) The energy, materials and consumer staples sectors performed relatively well. Large-capitalization stocks generally outperformed small caps, and growth stocks fared better than their value counterparts. (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 APRIL 30, 2008. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. 4 | Annual Report Franklin Flex Cap Growth Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Flex Cap Growth Fund seeks capital appreciation. The Fund invests predominantly 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 U.S., 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. We are pleased to bring you Franklin Flex Cap Growth Fund's annual report for the fiscal year ended April 30, 2008. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Flex Cap Growth Fund - Class A had a +2.98% cumulative total return. The Fund outperformed its narrow benchmark, the Russell 3000(R) Growth Index, which had a -0.79% return, and its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -4.68% return for the same period.(1) The Fund also outperformed its peers in the Lipper Multi-Cap Growth Funds Classification Average, which returned +0.03%.(2) 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. (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 12-month period ended 4/30/08, there were 513 funds in this category. Lipper calculations do not include sales charges or subsidization by a fund's manager. The Fund's performance relative to the average may have differed if these or other factors had been considered. The average includes reinvestment of any income or distributions. Past performance does not guarantee future results. 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 50. Annual Report | 5 PORTFOLIO BREAKDOWN Franklin Flex Cap Growth Fund Based on Total Net Assets as of 4/30/08 Software & Services* 18.9% Technology Hardware & Equipment* 15.5% Pharmaceuticals, Biotechnology & Life Sciences 12.1% Telecommunication Services 6.3% Capital Goods 5.7% Semiconductors & Semiconductor Equipment* 5.0% Health Care Equipment & Services 4.8% Transportation 4.3% Energy 4.0% Diversified Financials 3.4% Materials 3.2% Food, Beverage & Tobacco 2.9% Retailing 2.6% Household & Personal Products 2.1% Other 7.5% Short-Term Investments & Other Net Assets 1.7%
* 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 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 During the 12 months under review, among the holdings that contributed most to Fund performance relative to the Russell 3000 Growth Index were the world's largest consumer payment system operator Visa,(3) specialized imaging systems manufacturer FLIR Systems and medical monitoring device manufacturer Masimo.(3) From a sector perspective, our investments in the information technology sector made the largest contribution to relative Fund performance. In addition to Visa and FLIR Systems, key sector performers included BlackBerry smart phones manufacturer Research In Motion(3) and computer hardware, software and electronics device maker Apple. Stock selection in the information technology and health care sectors supported relative Fund performance. Biotechnology holdings Gilead Sciences and Celgene in the health care sector fared well. In addition, an underweighted allocation to the consumer discretionary sector helped relative performance. By contrast, the Fund had some disappointments during the reporting period, including international mobile telecommunication network provider NII Holdings, drug maker Schering-Plough, and residential and business mortgage lender CapitalSource (sold by period-end). Additionally, stock selection and our underweighted position in the consumer staples sector hurt the Fund's relative performance. Detractors included beverage company Hansen Natural and household products manufacturer Clorox. In the financials sector, an overweighted allocation negatively impacted performance, (3.) Not an index component. 6 | Annual Report and in addition to CapitalSource, credit rating agency Moody's and real estate services company Jones Lang LaSalle lost value. The Fund sold its positions in Moody's and CapitalSource by period-end. In the energy sector, underweighted positions in energy equipment and services, and oil, gas and consumable fuels companies also negatively affected relative Fund performance. Thank you for your continued participation in Franklin Flex Cap Growth Fund. We look forward to serving your future investment needs. (PHOTO OF CONRAD B. HERRMANN) /s/ Conrad B. Herrmann Conrad B. Herrmann, CFA Portfolio Manager Franklin Flex Cap Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF APRIL 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. TOP 10 HOLDINGS Franklin Flex Cap Growth Fund 4/30/08
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - ------------------------------------------------- ---------- Visa Inc., A 3.6% SOFTWARE & SERVICES Gilead Sciences Inc. 2.9% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES Google Inc., A 2.8% SOFTWARE & SERVICES Apple Inc. 2.7% TECHNOLOGY HARDWARE & EQUIPMENT Cisco Systems Inc. 2.4% TECHNOLOGY HARDWARE & EQUIPMENT American Tower Corp., A 2.2% TELECOMMUNICATION SERVICES FLIR Systems Inc. 2.2% TECHNOLOGY HARDWARE & EQUIPMENT Hewlett-Packard Co. 2.1% TECHNOLOGY HARDWARE & EQUIPMENT Praxair Inc. 2.0% MATERIALS CVS Caremark Corp. 2.0% FOOD & STAPLES RETAILING
Annual Report | 7 Performance Summary as of 4/30/08 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 and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FKCGX) CHANGE 4/30/08 4/30/07 - ------------------------------ ------ ------- ------- Net Asset Value (NAV) +$0.62 $45.77 $45.15 DISTRIBUTIONS (5/1/07-4/30/08) Dividend Income $0.0245 Long-Term Capital Gain $0.7438 TOTAL $0.7683
CLASS B (SYMBOL: FKCBX) CHANGE 4/30/08 4/30/07 - ------------------------------ ------ ------- ------- Net Asset Value (NAV) +$0.23 $42.66 $42.43 DISTRIBUTIONS (5/1/07-4/30/08) Long-Term Capital Gain $0.7438
CLASS C (SYMBOL: FCIIX) CHANGE 4/30/08 4/30/07 - ------------------------------ ------ ------- ------- Net Asset Value (NAV) +$0.24 $42.76 $42.52 DISTRIBUTIONS (5/1/07-4/30/08) Long-Term Capital Gain $0.7438
CLASS R (SYMBOL: FRCGX) CHANGE 4/30/08 4/30/07 - ------------------------------ ------ ------- ------- Net Asset Value (NAV) +$0.49 $45.10 $44.61 DISTRIBUTIONS (5/1/07-4/30/08) Dividend Income $0.0245 Long-Term Capital Gain $0.7438 TOTAL $0.7683
ADVISOR CLASS (SYMBOL: FKCAX) CHANGE 4/30/08 4/30/07 - ------------------------------ ------ ------- ------- Net Asset Value (NAV) +$0.74 $46.15 $45.41 DISTRIBUTIONS (5/1/07-4/30/08) Dividend Income $0.0245 Long-Term Capital Gain $0.7438 TOTAL $0.7683
8 | Annual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.UNTIL AUGUST 31, 2008, THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
CLASS A 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------ ------- ------- Cumulative Total Return(1) +2.98% +82.15% +104.61% Average Annual Total Return(2) -2.93% +11.41% +6.79% Value of $10,000 Investment(3) $9,707 $17,167 $19,287 Avg. Ann. Total Return (3/31/08)(4) -6.14% +11.21% +6.19% Total Annual Operating Expenses(5) 0.98%
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99) - ------------------------------------- ------ ------- ------------------ Cumulative Total Return(1) +2.19% +75.40% +92.18% Average Annual Total Return(2) -1.81% +11.64% +7.25% Value of $10,000 Investment(3) $9,819 $17,340 $19,218 Avg. Ann. Total Return (3/31/08)(4) -5.04% +11.43% +6.47% Total Annual Operating Expenses(5) 1.73%
CLASS C 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- ------- ------- Cumulative Total Return(1) +2.21% +75.45% +89.92% Average Annual Total Return(2) +1.21% +11.90% +6.62% Value of $10,000 Investment(3) $10,121 $17,545 $18,992 Avg. Ann. Total Return (3/31/08)(4) -2.12% +11.69% +6.03% Total Annual Operating Expenses(5) 1.71%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------------------------------------- ------- ------- ------------------ Cumulative Total Return(1) +2.73% +79.85% +43.98% Average Annual Total Return(2) +2.73% +12.46% +5.93% Value of $10,000 Investment(3) $10,273 $17,985 $14,398 Avg. Ann. Total Return (3/31/08)(4) -0.64% +12.25% +4.78% Total Annual Operating Expenses(5) 1.23%
ADVISOR CLASS(6) 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- ------- ------- Cumulative Total Return(1) +3.23% +83.79% +106.45% Average Annual Total Return(2) +3.23% +12.94% +7.52% Value of $10,000 Investment(3) $10,323 $18,379 $20,645 Avg. Ann. Total Return (3/31/08)(4) -0.15% +12.73% +6.92% Total Annual Operating Expenses(5) 0.73%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Annual Report | 9 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/08 - ------- ------- 1-Year -2.93% 5-Year +11.41% 10-Year +6.79%
CLASS A (5/1/98-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN FLEX CAP S&P 500 RUSSELL 3000 DATE GROWTH FUND - CLASS A INDEX GROWTH INDEX - ---------- --------------------- ------- ------------ 5/1/1998 $ 9,426 $10,000 $10,000 5/31/1998 $ 8,928 $ 9,828 $ 9,675 6/30/1998 $ 9,138 $10,227 $10,223 7/31/1998 $ 8,703 $10,118 $10,086 8/31/1998 $ 7,263 $ 8,656 $ 8,505 9/30/1998 $ 7,743 $ 9,210 $ 9,175 10/31/1998 $ 8,174 $ 9,959 $ 9,892 11/30/1998 $ 8,771 $10,563 $10,645 12/31/1998 $ 9,446 $11,171 $11,605 1/31/1999 $10,053 $11,639 $12,275 2/28/1999 $ 9,260 $11,277 $11,673 3/31/1999 $ 9,808 $11,728 $12,274 4/30/1999 $10,029 $12,182 $12,363 5/31/1999 $ 9,998 $11,895 $12,013 6/30/1999 $11,011 $12,555 $12,838 7/31/1999 $11,116 $12,163 $12,431 8/31/1999 $11,561 $12,102 $12,585 9/30/1999 $11,791 $11,771 $12,355 10/31/1999 $13,248 $12,516 $13,245 11/30/1999 $15,150 $12,770 $14,005 12/31/1999 $18,436 $13,522 $15,531 1/31/2000 $18,452 $12,843 $14,844 2/29/2000 $23,234 $12,600 $15,772 3/31/2000 $21,952 $13,832 $16,664 4/30/2000 $19,547 $13,416 $15,807 5/31/2000 $18,265 $13,141 $14,971 6/30/2000 $20,993 $13,465 $16,158 7/31/2000 $20,436 $13,254 $15,435 8/31/2000 $23,425 $14,078 $16,847 9/30/2000 $22,697 $13,334 $15,304 10/31/2000 $20,720 $13,278 $14,544 11/30/2000 $16,300 $12,231 $12,367 12/31/2000 $17,138 $12,291 $12,049 1/31/2001 $17,441 $12,727 $12,892 2/28/2001 $14,213 $11,567 $10,733 3/31/2001 $12,685 $10,834 $ 9,579 4/30/2001 $14,106 $11,676 $10,788 5/31/2001 $14,110 $11,754 $10,659 6/30/2001 $14,023 $11,468 $10,453 7/31/2001 $13,497 $11,355 $10,148 8/31/2001 $12,813 $10,644 $ 9,331 9/30/2001 $11,040 $ 9,785 $ 8,361 10/31/2001 $11,802 $ 9,971 $ 8,823 11/30/2001 $12,909 $10,736 $ 9,663 12/31/2001 $13,157 $10,830 $ 9,685 1/31/2002 $12,875 $10,672 $ 9,502 2/28/2002 $12,382 $10,466 $ 9,093 3/31/2002 $13,335 $10,860 $ 9,438 4/30/2002 $12,718 $10,201 $ 8,707 5/31/2002 $12,436 $10,126 $ 8,474 6/30/2002 $11,434 $ 9,405 $ 7,695 7/31/2002 $10,249 $ 8,672 $ 7,220 8/31/2002 $10,195 $ 8,729 $ 7,240 9/30/2002 $ 9,429 $ 7,780 $ 6,503 10/31/2002 $ 9,942 $ 8,465 $ 7,082 11/30/2002 $10,556 $ 8,963 $ 7,487 12/31/2002 $ 9,876 $ 8,437 $ 6,970 1/31/2003 $ 9,893 $ 8,216 $ 6,799 2/28/2003 $ 9,843 $ 8,092 $ 6,758 3/31/2003 $ 9,930 $ 8,171 $ 6,883 4/30/2003 $10,589 $ 8,844 $ 7,400 5/31/2003 $11,384 $ 9,310 $ 7,799 6/30/2003 $11,454 $ 9,429 $ 7,910 7/31/2003 $11,923 $ 9,595 $ 8,134 8/31/2003 $12,503 $ 9,782 $ 8,353 9/30/2003 $12,134 $ 9,678 $ 8,255 10/31/2003 $13,190 $10,226 $ 8,737 11/30/2003 $13,609 $10,316 $ 8,843 12/31/2003 $13,874 $10,857 $ 9,128 1/31/2004 $14,093 $11,056 $ 9,337 2/29/2004 $14,213 $11,210 $ 9,390 3/31/2004 $14,276 $11,040 $ 9,233 4/30/2004 $13,986 $10,867 $ 9,097 5/31/2004 $14,404 $11,016 $ 9,268 6/30/2004 $14,657 $11,230 $ 9,398 7/31/2004 $13,770 $10,859 $ 8,841 8/31/2004 $13,696 $10,903 $ 8,786 9/30/2004 $14,164 $11,021 $ 8,901 10/31/2004 $14,491 $11,189 $ 9,046 11/30/2004 $15,104 $11,642 $ 9,395 12/31/2004 $15,672 $12,038 $ 9,761 1/31/2005 $15,100 $11,745 $ 9,425 2/28/2005 $15,373 $11,992 $ 9,528 3/31/2005 $15,017 $11,779 $ 9,338 4/30/2005 $14,607 $11,556 $ 9,125 5/31/2005 $15,328 $11,924 $ 9,583 6/30/2005 $15,220 $11,941 $ 9,577 7/31/2005 $15,904 $12,385 $10,062 8/31/2005 $15,788 $12,272 $ 9,931 9/30/2005 $15,958 $12,371 $ 9,980 10/31/2005 $15,709 $12,165 $ 9,859 11/30/2005 $16,620 $12,625 $10,296 12/31/2005 $16,645 $12,629 $10,265 1/31/2006 $17,474 $12,964 $10,516 2/28/2006 $17,494 $12,999 $10,495 3/31/2006 $17,668 $13,161 $10,683 4/30/2006 $17,586 $13,337 $10,667 5/31/2006 $16,554 $12,954 $10,268 6/30/2006 $16,753 $12,971 $10,232 7/31/2006 $16,401 $13,051 $10,008 8/31/2006 $16,687 $13,362 $10,318 9/30/2006 $17,014 $13,706 $10,584 10/31/2006 $17,424 $14,153 $10,982 11/30/2006 $17,834 $14,422 $11,204 12/31/2006 $17,604 $14,624 $11,236 1/31/2007 $18,160 $14,845 $11,518 2/28/2007 $17,832 $14,555 $11,316 3/31/2007 $17,990 $14,718 $11,381 4/30/2007 $18,728 $15,370 $11,897 5/31/2007 $19,317 $15,906 $12,335 6/30/2007 $19,224 $15,642 $12,160 7/31/2007 $19,095 $15,157 $11,933 8/31/2007 $19,714 $15,384 $12,133 9/30/2007 $20,963 $15,959 $12,628 10/31/2007 $21,556 $16,213 $13,069 11/30/2007 $20,569 $15,535 $12,552 12/31/2007 $20,425 $15,427 $12,517 1/31/2008 $18,415 $14,502 $11,527 2/29/2008 $17,854 $14,031 $11,284 3/31/2008 $17,917 $13,970 $11,216 4/30/2008 $19,287 $14,651 $11,804
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/08 - ------------------------ ------- 1-Year -1.81% 5-Year +11.64% Since Inception (1/1/99) +7.25%
CLASS B (1/1/99-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN FLEX CAP S&P 500 RUSSELL 3000 DATE GROWTH FUND - CLASS B INDEX GROWTH INDEX - ---------- --------------------- ------- ------------ 1/1/1999 $10,000 $10,000 $10,000 1/31/1999 $10,633 $10,418 $10,577 2/28/1999 $ 9,786 $10,094 $10,058 3/31/1999 $10,362 $10,498 $10,576 4/30/1999 $10,588 $10,905 $10,653 5/31/1999 $10,551 $10,647 $10,351 6/30/1999 $11,610 $11,238 $11,062 7/31/1999 $11,709 $10,887 $10,711 8/31/1999 $12,175 $10,833 $10,845 9/30/1999 $12,406 $10,536 $10,646 10/31/1999 $13,932 $11,203 $11,413 11/30/1999 $15,919 $11,431 $12,068 12/31/1999 $19,359 $12,104 $13,383 1/31/2000 $19,359 $11,496 $12,791 2/29/2000 $24,362 $11,278 $13,590 3/31/2000 $23,001 $12,382 $14,359 4/30/2000 $20,473 $12,009 $13,620 5/31/2000 $19,116 $11,763 $12,900 6/30/2000 $21,957 $12,053 $13,923 7/31/2000 $21,363 $11,864 $13,300 8/31/2000 $24,473 $12,601 $14,517 9/30/2000 $23,694 $11,936 $13,187 10/31/2000 $21,615 $11,886 $12,532 11/30/2000 $16,992 $10,949 $10,656 12/31/2000 $17,857 $11,002 $10,383 1/31/2001 $18,160 $11,392 $11,109 2/28/2001 $14,795 $10,354 $ 9,248 3/31/2001 $13,193 $ 9,698 $ 8,254 4/30/2001 $14,668 $10,451 $ 9,295 5/31/2001 $14,659 $10,521 $ 9,185 6/30/2001 $14,558 $10,265 $ 9,007 7/31/2001 $14,005 $10,164 $ 8,744 8/31/2001 $13,290 $ 9,528 $ 8,040 9/30/2001 $11,438 $ 8,759 $ 7,205 10/31/2001 $12,219 $ 8,926 $ 7,602 11/30/2001 $13,360 $ 9,610 $ 8,326 12/31/2001 $13,610 $ 9,694 $ 8,345 1/31/2002 $13,312 $ 9,553 $ 8,187 2/28/2002 $12,794 $ 9,369 $ 7,835 3/31/2002 $13,768 $ 9,721 $ 8,133 4/30/2002 $13,123 $ 9,132 $ 7,503 5/31/2002 $12,825 $ 9,064 $ 7,302 6/30/2002 $11,785 $ 8,419 $ 6,631 7/31/2002 $10,556 $ 7,763 $ 6,221 8/31/2002 $10,495 $ 7,813 $ 6,238 9/30/2002 $ 9,701 $ 6,964 $ 5,603 10/31/2002 $10,219 $ 7,577 $ 6,103 11/30/2002 $10,846 $ 8,023 $ 6,451 12/31/2002 $10,140 $ 7,552 $ 6,005 1/31/2003 $10,148 $ 7,354 $ 5,859 2/28/2003 $10,091 $ 7,244 $ 5,823 3/31/2003 $10,175 $ 7,314 $ 5,931 4/30/2003 $10,846 $ 7,917 $ 6,377 5/31/2003 $11,649 $ 8,334 $ 6,721 6/30/2003 $11,719 $ 8,440 $ 6,816 7/31/2003 $12,189 $ 8,589 $ 7,009 8/31/2003 $12,772 $ 8,756 $ 7,198 9/30/2003 $12,386 $ 8,663 $ 7,113 10/31/2003 $13,457 $ 9,153 $ 7,528 11/30/2003 $13,873 $ 9,234 $ 7,620 12/31/2003 $14,137 $ 9,718 $ 7,866 1/31/2004 $14,356 $ 9,897 $ 8,045 2/29/2004 $14,466 $10,034 $ 8,091 3/31/2004 $14,523 $ 9,883 $ 7,956 4/30/2004 $14,216 $ 9,728 $ 7,839 5/31/2004 $14,632 $ 9,861 $ 7,986 6/30/2004 $14,882 $10,053 $ 8,098 7/31/2004 $13,970 $ 9,720 $ 7,618 8/31/2004 $13,887 $ 9,759 $ 7,570 9/30/2004 $14,356 $ 9,865 $ 7,670 10/31/2004 $14,676 $10,016 $ 7,795 11/30/2004 $15,286 $10,421 $ 8,095 12/31/2004 $15,852 $10,776 $ 8,410 1/31/2005 $15,264 $10,513 $ 8,121 2/28/2005 $15,532 $10,734 $ 8,210 3/31/2005 $15,163 $10,544 $ 8,047 4/30/2005 $14,738 $10,344 $ 7,863 5/31/2005 $15,453 $10,673 $ 8,258 6/30/2005 $15,339 $10,689 $ 8,252 7/31/2005 $16,014 $11,086 $ 8,670 8/31/2005 $15,892 $10,985 $ 8,558 9/30/2005 $16,054 $11,074 $ 8,600 10/31/2005 $15,791 $10,889 $ 8,495 11/30/2005 $16,699 $11,301 $ 8,872 12/31/2005 $16,708 $11,305 $ 8,845 1/31/2006 $17,528 $11,604 $ 9,061 2/28/2006 $17,541 $11,636 $ 9,044 3/31/2006 $17,704 $11,781 $ 9,205 4/30/2006 $17,612 $11,939 $ 9,192 5/31/2006 $16,567 $11,595 $ 8,848 6/30/2006 $16,756 $11,611 $ 8,817 7/31/2006 $16,392 $11,683 $ 8,623 8/31/2006 $16,668 $11,961 $ 8,891 9/30/2006 $16,984 $12,269 $ 9,120 10/31/2006 $17,383 $12,669 $ 9,463 11/30/2006 $17,778 $12,909 $ 9,654 12/31/2006 $17,541 $13,091 $ 9,682 1/31/2007 $18,095 $13,289 $ 9,925 2/28/2007 $17,770 $13,029 $ 9,751 3/31/2007 $17,926 $13,174 $ 9,807 4/30/2007 $18,661 $13,758 $10,252 5/31/2007 $19,249 $14,238 $10,628 6/30/2007 $19,156 $14,001 $10,478 7/31/2007 $19,028 $13,567 $10,283 8/31/2007 $19,645 $13,771 $10,454 9/30/2007 $20,890 $14,286 $10,881 10/31/2007 $21,481 $14,513 $11,261 11/30/2007 $20,497 $13,906 $10,816 12/31/2007 $20,354 $13,810 $10,785 1/31/2008 $18,351 $12,981 $ 9,932 2/29/2008 $17,793 $12,560 $ 9,723 3/31/2008 $17,855 $12,505 $ 9,664 4/30/2008 $19,218 $13,115 $10,171
10 | Annual Report Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/08 - ------- ------- 1-Year +1.21% 5-Year +11.90% 10-Year +6.62%
CLASS C (5/1/98-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN FLEX CAP S&P 500 RUSSELL 3000 DATE GROWTH FUND - CLASS C INDEX GROWTH INDEX - ---------- --------------------- ------- ------------ 5/1/1998 $10,000 $10,000 $10,000 5/31/1998 $ 9,468 $ 9,828 $ 9,675 6/30/1998 $ 9,682 $10,227 $10,223 7/31/1998 $ 9,214 $10,118 $10,086 8/31/1998 $ 7,687 $ 8,656 $ 8,505 9/30/1998 $ 8,191 $ 9,210 $ 9,175 10/31/1998 $ 8,642 $ 9,959 $ 9,892 11/30/1998 $ 9,263 $10,563 $10,645 12/31/1998 $ 9,974 $11,171 $11,605 1/31/1999 $10,609 $11,639 $12,275 2/28/1999 $ 9,768 $11,277 $11,673 3/31/1999 $10,337 $11,728 $12,274 4/30/1999 $10,567 $12,182 $12,363 5/31/1999 $10,526 $11,895 $12,013 6/30/1999 $11,586 $12,555 $12,838 7/31/1999 $11,689 $12,163 $12,431 8/31/1999 $12,151 $12,102 $12,585 9/30/1999 $12,382 $11,771 $12,355 10/31/1999 $13,908 $12,516 $13,245 11/30/1999 $15,893 $12,770 $14,005 12/31/1999 $19,330 $13,522 $15,531 1/31/2000 $19,334 $12,843 $14,844 2/29/2000 $24,330 $12,600 $15,772 3/31/2000 $22,973 $13,832 $16,664 4/30/2000 $20,444 $13,416 $15,807 5/31/2000 $19,091 $13,141 $14,971 6/30/2000 $21,925 $13,465 $16,158 7/31/2000 $21,331 $13,254 $15,435 8/31/2000 $24,434 $14,078 $16,847 9/30/2000 $23,658 $13,334 $15,304 10/31/2000 $21,583 $13,278 $14,544 11/30/2000 $16,966 $12,231 $12,367 12/31/2000 $17,834 $12,291 $12,049 1/31/2001 $18,131 $12,727 $12,892 2/28/2001 $14,770 $11,567 $10,733 3/31/2001 $13,171 $10,834 $ 9,579 4/30/2001 $14,639 $11,676 $10,788 5/31/2001 $14,635 $11,754 $10,659 6/30/2001 $14,530 $11,468 $10,453 7/31/2001 $13,975 $11,355 $10,148 8/31/2001 $13,263 $10,644 $ 9,331 9/30/2001 $11,419 $ 9,785 $ 8,361 10/31/2001 $12,196 $ 9,971 $ 8,823 11/30/2001 $13,337 $10,736 $ 9,663 12/31/2001 $13,582 $10,830 $ 9,685 1/31/2002 $13,284 $10,672 $ 9,502 2/28/2002 $12,769 $10,466 $ 9,093 3/31/2002 $13,743 $10,860 $ 9,438 4/30/2002 $13,097 $10,201 $ 8,707 5/31/2002 $12,799 $10,126 $ 8,474 6/30/2002 $11,764 $ 9,405 $ 7,695 7/31/2002 $10,536 $ 8,672 $ 7,220 8/31/2002 $10,475 $ 8,729 $ 7,240 9/30/2002 $ 9,684 $ 7,780 $ 6,503 10/31/2002 $10,199 $ 8,465 $ 7,082 11/30/2002 $10,824 $ 8,963 $ 7,487 12/31/2002 $10,121 $ 8,437 $ 6,970 1/31/2003 $10,129 $ 8,216 $ 6,799 2/28/2003 $10,073 $ 8,092 $ 6,758 3/31/2003 $10,156 $ 8,171 $ 6,883 4/30/2003 $10,824 $ 8,844 $ 7,400 5/31/2003 $11,628 $ 9,310 $ 7,799 6/30/2003 $11,694 $ 9,429 $ 7,910 7/31/2003 $12,161 $ 9,595 $ 8,134 8/31/2003 $12,747 $ 9,782 $ 8,353 9/30/2003 $12,362 $ 9,678 $ 8,255 10/31/2003 $13,429 $10,226 $ 8,737 11/30/2003 $13,848 $10,316 $ 8,843 12/31/2003 $14,110 $10,857 $ 9,128 1/31/2004 $14,325 $11,056 $ 9,337 2/29/2004 $14,438 $11,210 $ 9,390 3/31/2004 $14,495 $11,040 $ 9,233 4/30/2004 $14,189 $10,867 $ 9,097 5/31/2004 $14,604 $11,016 $ 9,268 6/30/2004 $14,853 $11,230 $ 9,398 7/31/2004 $13,944 $10,859 $ 8,841 8/31/2004 $13,857 $10,903 $ 8,786 9/30/2004 $14,325 $11,021 $ 8,901 10/31/2004 $14,648 $11,189 $ 9,046 11/30/2004 $15,255 $11,642 $ 9,395 12/31/2004 $15,819 $12,038 $ 9,761 1/31/2005 $15,233 $11,745 $ 9,425 2/28/2005 $15,500 $11,992 $ 9,528 3/31/2005 $15,133 $11,779 $ 9,338 4/30/2005 $14,709 $11,556 $ 9,125 5/31/2005 $15,421 $11,924 $ 9,583 6/30/2005 $15,308 $11,941 $ 9,577 7/31/2005 $15,981 $12,385 $10,062 8/31/2005 $15,858 $12,272 $ 9,931 9/30/2005 $16,020 $12,371 $ 9,980 10/31/2005 $15,758 $12,165 $ 9,859 11/30/2005 $16,662 $12,625 $10,296 12/31/2005 $16,676 $12,629 $10,265 1/31/2006 $17,493 $12,964 $10,516 2/28/2006 $17,510 $12,999 $10,495 3/31/2006 $17,668 $13,161 $10,683 4/30/2006 $17,576 $13,337 $10,667 5/31/2006 $16,531 $12,954 $10,268 6/30/2006 $16,724 $12,971 $10,232 7/31/2006 $16,361 $13,051 $10,008 8/31/2006 $16,632 $13,362 $10,318 9/30/2006 $16,951 $13,706 $10,584 10/31/2006 $17,349 $14,153 $10,982 11/30/2006 $17,746 $14,422 $11,204 12/31/2006 $17,506 $14,624 $11,236 1/31/2007 $18,048 $14,845 $11,518 2/28/2007 $17,711 $14,555 $11,316 3/31/2007 $17,860 $14,718 $11,381 4/30/2007 $18,581 $15,370 $11,897 5/31/2007 $19,153 $15,906 $12,335 6/30/2007 $19,048 $15,642 $12,160 7/31/2007 $18,909 $15,157 $11,933 8/31/2007 $19,507 $15,384 $12,133 9/30/2007 $20,731 $15,959 $12,628 10/31/2007 $21,308 $16,213 $13,069 11/30/2007 $20,316 $15,535 $12,552 12/31/2007 $20,164 $15,427 $12,517 1/31/2008 $18,166 $14,502 $11,527 2/29/2008 $17,602 $14,031 $11,284 3/31/2008 $17,655 $13,970 $11,216 4/30/2008 $18,992 $14,651 $11,804
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/08 - ------- ------- 1-Year +2.73% 5-Year +12.46% Since Inception (1/1/02) +5.93%
CLASS R (1/1/02-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN FLEX CAP S&P 500 RUSSELL 3000 DATE GROWTH FUND - CLASS R INDEX GROWTH INDEX - ---------- --------------------- ------- ------------ 1/1/2002 $10,000 $10,000 $10,000 1/31/2002 $ 9,758 $ 9,854 $ 9,811 2/28/2002 $ 9,384 $ 9,664 $ 9,389 3/31/2002 $10,103 $10,027 $ 9,746 4/30/2002 $ 9,632 $ 9,420 $ 8,991 5/31/2002 $ 9,415 $ 9,350 $ 8,750 6/30/2002 $ 8,659 $ 8,684 $ 7,946 7/31/2002 $ 7,760 $ 8,007 $ 7,455 8/31/2002 $ 7,719 $ 8,060 $ 7,476 9/30/2002 $ 7,139 $ 7,184 $ 6,715 10/31/2002 $ 7,525 $ 7,816 $ 7,313 11/30/2002 $ 7,987 $ 8,276 $ 7,730 12/31/2002 $ 7,471 $ 7,790 $ 7,197 1/31/2003 $ 7,481 $ 7,586 $ 7,021 2/28/2003 $ 7,443 $ 7,472 $ 6,978 3/31/2003 $ 7,506 $ 7,545 $ 7,107 4/30/2003 $ 8,005 $ 8,166 $ 7,641 5/31/2003 $ 8,602 $ 8,596 $ 8,053 6/30/2003 $ 8,655 $ 8,706 $ 8,167 7/31/2003 $ 9,007 $ 8,859 $ 8,399 8/31/2003 $ 9,444 $ 9,032 $ 8,626 9/30/2003 $ 9,165 $ 8,936 $ 8,524 10/31/2003 $ 9,955 $ 9,442 $ 9,021 11/30/2003 $10,273 $ 9,525 $ 9,131 12/31/2003 $10,470 $10,024 $ 9,426 1/31/2004 $10,634 $10,208 $ 9,641 2/29/2004 $10,722 $10,350 $ 9,696 3/31/2004 $10,765 $10,194 $ 9,533 4/30/2004 $10,543 $10,034 $ 9,394 5/31/2004 $10,857 $10,172 $ 9,570 6/30/2004 $11,046 $10,370 $ 9,704 7/31/2004 $10,376 $10,026 $ 9,129 8/31/2004 $10,317 $10,067 $ 9,072 9/30/2004 $10,669 $10,176 $ 9,191 10/31/2004 $10,913 $10,332 $ 9,341 11/30/2004 $11,369 $10,750 $ 9,701 12/31/2004 $11,796 $11,115 $10,078 1/31/2005 $11,363 $10,844 $ 9,732 2/28/2005 $11,566 $11,073 $ 9,838 3/31/2005 $11,296 $10,877 $ 9,643 4/30/2005 $10,986 $10,670 $ 9,422 5/31/2005 $11,522 $11,010 $ 9,895 6/30/2005 $11,441 $11,025 $ 9,889 7/31/2005 $11,952 $11,435 $10,390 8/31/2005 $11,865 $11,331 $10,255 9/30/2005 $11,990 $11,423 $10,305 10/31/2005 $11,799 $11,232 $10,180 11/30/2005 $12,484 $11,657 $10,631 12/31/2005 $12,496 $11,661 $10,599 1/31/2006 $13,114 $11,970 $10,858 2/28/2006 $13,130 $12,003 $10,837 3/31/2006 $13,256 $12,152 $11,031 4/30/2006 $13,190 $12,315 $11,014 5/31/2006 $12,414 $11,961 $10,603 6/30/2006 $12,562 $11,977 $10,565 7/31/2006 $12,295 $12,051 $10,334 8/31/2006 $12,506 $12,338 $10,654 9/30/2006 $12,747 $12,655 $10,929 10/31/2006 $13,056 $13,068 $11,340 11/30/2006 $13,357 $13,316 $11,568 12/31/2006 $13,182 $13,503 $11,602 1/31/2007 $13,597 $13,707 $11,893 2/28/2007 $13,349 $13,439 $11,685 3/31/2007 $13,466 $13,590 $11,752 4/30/2007 $14,015 $14,192 $12,285 5/31/2007 $14,455 $14,687 $12,736 6/30/2007 $14,378 $14,443 $12,556 7/31/2007 $14,280 $13,995 $12,322 8/31/2007 $14,739 $14,205 $12,528 9/30/2007 $15,670 $14,736 $13,039 10/31/2007 $16,113 $14,970 $13,495 11/30/2007 $15,372 $14,344 $12,961 12/31/2007 $15,259 $14,245 $12,925 1/31/2008 $13,753 $13,391 $11,902 2/29/2008 $13,334 $12,956 $11,652 3/31/2008 $13,379 $12,900 $11,581 4/30/2008 $14,398 $13,528 $12,188
Annual Report | 11 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(6) 4/30/08 - ---------------- ------- 1-Year +3.23% 5-Year +12.94% 10-Year +7.52%
ADVISOR CLASS (5/1/98-4/30/08)(6) (PERFORMANCE GRAPH)
FRANKLIN FLEX CAP S&P 500 RUSSELL 3000 DATE GROWTH FUND - ADVISOR CLASS INDEX GROWTH INDEX - ---------- --------------------------- ------- ------------ 5/1/1998 $10,000 $10,000 $10,000 5/31/1998 $ 9,472 $ 9,828 $ 9,675 6/30/1998 $ 9,694 $10,227 $10,223 7/31/1998 $ 9,233 $10,118 $10,086 8/31/1998 $ 7,705 $ 8,656 $ 8,505 9/30/1998 $ 8,214 $ 9,210 $ 9,175 10/31/1998 $ 8,671 $ 9,959 $ 9,892 11/30/1998 $ 9,305 $10,563 $10,645 12/31/1998 $10,021 $11,171 $11,605 1/31/1999 $10,664 $11,639 $12,275 2/28/1999 $ 9,823 $11,277 $11,673 3/31/1999 $10,405 $11,728 $12,274 4/30/1999 $10,639 $12,182 $12,363 5/31/1999 $10,606 $11,895 $12,013 6/30/1999 $11,681 $12,555 $12,838 7/31/1999 $11,793 $12,163 $12,431 8/31/1999 $12,264 $12,102 $12,585 9/30/1999 $12,508 $11,771 $12,355 10/31/1999 $14,055 $12,516 $13,245 11/30/1999 $16,072 $12,770 $14,005 12/31/1999 $19,558 $13,522 $15,531 1/31/2000 $19,575 $12,843 $14,844 2/29/2000 $24,648 $12,600 $15,772 3/31/2000 $23,288 $13,832 $16,664 4/30/2000 $20,737 $13,416 $15,807 5/31/2000 $19,376 $13,141 $14,971 6/30/2000 $22,271 $13,465 $16,158 7/31/2000 $21,679 $13,254 $15,435 8/31/2000 $24,851 $14,078 $16,847 9/30/2000 $24,078 $13,334 $15,304 10/31/2000 $21,981 $13,278 $14,544 11/30/2000 $17,292 $12,231 $12,367 12/31/2000 $18,181 $12,291 $12,049 1/31/2001 $18,502 $12,727 $12,892 2/28/2001 $15,078 $11,567 $10,733 3/31/2001 $13,457 $10,834 $ 9,579 4/30/2001 $14,964 $11,676 $10,788 5/31/2001 $14,968 $11,754 $10,659 6/30/2001 $14,876 $11,468 $10,453 7/31/2001 $14,318 $11,355 $10,148 8/31/2001 $13,593 $10,644 $ 9,331 9/30/2001 $11,712 $ 9,785 $ 8,361 10/31/2001 $12,521 $ 9,971 $ 8,823 11/30/2001 $13,694 $10,736 $ 9,663 12/31/2001 $13,958 $10,830 $ 9,685 1/31/2002 $13,659 $10,672 $ 9,502 2/28/2002 $13,136 $10,466 $ 9,093 3/31/2002 $14,147 $10,860 $ 9,438 4/30/2002 $13,492 $10,201 $ 8,707 5/31/2002 $13,193 $10,126 $ 8,474 6/30/2002 $12,129 $ 9,405 $ 7,695 7/31/2002 $10,873 $ 8,672 $ 7,220 8/31/2002 $10,815 $ 8,729 $ 7,240 9/30/2002 $10,002 $ 7,780 $ 6,503 10/31/2002 $10,547 $ 8,465 $ 7,082 11/30/2002 $11,198 $ 8,963 $ 7,487 12/31/2002 $10,477 $ 8,437 $ 6,970 1/31/2003 $10,495 $ 8,216 $ 6,799 2/28/2003 $10,442 $ 8,092 $ 6,758 3/31/2003 $10,534 $ 8,171 $ 6,883 4/30/2003 $11,233 $ 8,844 $ 7,400 5/31/2003 $12,077 $ 9,310 $ 7,799 6/30/2003 $12,151 $ 9,429 $ 7,910 7/31/2003 $12,648 $ 9,595 $ 8,134 8/31/2003 $13,263 $ 9,782 $ 8,353 9/30/2003 $12,872 $ 9,678 $ 8,255 10/31/2003 $13,993 $10,226 $ 8,737 11/30/2003 $14,437 $10,316 $ 8,843 12/31/2003 $14,718 $10,857 $ 9,128 1/31/2004 $14,951 $11,056 $ 9,337 2/29/2004 $15,078 $11,210 $ 9,390 3/31/2004 $15,144 $11,040 $ 9,233 4/30/2004 $14,837 $10,867 $ 9,097 5/31/2004 $15,281 $11,016 $ 9,268 6/30/2004 $15,549 $11,230 $ 9,398 7/31/2004 $14,608 $10,859 $ 8,841 8/31/2004 $14,529 $10,903 $ 8,786 9/30/2004 $15,030 $11,021 $ 8,901 10/31/2004 $15,382 $11,189 $ 9,046 11/30/2004 $16,032 $11,642 $ 9,395 12/31/2004 $16,638 $12,038 $ 9,761 1/31/2005 $16,036 $11,745 $ 9,425 2/28/2005 $16,331 $11,992 $ 9,528 3/31/2005 $15,953 $11,779 $ 9,338 4/30/2005 $15,522 $11,556 $ 9,125 5/31/2005 $16,287 $11,924 $ 9,583 6/30/2005 $16,181 $11,941 $ 9,577 7/31/2005 $16,907 $12,385 $10,062 8/31/2005 $16,792 $12,272 $ 9,931 9/30/2005 $16,977 $12,371 $ 9,980 10/31/2005 $16,713 $12,165 $ 9,859 11/30/2005 $17,689 $12,625 $10,296 12/31/2005 $17,715 $12,629 $10,265 1/31/2006 $18,599 $12,964 $10,516 2/28/2006 $18,629 $12,999 $10,495 3/31/2006 $18,814 $13,161 $10,683 4/30/2006 $18,730 $13,337 $10,667 5/31/2006 $17,636 $12,954 $10,268 6/30/2006 $17,851 $12,971 $10,232 7/31/2006 $17,482 $13,051 $10,008 8/31/2006 $17,786 $13,362 $10,318 9/30/2006 $18,141 $13,706 $10,584 10/31/2006 $18,585 $14,153 $10,982 11/30/2006 $19,020 $14,422 $11,204 12/31/2006 $18,783 $14,624 $11,236 1/31/2007 $19,378 $14,845 $11,518 2/28/2007 $19,034 $14,555 $11,316 3/31/2007 $19,206 $14,718 $11,381 4/30/2007 $19,999 $15,370 $11,897 5/31/2007 $20,633 $15,906 $12,335 6/30/2007 $20,534 $15,642 $12,160 7/31/2007 $20,406 $15,157 $11,933 8/31/2007 $21,067 $15,384 $12,133 9/30/2007 $22,406 $15,959 $12,628 10/31/2007 $23,045 $16,213 $13,069 11/30/2007 $21,997 $15,535 $12,552 12/31/2007 $21,849 $15,427 $12,517 1/31/2008 $19,701 $14,502 $11,527 2/29/2008 $19,106 $14,031 $11,284 3/31/2008 $19,178 $13,970 $11,216 4/30/2008 $20,645 $14,651 $11,804
ENDNOTES SMALL- AND MIDSIZED-COMPANY STOCKS CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM. SMALLER, MIDSIZED AND RELATIVELY NEW OR UNSEASONED COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS, AND THEIR PROSPECTS FOR GROWTH ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES. THE FUND ALSO INVESTS IN TECHNOLOGY STOCKS, WHICH CAN BE HIGHLY VOLATILE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. (6.) 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 +40.86% and +9.59%. (7.) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The 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. 12 | Annual Report Your Fund's Expenses FRANKLIN FLEX CAP GROWTH FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600/$1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 x $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 13 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 11/1/07 VALUE 4/30/08 PERIOD* 11/1/07-4/30/08 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $ 894.70 $4.38 Hypothetical (5% return before expenses) $1,000 $1,020.24 $4.67 CLASS B Actual $1,000 $ 891.30 $7.90 Hypothetical (5% return before expenses) $1,000 $1,016.51 $8.42 CLASS C Actual $1,000 $ 891.30 $7.95 Hypothetical (5% return before expenses) $1,000 $1,016.46 $8.47 CLASS R Actual $1,000 $ 893.50 $5.56 Hypothetical (5% return before expenses) $1,000 $1,019.00 $5.92 ADVISOR CLASS Actual $1,000 $ 895.80 $3.21 Hypothetical (5% return before expenses) $1,000 $1,021.48 $3.42
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.93%; B:1.68%; C: 1.69%; R: 1.18%; and Advisor: 0.68%), multiplied by the average account value over the period, multiplied by 182/366 to reflect the one-half year period. 14 | Annual Report Franklin Growth Opportunities Fund (Formerly, Franklin Aggressive Growth Fund) YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Opportunities 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 Growth Opportunities Fund's annual report for the fiscal year ended April 30, 2008. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Growth Opportunities Fund - Class A had a cumulative total return of +8.20%. The Fund outperformed its narrow benchmark, the Russell 3000 Growth Index, which had a -0.79% return, and its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -4.68% return for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 18. 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. (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 59. Annual Report | 15 PORTFOLIO BREAKDOWN Franklin Growth Opportunities Fund Based on Total Net Assets as of 4/30/08 Information Technology* 33.8% Industrials 18.8% Health Care 12.6% Consumer Discretionary 9.0% Energy 8.0% Telecommunication Services 7.8% Financials 3.8% Materials 2.6% Consumer Staples 2.1% Short-Term Investments & Other Net Assets 1.5%
* 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. MANAGER'S DISCUSSION Among the most significant contributors to the Fund's absolute performance for the 12 months under review were Apple and Visa in the information technology sector, and FMC Technologies in the energy sector. Apple is a computer hardware, software and electronics device maker, while Visa is the world's largest consumer payment system operator. FMC Technologies is a leading manufacturer of undersea oil and gas drilling and production systems. From a sector perspective, our investments in the information technology, energy and health care sectors contributed to absolute results. Key information technology performers included Juniper Networks, a network infrastructure designer, and Concur Technologies, a corporate expense management software developer. In the energy sector, Schlumberger, one of the world's largest oil field services companies, and McMoRan Exploration, an oil and gas exploration and production company, were notable contributors. In the health care sector, biotechnology stocks Celgene, Gilead Sciences and Millennium Pharmaceuticals helped the Fund's results. We sold our positions in Juniper Networks, McMoRan Exploration and Millennium Pharmaceuticals by period-end. By contrast, the Fund had some disappointments during the reporting period. Major detractors included NII Holdings in the telecommunication services sector, and DealerTrack Holdings and Limelight Networks (sold by period-end) in the information technology sector. NII Holdings is an international mobile telecommunication network provider. DealerTrack Holdings designs and customizes software for automotive dealerships, while Limelight Networks offers services for delivering media content including video and music files via the Internet. By sector, our holdings in the consumer discretionary, telecommunication services and financials sectors weighed on the Fund's absolute performance. Bakery-cafe chain Panera Bread and discount department store chain Kohl's in the consumer discretionary sector declined in value. Other major detractors included mobile services provider Leap Wireless International in the telecommunication services sector and brokerage firm Goldman Sachs Group in the financials sector. We sold our positions in Panera Bread, Kohl's and Leap Wireless by period-end. 16 | Annual Report Effective November 1, 2007, the Fund's name changed to Franklin Growth Opportunities Fund. While the Fund's investment goal and strategy remain the same, we believe the new name better describes the Fund's strategy of seeking growth opportunities wherever they are located. Thank you for your continued participation in Franklin Growth Opportunities Fund. We look forward to serving your future investment needs. (PHOTO OF GRANT BOWERS) /s/ Grant Bowers Grant Bowers Portfolio Manager Franklin Growth Opportunities Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF APRIL 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. TOP 10 HOLDINGS Franklin Growth Opportunities Fund 4/30/08
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - ----------------------------- ---------- Apple Inc. 3.8% INFORMATION TECHNOLOGY Google Inc., A 3.6% INFORMATION TECHNOLOGY SBA Communications Corp. 3.0% TELECOMMUNICATION SERVICES Gilead Sciences Inc. 3.0% HEALTH CARE FLIR Systems Inc. 2.9% INFORMATION TECHNOLOGY Celgene Corp. 2.9% HEALTH CARE NII Holdings Inc. 2.8% TELECOMMUNICATION SERVICES Precision Castparts Corp. 2.8% INDUSTRIALS Visa Inc., A 2.8% INFORMATION TECHNOLOGY Activision Inc. 2.6% INFORMATION TECHNOLOGY
Annual Report | 17 Performance Summary as of 4/30/08 FRANKLIN GROWTH OPPORTUNITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION
CLASS A (SYMBOL: FGRAX) CHANGE 4/30/08 4/30/07 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) +$1.52 $20.06 $18.54
CLASS B (SYMBOL: FKABX) CHANGE 4/30/08 4/30/07 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) +$1.31 $18.95 $17.64
CLASS C (SYMBOL: FKACX) CHANGE 4/30/08 4/30/07 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) +$1.30 $18.91 $17.61
CLASS R (SYMBOL: FKARX) CHANGE 4/30/08 4/30/07 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) +$1.47 $19.80 $18.33
ADVISOR CLASS (SYMBOL: FRAAX) CHANGE 4/30/08 4/30/07 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) +$1.61 $20.60 $18.99
18 | Annual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. UNTIL AUGUST 31, 2008, THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
CLASS A 1-YEAR 5-YEAR INCEPTION (6/23/99) - ------------------------------------- ------- -------- ------------------- Cumulative Total Return(1) +8.20% +111.16% +105.40% Average Annual Total Return(2) +1.98% +14.76% +7.75% Value of $10,000 Investment(3) $10,198 $ 19,901 $ 19,359 Avg. Ann. Total Return (3/31/08)(4) -5.56% +14.17% +6.60% Total Annual Operating Expenses(5) 1.42%
CLASS B 1-YEAR 5-YEAR INCEPTION (6/23/99) - ------------------------------------- ------- -------- ------------------- Cumulative Total Return(1) +7.43% +103.76% +95.09% Average Annual Total Return(2) +3.43% +15.07% +7.84% Value of $10,000 Investment(3) $10,343 $20,176 $19,509 Avg. Ann. Total Return (3/31/08)(4) -4.45% +14.52% +6.70% Total Annual Operating Expenses(5) 2.12%
CLASS C 1-YEAR 5-YEAR INCEPTION (6/23/99) - ------------------------------------- ------- -------- ------------------- Cumulative Total Return(1) +7.38% +103.77% +93.46% Average Annual Total Return(2) +6.38% +15.30% +7.74% Value of $10,000 Investment(3) $10,638 $ 20,377 $19,346 Avg. Ann. Total Return (3/31/08)(4) -1.52% +14.72% +6.60% Total Annual Operating Expenses(5) 2.13%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------------------------------------- ------- -------- ------------------- Cumulative Total Return(1) +8.02% +109.08% +44.00% Average Annual Total Return(2) +8.02% +15.89% +5.94% Value of $10,000 Investment(3) $10,802 $ 20,908 $14,400 Avg. Ann. Total Return (3/31/08)(4) 0.00% +15.30% +4.33% Total Annual Operating Expenses(5) 1.63%
ADVISOR CLASS 1-YEAR 5-YEAR INCEPTION (6/23/99) - ------------------------------------- ------- -------- ------------------- Cumulative Total Return(1) +8.48% +114.14% +111.02% Average Annual Total Return(2) +8.48% +16.45% +8.80% Value of $10,000 Investment(3) $10,848 $ 21,414 $ 21,102 Avg. Ann. Total Return (3/31/08)(4) +0.48% +15.87% +7.66% Total Annual Operating Expenses(5) 1.13%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Annual Report | 19 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/08 - ------------------------- ------- 1-Year +1.98% 5-Year +14.76% Since Inception (6/23/99) +7.75%
CLASS A (6/23/99-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN GROWTH RUSSELL 3000 DATE OPPORTUNITIES FUND - CLASS A S&P 500 INDEX GROWTH INDEX - ---------- ---------------------------- ------------- ------------ 6/23/1999 $ 9,425 $10,000 $10,000 6/30/1999 $10,160 $10,129 $10,160 7/31/1999 $11,235 $ 9,813 $ 9,838 8/31/1999 $12,385 $ 9,765 $ 9,960 9/30/1999 $13,195 $ 9,497 $ 9,778 10/31/1999 $15,438 $10,098 $10,482 11/30/1999 $18,596 $10,303 $11,084 12/31/1999 $23,095 $10,910 $12,291 1/31/2000 $22,603 $10,362 $11,748 2/29/2000 $30,639 $10,166 $12,482 3/31/2000 $28,536 $11,160 $13,188 4/30/2000 $24,330 $10,824 $12,510 5/31/2000 $21,899 $10,602 $11,848 6/30/2000 $26,443 $10,864 $12,788 7/31/2000 $25,594 $10,694 $12,215 8/31/2000 $28,401 $11,358 $13,333 9/30/2000 $27,147 $10,759 $12,112 10/31/2000 $23,896 $10,713 $11,510 11/30/2000 $17,239 $ 9,868 $ 9,787 12/31/2000 $17,130 $ 9,917 $ 9,536 1/31/2001 $19,340 $10,269 $10,203 2/28/2001 $14,833 $ 9,332 $ 8,494 3/31/2001 $12,874 $ 8,741 $ 7,581 4/30/2001 $14,766 $ 9,420 $ 8,537 5/31/2001 $14,717 $ 9,483 $ 8,436 6/30/2001 $14,611 $ 9,253 $ 8,273 7/31/2001 $13,694 $ 9,162 $ 8,031 8/31/2001 $12,411 $ 8,588 $ 7,385 9/30/2001 $10,046 $ 7,895 $ 6,617 10/31/2001 $11,253 $ 8,045 $ 6,982 11/30/2001 $12,835 $ 8,662 $ 7,647 12/31/2001 $13,260 $ 8,738 $ 7,665 1/31/2002 $12,652 $ 8,611 $ 7,520 2/28/2002 $11,726 $ 8,444 $ 7,196 3/31/2002 $12,652 $ 8,762 $ 7,470 4/30/2002 $11,948 $ 8,231 $ 6,891 5/31/2002 $11,523 $ 8,170 $ 6,707 6/30/2002 $10,268 $ 7,588 $ 6,090 7/31/2002 $ 8,850 $ 6,997 $ 5,714 8/31/2002 $ 8,657 $ 7,043 $ 5,730 9/30/2002 $ 7,798 $ 6,277 $ 5,147 10/31/2002 $ 8,531 $ 6,830 $ 5,605 11/30/2002 $ 9,458 $ 7,232 $ 5,925 12/31/2002 $ 8,522 $ 6,807 $ 5,516 1/31/2003 $ 8,483 $ 6,629 $ 5,381 2/28/2003 $ 8,415 $ 6,529 $ 5,349 3/31/2003 $ 8,512 $ 6,593 $ 5,447 4/30/2003 $ 9,168 $ 7,136 $ 5,857 5/31/2003 $ 9,959 $ 7,512 $ 6,173 6/30/2003 $10,046 $ 7,607 $ 6,260 7/31/2003 $10,539 $ 7,741 $ 6,438 8/31/2003 $11,060 $ 7,892 $ 6,611 9/30/2003 $10,712 $ 7,809 $ 6,533 10/31/2003 $11,668 $ 8,250 $ 6,915 11/30/2003 $11,967 $ 8,323 $ 6,998 12/31/2003 $12,266 $ 8,759 $ 7,224 1/31/2004 $12,546 $ 8,920 $ 7,389 2/29/2004 $12,565 $ 9,044 $ 7,432 3/31/2004 $12,613 $ 8,908 $ 7,307 4/30/2004 $12,131 $ 8,768 $ 7,200 5/31/2004 $12,469 $ 8,888 $ 7,335 6/30/2004 $12,913 $ 9,061 $ 7,438 7/31/2004 $11,996 $ 8,761 $ 6,997 8/31/2004 $11,812 $ 8,797 $ 6,953 9/30/2004 $12,498 $ 8,892 $ 7,044 10/31/2004 $12,903 $ 9,028 $ 7,159 11/30/2004 $13,800 $ 9,393 $ 7,435 12/31/2004 $14,389 $ 9,713 $ 7,725 1/31/2005 $13,849 $ 9,476 $ 7,459 2/28/2005 $13,849 $ 9,675 $ 7,540 3/31/2005 $13,472 $ 9,504 $ 7,391 4/30/2005 $12,864 $ 9,324 $ 7,222 5/31/2005 $13,714 $ 9,620 $ 7,584 6/30/2005 $13,907 $ 9,634 $ 7,579 7/31/2005 $14,669 $ 9,992 $ 7,963 8/31/2005 $14,582 $ 9,901 $ 7,860 9/30/2005 $14,881 $ 9,981 $ 7,898 10/31/2005 $14,891 $ 9,815 $ 7,803 11/30/2005 $15,895 $10,186 $ 8,148 12/31/2005 $15,982 $10,190 $ 8,124 1/31/2006 $17,082 $10,460 $ 8,322 2/28/2006 $17,188 $10,488 $ 8,306 3/31/2006 $17,738 $10,618 $ 8,455 4/30/2006 $17,661 $10,761 $ 8,442 5/31/2006 $16,281 $10,451 $ 8,126 6/30/2006 $16,474 $10,465 $ 8,098 7/31/2006 $15,711 $10,530 $ 7,920 8/31/2006 $15,846 $10,781 $ 8,166 9/30/2006 $16,242 $11,058 $ 8,376 10/31/2006 $16,618 $11,419 $ 8,691 11/30/2006 $17,178 $11,636 $ 8,867 12/31/2006 $17,062 $11,799 $ 8,892 1/31/2007 $17,487 $11,978 $ 9,116 2/28/2007 $17,217 $11,743 $ 8,956 3/31/2007 $17,487 $11,875 $ 9,007 4/30/2007 $17,892 $12,401 $ 9,416 5/31/2007 $18,529 $12,833 $ 9,762 6/30/2007 $18,655 $12,620 $ 9,624 7/31/2007 $18,635 $12,229 $ 9,444 8/31/2007 $19,243 $12,412 $ 9,602 9/30/2007 $21,145 $12,876 $ 9,994 10/31/2007 $22,351 $13,081 $10,343 11/30/2007 $20,604 $12,534 $ 9,934 12/31/2007 $20,633 $12,447 $ 9,906 1/31/2008 $18,317 $11,701 $ 9,122 2/29/2008 $17,574 $11,321 $ 8,931 3/31/2008 $17,526 $11,272 $ 8,876 4/30/2008 $19,359 $11,821 $ 9,342
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/08 - ------------------------- ------- 1-Year +3.43% 5-Year +15.07% Since Inception (6/23/99) +7.84%
CLASS B (6/23/99-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN GROWTH OPPORTUNITIES RUSSELL 3000 DATE FUND - CLASS B S&P 500 INDEX GROWTH INDEX - ---------- ----------------------------- ------------- ------------ 6/23/1999 $10,000 $10,000 $10,000 6/30/1999 $10,780 $10,129 $10,160 7/31/1999 $11,920 $ 9,813 $ 9,838 8/31/1999 $13,140 $ 9,765 $ 9,960 9/30/1999 $13,970 $ 9,497 $ 9,778 10/31/1999 $16,380 $10,098 $10,482 11/30/1999 $19,720 $10,303 $11,084 12/31/1999 $24,486 $10,910 $12,291 1/31/2000 $23,975 $10,362 $11,748 2/29/2000 $32,485 $10,166 $12,482 3/31/2000 $30,245 $11,160 $13,188 4/30/2000 $25,755 $10,824 $12,510 5/31/2000 $23,177 $10,602 $11,848 6/30/2000 $27,964 $10,864 $12,788 7/31/2000 $27,043 $10,694 $12,215 8/31/2000 $29,999 $11,358 $13,333 9/30/2000 $28,660 $10,759 $12,112 10/31/2000 $25,213 $10,713 $11,510 11/30/2000 $18,176 $ 9,868 $ 9,787 12/31/2000 $18,049 $ 9,917 $ 9,536 1/31/2001 $20,362 $10,269 $10,203 2/28/2001 $15,604 $ 9,332 $ 8,494 3/31/2001 $13,547 $ 8,741 $ 7,581 4/30/2001 $15,522 $ 9,420 $ 8,537 5/31/2001 $15,461 $ 9,483 $ 8,436 6/30/2001 $15,348 $ 9,253 $ 8,273 7/31/2001 $14,376 $ 9,162 $ 8,031 8/31/2001 $13,015 $ 8,588 $ 7,385 9/30/2001 $10,529 $ 7,895 $ 6,617 10/31/2001 $11,798 $ 8,045 $ 6,982 11/30/2001 $13,435 $ 8,662 $ 7,647 12/31/2001 $13,875 $ 8,738 $ 7,665 1/31/2002 $13,230 $ 8,611 $ 7,520 2/28/2002 $12,258 $ 8,444 $ 7,196 3/31/2002 $13,220 $ 8,762 $ 7,470 4/30/2002 $12,483 $ 8,231 $ 6,891 5/31/2002 $12,023 $ 8,170 $ 6,707 6/30/2002 $10,713 $ 7,588 $ 6,090 7/31/2002 $ 9,219 $ 6,997 $ 5,714 8/31/2002 $ 9,014 $ 7,043 $ 5,730 9/30/2002 $ 8,114 $ 6,277 $ 5,147 10/31/2002 $ 8,881 $ 6,830 $ 5,605 11/30/2002 $ 9,843 $ 7,232 $ 5,925 12/31/2002 $ 8,861 $ 6,807 $ 5,516 1/31/2003 $ 8,820 $ 6,629 $ 5,381 2/28/2003 $ 8,738 $ 6,529 $ 5,349 3/31/2003 $ 8,830 $ 6,593 $ 5,447 4/30/2003 $ 9,516 $ 7,136 $ 5,857 5/31/2003 $10,324 $ 7,512 $ 6,173 6/30/2003 $10,406 $ 7,607 $ 6,260 7/31/2003 $10,907 $ 7,741 $ 6,438 8/31/2003 $11,450 $ 7,892 $ 6,611 9/30/2003 $11,081 $ 7,809 $ 6,533 10/31/2003 $12,064 $ 8,250 $ 6,915 11/30/2003 $12,360 $ 8,323 $ 6,998 12/31/2003 $12,667 $ 8,759 $ 7,224 1/31/2004 $12,943 $ 8,920 $ 7,389 2/29/2004 $12,964 $ 9,044 $ 7,432 3/31/2004 $13,005 $ 8,908 $ 7,307 4/30/2004 $12,504 $ 8,768 $ 7,200 5/31/2004 $12,841 $ 8,888 $ 7,335 6/30/2004 $13,291 $ 9,061 $ 7,438 7/31/2004 $12,340 $ 8,761 $ 6,997 8/31/2004 $12,135 $ 8,797 $ 6,953 9/30/2004 $12,841 $ 8,892 $ 7,044 10/31/2004 $13,250 $ 9,028 $ 7,159 11/30/2004 $14,161 $ 9,393 $ 7,435 12/31/2004 $14,755 $ 9,713 $ 7,725 1/31/2005 $14,202 $ 9,476 $ 7,459 2/28/2005 $14,192 $ 9,675 $ 7,540 3/31/2005 $13,793 $ 9,504 $ 7,391 4/30/2005 $13,169 $ 9,324 $ 7,222 5/31/2005 $14,028 $ 9,620 $ 7,584 6/30/2005 $14,212 $ 9,634 $ 7,579 7/31/2005 $14,980 $ 9,992 $ 7,963 8/31/2005 $14,888 $ 9,901 $ 7,860 9/30/2005 $15,184 $ 9,981 $ 7,898 10/31/2005 $15,184 $ 9,815 $ 7,803 11/30/2005 $16,187 $10,186 $ 8,148 12/31/2005 $16,279 $10,190 $ 8,124 1/31/2006 $17,384 $10,460 $ 8,322 2/28/2006 $17,476 $10,488 $ 8,306 3/31/2006 $18,019 $10,618 $ 8,455 4/30/2006 $17,937 $10,761 $ 8,442 5/31/2006 $16,525 $10,451 $ 8,126 6/30/2006 $16,709 $10,465 $ 8,098 7/31/2006 $15,931 $10,530 $ 7,920 8/31/2006 $16,064 $10,781 $ 8,166 9/30/2006 $16,453 $11,058 $ 8,376 10/31/2006 $16,821 $11,419 $ 8,691 11/30/2006 $17,384 $11,636 $ 8,867 12/31/2006 $17,251 $11,799 $ 8,892 1/31/2007 $17,671 $11,978 $ 9,116 2/28/2007 $17,384 $11,743 $ 8,956 3/31/2007 $18,049 $11,875 $ 9,007 4/30/2007 $18,049 $12,401 $ 9,416 5/31/2007 $18,694 $12,833 $ 9,762 6/30/2007 $18,796 $12,620 $ 9,624 7/31/2007 $18,777 $12,229 $ 9,444 8/31/2007 $19,389 $12,412 $ 9,602 9/30/2007 $21,305 $12,876 $ 9,994 10/31/2007 $22,522 $13,081 $10,343 11/30/2007 $20,760 $12,534 $ 9,934 12/31/2007 $20,789 $12,447 $ 9,906 1/31/2008 $18,455 $11,701 $ 9,122 2/29/2008 $17,705 $11,321 $ 8,931 3/31/2008 $17,658 $11,272 $ 8,876 4/30/2008 $19,509 $11,821 $ 9,342
20 | Annual Report Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/08 - ------------------------- ------- 1-Year +6.38% 5-Year +15.30% Since Inception (6/23/99) +7.74%
CLASS C (6/23/99-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN GROWTH RUSSELL 3000 DATE OPPORTUNITIES FUND - CLASS C S&P 500 INDEX GROWTH INDEX - ---------- ---------------------------- ------------- ------------ 6/23/1999 $10,000 $10,000 $10,000 6/30/1999 $10,780 $10,129 $10,160 7/31/1999 $11,920 $ 9,813 $ 9,838 8/31/1999 $13,150 $ 9,765 $ 9,960 9/30/1999 $13,980 $ 9,497 $ 9,778 10/31/1999 $16,370 $10,098 $10,482 11/30/1999 $19,710 $10,303 $11,084 12/31/1999 $24,443 $10,910 $12,291 1/31/2000 $23,921 $10,362 $11,748 2/29/2000 $32,389 $10,166 $12,482 3/31/2000 $30,149 $11,160 $13,188 4/30/2000 $25,690 $10,824 $12,510 5/31/2000 $23,123 $10,602 $11,848 6/30/2000 $27,899 $10,864 $12,788 7/31/2000 $26,989 $10,694 $12,215 8/31/2000 $29,935 $11,358 $13,333 9/30/2000 $28,595 $10,759 $12,112 10/31/2000 $25,158 $10,713 $11,510 11/30/2000 $18,133 $ 9,868 $ 9,787 12/31/2000 $18,016 $ 9,917 $ 9,536 1/31/2001 $20,329 $10,269 $10,203 2/28/2001 $15,582 $ 9,332 $ 8,494 3/31/2001 $13,515 $ 8,741 $ 7,581 4/30/2001 $15,489 $ 9,420 $ 8,537 5/31/2001 $15,428 $ 9,483 $ 8,436 6/30/2001 $15,316 $ 9,253 $ 8,273 7/31/2001 $14,344 $ 9,162 $ 8,031 8/31/2001 $12,983 $ 8,588 $ 7,385 9/30/2001 $10,507 $ 7,895 $ 6,617 10/31/2001 $11,776 $ 8,045 $ 6,982 11/30/2001 $13,413 $ 8,662 $ 7,647 12/31/2001 $13,853 $ 8,738 $ 7,665 1/31/2002 $13,208 $ 8,611 $ 7,520 2/28/2002 $12,236 $ 8,444 $ 7,196 3/31/2002 $13,198 $ 8,762 $ 7,470 4/30/2002 $12,461 $ 8,231 $ 6,891 5/31/2002 $12,001 $ 8,170 $ 6,707 6/30/2002 $10,691 $ 7,588 $ 6,090 7/31/2002 $ 9,208 $ 6,997 $ 5,714 8/31/2002 $ 9,003 $ 7,043 $ 5,730 9/30/2002 $ 8,103 $ 6,277 $ 5,147 10/31/2002 $ 8,870 $ 6,830 $ 5,605 11/30/2002 $ 9,822 $ 7,232 $ 5,925 12/31/2002 $ 8,839 $ 6,807 $ 5,516 1/31/2003 $ 8,798 $ 6,629 $ 5,381 2/28/2003 $ 8,727 $ 6,529 $ 5,349 3/31/2003 $ 8,819 $ 6,593 $ 5,447 4/30/2003 $ 9,494 $ 7,136 $ 5,857 5/31/2003 $10,302 $ 7,512 $ 6,173 6/30/2003 $10,384 $ 7,607 $ 6,260 7/31/2003 $10,886 $ 7,741 $ 6,438 8/31/2003 $11,428 $ 7,892 $ 6,611 9/30/2003 $11,059 $ 7,809 $ 6,533 10/31/2003 $12,042 $ 8,250 $ 6,915 11/30/2003 $12,338 $ 8,323 $ 6,998 12/31/2003 $12,635 $ 8,759 $ 7,224 1/31/2004 $12,921 $ 8,920 $ 7,389 2/29/2004 $12,942 $ 9,044 $ 7,432 3/31/2004 $12,973 $ 8,908 $ 7,307 4/30/2004 $12,471 $ 8,768 $ 7,200 5/31/2004 $12,809 $ 8,888 $ 7,335 6/30/2004 $13,259 $ 9,061 $ 7,438 7/31/2004 $12,308 $ 8,761 $ 6,997 8/31/2004 $12,113 $ 8,797 $ 6,953 9/30/2004 $12,819 $ 8,892 $ 7,044 10/31/2004 $13,218 $ 9,028 $ 7,159 11/30/2004 $14,139 $ 9,393 $ 7,435 12/31/2004 $14,722 $ 9,713 $ 7,725 1/31/2005 $14,170 $ 9,476 $ 7,459 2/28/2005 $14,159 $ 9,675 $ 7,540 3/31/2005 $13,760 $ 9,504 $ 7,391 4/30/2005 $13,136 $ 9,324 $ 7,222 5/31/2005 $13,996 $ 9,620 $ 7,584 6/30/2005 $14,180 $ 9,634 $ 7,579 7/31/2005 $14,947 $ 9,992 $ 7,963 8/31/2005 $14,855 $ 9,901 $ 7,860 9/30/2005 $15,152 $ 9,981 $ 7,898 10/31/2005 $15,152 $ 9,815 $ 7,803 11/30/2005 $16,154 $10,186 $ 8,148 12/31/2005 $16,236 $10,190 $ 8,124 1/31/2006 $17,351 $10,460 $ 8,322 2/28/2006 $17,433 $10,488 $ 8,306 3/31/2006 $17,986 $10,618 $ 8,455 4/30/2006 $17,894 $10,761 $ 8,442 5/31/2006 $16,492 $10,451 $ 8,126 6/30/2006 $16,676 $10,465 $ 8,098 7/31/2006 $15,899 $10,530 $ 7,920 8/31/2006 $16,032 $10,781 $ 8,166 9/30/2006 $16,410 $11,058 $ 8,376 10/31/2006 $16,779 $11,419 $ 8,691 11/30/2006 $17,341 $11,636 $ 8,867 12/31/2006 $17,208 $11,799 $ 8,892 1/31/2007 $17,628 $11,978 $ 9,116 2/28/2007 $17,351 $11,743 $ 8,956 3/31/2007 $17,617 $11,875 $ 9,007 4/30/2007 $18,016 $12,401 $ 9,416 5/31/2007 $18,641 $12,833 $ 9,762 6/30/2007 $18,753 $12,620 $ 9,624 7/31/2007 $18,733 $12,229 $ 9,444 8/31/2007 $19,326 $12,412 $ 9,602 9/30/2007 $21,219 $12,876 $ 9,994 10/31/2007 $22,416 $13,081 $10,343 11/30/2007 $20,656 $12,534 $ 9,934 12/31/2007 $20,666 $12,447 $ 9,906 1/31/2008 $18,334 $11,701 $ 9,122 2/29/2008 $17,577 $11,321 $ 8,931 3/31/2008 $17,525 $11,272 $ 8,876 4/30/2008 $19,346 $11,821 $ 9,342
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/08 - ------------------------ ------- 1-Year +8.02% 5-Year +15.89% Since Inception (1/1/02) +5.94%
CLASS R (1/1/02-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN GROWTH RUSSELL 3000 DATE OPPORTUNITIES FUND - CLASS R S&P 500 INDEX GROWTH INDEX - ---------- ---------------------------- ------------- ------------ 1/1/2002 $10,000 $10,000 $10,000 1/31/2002 $ 9,535 $ 9,854 $ 9,811 2/28/2002 $ 8,837 $ 9,664 $ 9,389 3/31/2002 $ 9,535 $10,027 $ 9,746 4/30/2002 $ 8,997 $ 9,420 $ 8,991 5/31/2002 $ 8,678 $ 9,350 $ 8,750 6/30/2002 $ 7,731 $ 8,684 $ 7,946 7/31/2002 $ 6,655 $ 8,007 $ 7,455 8/31/2002 $ 6,510 $ 8,060 $ 7,476 9/30/2002 $ 5,862 $ 7,184 $ 6,715 10/31/2002 $ 6,415 $ 7,816 $ 7,313 11/30/2002 $ 7,114 $ 8,276 $ 7,730 12/31/2002 $ 6,408 $ 7,790 $ 7,197 1/31/2003 $ 6,379 $ 7,586 $ 7,021 2/28/2003 $ 6,321 $ 7,472 $ 6,978 3/31/2003 $ 6,393 $ 7,545 $ 7,107 4/30/2003 $ 6,888 $ 8,166 $ 7,641 5/31/2003 $ 7,477 $ 8,596 $ 8,053 6/30/2003 $ 7,542 $ 8,706 $ 8,167 7/31/2003 $ 7,906 $ 8,859 $ 8,399 8/31/2003 $ 8,299 $ 9,032 $ 8,626 9/30/2003 $ 8,037 $ 8,936 $ 8,524 10/31/2003 $ 8,757 $ 9,442 $ 9,021 11/30/2003 $ 8,975 $ 9,525 $ 9,131 12/31/2003 $ 9,201 $10,024 $ 9,426 1/31/2004 $ 9,412 $10,208 $ 9,641 2/29/2004 $ 9,426 $10,350 $ 9,696 3/31/2004 $ 9,455 $10,194 $ 9,533 4/30/2004 $ 9,099 $10,034 $ 9,394 5/31/2004 $ 9,346 $10,172 $ 9,570 6/30/2004 $ 9,674 $10,370 $ 9,704 7/31/2004 $ 8,982 $10,026 $ 9,129 8/31/2004 $ 8,844 $10,067 $ 9,072 9/30/2004 $ 9,361 $10,176 $ 9,191 10/31/2004 $ 9,659 $10,332 $ 9,341 11/30/2004 $10,335 $10,750 $ 9,701 12/31/2004 $10,772 $11,115 $10,078 1/31/2005 $10,371 $10,844 $ 9,732 2/28/2005 $10,364 $11,073 $ 9,838 3/31/2005 $10,081 $10,877 $ 9,643 4/30/2005 $ 9,630 $10,670 $ 9,422 5/31/2005 $10,263 $11,010 $ 9,895 6/30/2005 $10,400 $11,025 $ 9,889 7/31/2005 $10,968 $11,435 $10,390 8/31/2005 $10,903 $11,331 $10,255 9/30/2005 $11,128 $11,423 $10,305 10/31/2005 $11,136 $11,232 $10,180 11/30/2005 $11,871 $11,657 $10,631 12/31/2005 $11,942 $11,661 $10,599 1/31/2006 $12,758 $11,970 $10,858 2/28/2006 $12,830 $12,003 $10,837 3/31/2006 $13,238 $12,152 $11,031 4/30/2006 $13,180 $12,315 $11,014 5/31/2006 $12,146 $11,961 $10,603 6/30/2006 $12,292 $11,977 $10,565 7/31/2006 $11,725 $12,051 $10,334 8/31/2006 $11,820 $12,338 $10,654 9/30/2006 $12,110 $12,655 $10,929 10/31/2006 $12,386 $13,068 $11,340 11/30/2006 $12,808 $13,316 $11,568 12/31/2006 $12,714 $13,503 $11,602 1/31/2007 $13,034 $13,707 $11,893 2/28/2007 $12,830 $13,439 $11,685 3/31/2007 $13,027 $13,590 $11,752 4/30/2007 $13,332 $14,192 $12,285 5/31/2007 $13,797 $14,687 $12,736 6/30/2007 $13,885 $14,443 $12,556 7/31/2007 $13,877 $13,995 $12,322 8/31/2007 $14,321 $14,205 $12,528 9/30/2007 $15,732 $14,736 $13,039 10/31/2007 $16,627 $14,970 $13,495 11/30/2007 $15,332 $14,344 $12,961 12/31/2007 $15,346 $14,245 $12,925 1/31/2008 $13,615 $13,391 $11,902 2/29/2008 $13,063 $12,956 $11,652 3/31/2008 $13,027 $12,900 $11,581 4/30/2008 $14,400 $13,528 $12,188
Annual Report | 21 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/08 - ------------------------- ------- 1-Year +8.48% 5-Year +16.45% Since Inception (6/23/99) +8.80%
ADVISOR CLASS (6/23/99-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN GROWTH OPPORTUNITIES RUSSELL 3000 DATE FUND - ADVISOR CLASS S&P 500 INDEX GROWTH INDEX - ---------- ----------------------------- ------------- ------------ 6/23/1999 $10,000 $10,000 $10,000 6/30/1999 $10,780 $10,129 $10,160 7/31/1999 $11,920 $ 9,813 $ 9,838 8/31/1999 $13,150 $ 9,765 $ 9,960 9/30/1999 $14,000 $ 9,497 $ 9,778 10/31/1999 $16,410 $10,098 $10,482 11/30/1999 $19,770 $10,303 $11,084 12/31/1999 $24,566 $10,910 $12,291 1/31/2000 $24,064 $10,362 $11,748 2/29/2000 $32,615 $10,166 $12,482 3/31/2000 $30,393 $11,160 $13,188 4/30/2000 $25,918 $10,824 $12,510 5/31/2000 $23,337 $10,602 $11,848 6/30/2000 $28,191 $10,864 $12,788 7/31/2000 $27,280 $10,694 $12,215 8/31/2000 $30,290 $11,358 $13,333 9/30/2000 $28,959 $10,759 $12,112 10/31/2000 $25,498 $10,713 $11,510 11/30/2000 $18,402 $ 9,868 $ 9,787 12/31/2000 $18,285 $ 9,917 $ 9,536 1/31/2001 $20,652 $10,269 $10,203 2/28/2001 $15,837 $ 9,332 $ 8,494 3/31/2001 $13,747 $ 8,741 $ 7,581 4/30/2001 $15,776 $ 9,420 $ 8,537 5/31/2001 $15,724 $ 9,483 $ 8,436 6/30/2001 $15,622 $ 9,253 $ 8,273 7/31/2001 $14,649 $ 9,162 $ 8,031 8/31/2001 $13,266 $ 8,588 $ 7,385 9/30/2001 $10,746 $ 7,895 $ 6,617 10/31/2001 $12,047 $ 8,045 $ 6,982 11/30/2001 $13,737 $ 8,662 $ 7,647 12/31/2001 $14,198 $ 8,738 $ 7,665 1/31/2002 $13,542 $ 8,611 $ 7,520 2/28/2002 $12,559 $ 8,444 $ 7,196 3/31/2002 $13,563 $ 8,762 $ 7,470 4/30/2002 $12,805 $ 8,231 $ 6,891 5/31/2002 $12,344 $ 8,170 $ 6,707 6/30/2002 $11,002 $ 7,588 $ 6,090 7/31/2002 $ 9,486 $ 6,997 $ 5,714 8/31/2002 $ 9,281 $ 7,043 $ 5,730 9/30/2002 $ 8,359 $ 6,277 $ 5,147 10/31/2002 $ 9,158 $ 6,830 $ 5,605 11/30/2002 $10,152 $ 7,232 $ 5,925 12/31/2002 $ 9,148 $ 6,807 $ 5,516 1/31/2003 $ 9,117 $ 6,629 $ 5,381 2/28/2003 $ 9,035 $ 6,529 $ 5,349 3/31/2003 $ 9,148 $ 6,593 $ 5,447 4/30/2003 $ 9,855 $ 7,136 $ 5,857 5/31/2003 $10,705 $ 7,512 $ 6,173 6/30/2003 $10,797 $ 7,607 $ 6,260 7/31/2003 $11,330 $ 7,741 $ 6,438 8/31/2003 $11,893 $ 7,892 $ 6,611 9/30/2003 $11,524 $ 7,809 $ 6,533 10/31/2003 $12,559 $ 8,250 $ 6,915 11/30/2003 $12,887 $ 8,323 $ 6,998 12/31/2003 $13,204 $ 8,759 $ 7,224 1/31/2004 $13,512 $ 8,920 $ 7,389 2/29/2004 $13,542 $ 9,044 $ 7,432 3/31/2004 $13,594 $ 8,908 $ 7,307 4/30/2004 $13,081 $ 8,768 $ 7,200 5/31/2004 $13,440 $ 8,888 $ 7,335 6/30/2004 $13,921 $ 9,061 $ 7,438 7/31/2004 $12,938 $ 8,761 $ 6,997 8/31/2004 $12,743 $ 8,797 $ 6,953 9/30/2004 $13,491 $ 8,892 $ 7,044 10/31/2004 $13,932 $ 9,028 $ 7,159 11/30/2004 $14,905 $ 9,393 $ 7,435 12/31/2004 $15,540 $ 9,713 $ 7,725 1/31/2005 $14,966 $ 9,476 $ 7,459 2/28/2005 $14,977 $ 9,675 $ 7,540 3/31/2005 $14,557 $ 9,504 $ 7,391 4/30/2005 $13,911 $ 9,324 $ 7,222 5/31/2005 $14,833 $ 9,620 $ 7,584 6/30/2005 $15,048 $ 9,634 $ 7,579 7/31/2005 $15,878 $ 9,992 $ 7,963 8/31/2005 $15,786 $ 9,901 $ 7,860 9/30/2005 $16,114 $ 9,981 $ 7,898 10/31/2005 $16,124 $ 9,815 $ 7,803 11/30/2005 $17,210 $10,186 $ 8,148 12/31/2005 $17,312 $10,190 $ 8,124 1/31/2006 $18,511 $10,460 $ 8,322 2/28/2006 $18,623 $10,488 $ 8,306 3/31/2006 $19,217 $10,618 $ 8,455 4/30/2006 $19,136 $10,761 $ 8,442 5/31/2006 $17,650 $10,451 $ 8,126 6/30/2006 $17,865 $10,465 $ 8,098 7/31/2006 $17,046 $10,530 $ 7,920 8/31/2006 $17,199 $10,781 $ 8,166 9/30/2006 $17,630 $11,058 $ 8,376 10/31/2006 $18,039 $11,419 $ 8,691 11/30/2006 $18,654 $11,636 $ 8,867 12/31/2006 $18,531 $11,799 $ 8,892 1/31/2007 $19,002 $11,978 $ 9,116 2/28/2007 $18,705 $11,743 $ 8,956 3/31/2007 $19,013 $11,875 $ 9,007 4/30/2007 $19,453 $12,401 $ 9,416 5/31/2007 $20,150 $12,833 $ 9,762 6/30/2007 $20,293 $12,620 $ 9,624 7/31/2007 $20,283 $12,229 $ 9,444 8/31/2007 $20,949 $12,412 $ 9,602 9/30/2007 $23,008 $12,876 $ 9,994 10/31/2007 $24,329 $13,081 $10,343 11/30/2007 $22,444 $12,534 $ 9,934 12/31/2007 $22,475 $12,447 $ 9,906 1/31/2008 $19,955 $11,701 $ 9,122 2/29/2008 $19,146 $11,321 $ 8,931 3/31/2008 $19,105 $11,272 $ 8,876 4/30/2008 $21,102 $11,821 $ 9,342
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 INVESTORS. THE FUND'S INVESTMENTS IN SMALLER- AND MIDSIZED-COMPANY STOCKS INVOLVE SPECIAL RISKS SUCH AS RELATIVELY SMALLER REVENUES, LIMITED PRODUCT LINES AND SMALLER MARKET SHARE. SMALLER- AND MIDSIZED-COMPANY STOCKS HISTORICALLY HAVE EXHIBITED GREATER PRICE VOLATILITY THAN LARGER-COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM. THE FUND'S PORTFOLIO INCLUDES TECHNOLOGY STOCKS, A SECTOR THAT HAS BEEN ONE OF THE MOST VOLATILE 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. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. (6.) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The 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. 22 | Annual Report Your Fund's Expenses FRANKLIN GROWTH OPPORTUNITIES FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600/$1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 x $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 23 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 11/1/07 VALUE 4/30/08 PERIOD* 11/1/07-4/30/08 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $ 866.10 $5.80 Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.27 CLASS B Actual $1,000 $ 863.30 $9.08 Hypothetical (5% return before expenses) $1,000 $1,015.12 $9.82 CLASS C Actual $1,000 $ 863.10 $9.08 Hypothetical (5% return before expenses) $1,000 $1,015.12 $9.82 CLASS R Actual $1,000 $ 866.10 $6.77 Hypothetical (5% return before expenses) $1,000 $1,017.60 $7.32 ADVISOR CLASS Actual $1,000 $ 867.40 $4.46 Hypothetical (5% return before expenses) $1,000 $1,020.09 $4.82
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.25%; B: 1.96%; C: 1.96%; R: 1.46%; and Advisor: 0.96%), multiplied by the average account value over the period, multiplied by 182/366 to reflect the one-half year period. 24 | Annual Report Franklin Small Cap Growth Fund (Formerly, Franklin Small Cap Growth Fund II) YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small Cap Growth Fund 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 annual report for Franklin Small Cap Growth Fund covers the fiscal year ended April 30, 2008. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Small Cap Growth Fund - Class A had a - -14.73% cumulative total return. The Fund underperformed its narrow benchmark, the Russell 2000 Growth Index, which had a -6.70% return, and its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -4.68% return for the same period.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 28. Effective March 31, 2008, the Fund's name changed to Franklin Small Cap Growth Fund. Our strategy remains the same. 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 (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 67. Annual Report | 25 PORTFOLIO BREAKDOWN Franklin Small Cap Growth Fund Based on Total Net Assets as of 4/30/08 Information Technology* 37.2% Consumer Discretionary 18.2% Health Care 14.3% Industrials 8.8% Energy 8.5% Financials 4.5% Consumer Staples 2.3% Materials 1.8% Telecommunication Services 1.3% Short-Term Investments & Other Net Assets 3.1%
* 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. 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 Among the most significant contributors to Fund performance relative to the Russell 2000 Growth Index for the 12 months under review were McMoRan Exploration (sold by period-end), an oil and gas exploration and production company; FLIR Systems, a specialized imaging systems manufacturer; and drug maker Adams Respiratory Therapeutics (sold by period-end). Driven by stock selection, our investments in the energy, materials and information technology sectors benefited relative Fund performance. In addition to McMoRan Exploration, key contributors in the energy sector included oil and gas exploration and production companies Bill Barrett and Mariner Energy, and Superior Energy Services,(3) a specialized oil field services provider. Materials sector holding FMC Corp.,(3) an industrial chemicals company, and information technology sector holdings Power Integrations(3) and FARO Technologies, also helped the Fund. Power Integrations makes high voltage analog integrated circuitry and semiconductors found in PCs, cell phones, cable boxes and other electronic devices, while FARO Technologies makes computerized measurement devices and software. The Fund also had some significant detractors from relative performance during the reporting period, including military armored land vehicles manufacturer Force Protection,(3) gaming and entertainment products manufacturer Shuffle Master, and drug maker Keryx Biopharmaceuticals (sold by period-end). Stock selection in the financials, health care and industrials sectors weighed on relative Fund performance. In the financials sector, major detractors included real estate and mortgage financier RAIT Financial Trust(3) (sold by period-end) and Clayton Holdings, which provides technology-based analysis and risk-management services for lenders, investors and financial services firms. In addition to Keryx Biopharmaceuticals, health care holdings Allscripts Healthcare Solutions (sold by period-end), a clinical software and information systems developer, and Penwest Pharmaceuticals, a designer of a time-released drug delivery system, hindered Fund performance. Additionally, an underweighted (3.) Not an index component. 26 | Annual Report position in the industrials sector and owning Huron Consulting Group, which offers financial consulting services to companies in financial distress or under litigation, hurt Fund performance. Thank you for your continued participation in Franklin Small Cap Growth Fund. We look forward to serving your future investment needs. (PHOTO OF MICHAEL P. MCCARTHY) /s/ Michael P. McCarthy Michael P. McCarthy, CFA Portfolio Manager Franklin Small Cap Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF APRIL 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. TOP 10 HOLDINGS Franklin Small Cap Growth Fund 4/30/08
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - ------------------------------ ---------- Power Integrations Inc. 2.2% INFORMATION TECHNOLOGY Psychiatric Solutions Inc. 2.0% HEALTH CARE Orbital Sciences Corp. 2.0% INDUSTRIALS Mariner Energy Inc. 2.0% ENERGY Superior Energy Services Inc. 1.9% ENERGY Sapient Corp. 1.9% INFORMATION TECHNOLOGY Netlogic Microsystems Inc. 1.8% INFORMATION TECHNOLOGY FLIR Systems Inc. 1.8% INFORMATION TECHNOLOGY Chipotle Mexican Grill Inc., B 1.8% CONSUMER DISCRETIONARY Microsemi Corp. 1.7% INFORMATION TECHNOLOGY
Annual Report | 27 Performance Summary as of 4/30/08 FRANKLIN SMALL 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 and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FSGRX) CHANGE 4/30/08 4/30/07 - ------------------------------ ------ ------- ------- Net Asset Value (NAV) -$3.96 $9.09 $13.05 DISTRIBUTIONS (5/1/07-4/30/08) Short-Term Capital Gain $0.0763 Long-Term Capital Gain $2.1993 TOTAL $2.2756
CLASS B (SYMBOL: FBSGX) CHANGE 4/30/08 4/30/07 - ------------------------------ ------ ------- ------- Net Asset Value (NAV) -$3.92 $8.43 $12.35 DISTRIBUTIONS (5/1/07-4/30/08) Short-Term Capital Gain $0.0763 Long-Term Capital Gain $2.1993 TOTAL $2.2756
CLASS C (SYMBOL: FCSGX) CHANGE 4/30/08 4/30/07 - ------------------------------ ------ ------- ------- Net Asset Value (NAV) -$3.93 $8.43 $12.36 DISTRIBUTIONS (5/1/07-4/30/08) Short-Term Capital Gain $0.0763 Long-Term Capital Gain $2.1993 TOTAL $2.2756
CLASS R (SYMBOL: FSSRX) CHANGE 4/30/08 4/30/07 - ------------------------------ ------ ------- ------- Net Asset Value (NAV) -$3.95 $8.91 $12.86 DISTRIBUTIONS (5/1/07-4/30/08) Short-Term Capital Gain $0.0763 Long-Term Capital Gain $2.1993 TOTAL $2.2756
ADVISOR CLASS (SYMBOL: FSSAX) CHANGE 4/30/08 4/30/07 - ------------------------------ ------ ------- ------- Net Asset Value (NAV) -$3.97 $9.37 $13.34 DISTRIBUTIONS (5/1/07-4/30/08) Short-Term Capital Gain $0.0763 Long-Term Capital Gain $2.1993 TOTAL $2.2756
28 | Annual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.UNTIL AUGUST 31, 2008, THEFUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
CLASS A 1-YEAR 5-YEAR INCEPTION (5/1/00) - ------------------------------------- ------- -------- ------------------ Cumulative Total Return(1) -14.73% +65.28% +23.30% Average Annual Total Return(2) -19.65% +9.26% +1.90% Value of $10,000 Investment(3) $ 8,035 $15,568 $11,621 Avg. Ann. Total Return (3/31/08)(4) -22.73% +9.86% +1.12% Total Annual Operating Expenses(5) 1.25%
CLASS B 1-YEAR 5-YEAR INCEPTION (5/1/00) - ------------------------------------- ------- -------- ------------------ Cumulative Total Return(1) -15.27% +59.01% +16.55% Average Annual Total Return(2) -18.00% +9.44% +1.93% Value of $10,000 Investment(3) $ 8,200 $15,701 $11,655 Avg. Ann. Total Return (3/31/08)(4) -21.17% +10.09% +1.15% Total Annual Operating Expenses(5) 2.01%
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/00) - ------------------------------------- ------- -------- ------------------ Cumulative Total Return(1) -15.35% +58.96% +16.52% Average Annual Total Return(2) -16.04% +9.71% +1.93% Value of $10,000 Investment(3) $ 8,396 $15,896 $11,652 Avg. Ann. Total Return (3/31/08)(4) -19.29% +10.32% +1.15% Total Annual Operating Expenses(5) 2.00%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------------------------------------- ------- -------- ------------------ Cumulative Total Return(1) -14.87% +63.04% +22.94% Average Annual Total Return(2) -14.87% +10.27% +3.32% Value of $10,000 Investment(3) $ 8,513 $16,304 $12,294 Avg. Ann. Total Return (3/31/08)(4) -18.28% +10.88% +2.31% Total Annual Operating Expenses(5) 1.51%
ADVISOR CLASS 1-YEAR 5-YEAR INCEPTION (5/1/00) - ------------------------------------- ------- -------- ------------------ Cumulative Total Return(1) -14.46% +67.11% +26.16% Average Annual Total Return(2) -14.46% +10.81% +2.95% Value of $10,000 Investment(3) $ 8,554 $16,711 $12,616 Avg. Ann. Total Return (3/31/08)(4) -17.82% +11.45% +2.17% Total Annual Operating Expenses(5) 1.01%
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. Annual Report | 29 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/08 - ------------------------ ------- 1-Year -19.65% 5-Year +9.26% Since Inception (5/1/00) +1.90%
CLASS A (5/1/00-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000 DATE GROWTH FUND - CLASS A INDEX GROWTH INDEX - ---------- --------------------- ------- ------------ 5/1/2000 $ 9,425 $10,000 $10,000 5/31/2000 $ 8,982 $ 9,795 $ 9,124 6/30/2000 $11,178 $10,036 $10,303 7/31/2000 $10,688 $ 9,879 $ 9,420 8/31/2000 $12,319 $10,493 $10,411 9/30/2000 $11,744 $ 9,939 $ 9,894 10/31/2000 $11,008 $ 9,897 $ 9,091 11/30/2000 $ 9,048 $ 9,117 $ 7,440 12/31/2000 $ 9,623 $ 9,161 $ 7,895 1/31/2001 $10,707 $ 9,486 $ 8,534 2/28/2001 $ 9,161 $ 8,621 $ 7,365 3/31/2001 $ 8,539 $ 8,075 $ 6,695 4/30/2001 $ 9,680 $ 8,703 $ 7,515 5/31/2001 $ 9,623 $ 8,761 $ 7,689 6/30/2001 $ 9,906 $ 8,548 $ 7,898 7/31/2001 $ 9,444 $ 8,464 $ 7,225 8/31/2001 $ 8,954 $ 7,934 $ 6,773 9/30/2001 $ 7,333 $ 7,293 $ 5,680 10/31/2001 $ 8,096 $ 7,432 $ 6,227 11/30/2001 $ 8,822 $ 8,002 $ 6,747 12/31/2001 $ 9,303 $ 8,072 $ 7,167 1/31/2002 $ 9,161 $ 7,955 $ 6,912 2/28/2002 $ 8,775 $ 7,801 $ 6,464 3/31/2002 $ 9,510 $ 8,095 $ 7,026 4/30/2002 $ 9,227 $ 7,604 $ 6,874 5/31/2002 $ 8,803 $ 7,548 $ 6,472 6/30/2002 $ 8,096 $ 7,010 $ 5,923 7/31/2002 $ 6,814 $ 6,464 $ 5,013 8/31/2002 $ 6,795 $ 6,506 $ 5,011 9/30/2002 $ 6,013 $ 5,799 $ 4,649 10/31/2002 $ 6,579 $ 6,310 $ 4,884 11/30/2002 $ 7,220 $ 6,681 $ 5,368 12/31/2002 $ 6,767 $ 6,288 $ 4,998 1/31/2003 $ 6,692 $ 6,124 $ 4,862 2/28/2003 $ 6,550 $ 6,032 $ 4,733 3/31/2003 $ 6,428 $ 6,090 $ 4,804 4/30/2003 $ 7,031 $ 6,592 $ 5,259 5/31/2003 $ 7,729 $ 6,939 $ 5,851 6/30/2003 $ 7,851 $ 7,028 $ 5,964 7/31/2003 $ 8,238 $ 7,152 $ 6,415 8/31/2003 $ 9,048 $ 7,291 $ 6,760 9/30/2003 $ 8,577 $ 7,214 $ 6,589 10/31/2003 $ 9,595 $ 7,622 $ 7,158 11/30/2003 $ 9,953 $ 7,689 $ 7,391 12/31/2003 $10,047 $ 8,092 $ 7,424 1/31/2004 $10,415 $ 8,241 $ 7,814 2/29/2004 $10,358 $ 8,355 $ 7,802 3/31/2004 $10,320 $ 8,229 $ 7,839 4/30/2004 $ 9,943 $ 8,100 $ 7,445 5/31/2004 $10,236 $ 8,211 $ 7,593 6/30/2004 $10,622 $ 8,371 $ 7,846 7/31/2004 $ 9,774 $ 8,094 $ 7,142 8/31/2004 $ 9,548 $ 8,127 $ 6,988 9/30/2004 $10,057 $ 8,215 $ 7,374 10/31/2004 $10,207 $ 8,340 $ 7,553 11/30/2004 $10,782 $ 8,678 $ 8,192 12/31/2004 $11,159 $ 8,973 $ 8,486 1/31/2005 $10,707 $ 8,754 $ 8,104 2/28/2005 $10,999 $ 8,938 $ 8,215 3/31/2005 $10,688 $ 8,780 $ 7,907 4/30/2005 $10,019 $ 8,614 $ 7,404 5/31/2005 $10,669 $ 8,888 $ 7,926 6/30/2005 $11,018 $ 8,900 $ 8,182 7/31/2005 $11,640 $ 9,231 $ 8,754 8/31/2005 $11,404 $ 9,147 $ 8,631 9/30/2005 $11,508 $ 9,221 $ 8,699 10/31/2005 $10,971 $ 9,067 $ 8,378 11/30/2005 $11,762 $ 9,410 $ 8,852 12/31/2005 $11,659 $ 9,414 $ 8,839 1/31/2006 $12,592 $ 9,663 $ 9,691 2/28/2006 $12,743 $ 9,689 $ 9,640 3/31/2006 $13,148 $ 9,810 $10,108 4/30/2006 $13,101 $ 9,941 $10,079 5/31/2006 $12,224 $ 9,655 $ 9,370 6/30/2006 $12,205 $ 9,668 $ 9,375 7/31/2006 $11,480 $ 9,728 $ 8,888 8/31/2006 $11,772 $ 9,959 $ 9,149 9/30/2006 $11,744 $10,216 $ 9,211 10/31/2006 $12,356 $10,549 $ 9,807 11/30/2006 $12,771 $10,750 $10,042 12/31/2006 $12,761 $10,900 $10,018 1/31/2007 $13,106 $11,065 $10,205 2/28/2007 $13,263 $10,849 $10,172 3/31/2007 $13,315 $10,970 $10,266 4/30/2007 $13,628 $11,456 $10,535 5/31/2007 $14,161 $11,856 $11,016 6/30/2007 $14,025 $11,659 $10,954 7/31/2007 $13,263 $11,297 $10,385 8/31/2007 $13,492 $11,467 $10,646 9/30/2007 $13,868 $11,896 $10,956 10/31/2007 $14,464 $12,085 $11,449 11/30/2007 $13,263 $11,580 $10,658 12/31/2007 $13,181 $11,499 $10,725 1/31/2008 $11,736 $10,810 $ 9,741 2/29/2008 $11,225 $10,458 $ 9,404 3/31/2008 $10,918 $10,413 $ 9,349 4/30/2008 $11,621 $10,920 $ 9,830
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/08 - ------------------------ ------- 1-Year -18.00% 5-Year +9.44% Since Inception (5/1/00) +1.93%
CLASS B (5/1/00-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000 DATE GROWTH FUND - CLASS B INDEX GROWTH INDEX - ---------- --------------------- ------- ------------ 5/1/2000 $10,000 $10,000 $10,000 5/31/2000 $ 9,530 $ 9,795 $ 9,124 6/30/2000 $11,850 $10,036 $10,303 7/31/2000 $11,330 $ 9,879 $ 9,420 8/31/2000 $13,040 $10,493 $10,411 9/30/2000 $12,430 $ 9,939 $ 9,894 10/31/2000 $11,640 $ 9,897 $ 9,091 11/30/2000 $ 9,570 $ 9,117 $ 7,440 12/31/2000 $10,170 $ 9,161 $ 7,895 1/31/2001 $11,300 $ 9,486 $ 8,534 2/28/2001 $ 9,670 $ 8,621 $ 7,365 3/31/2001 $ 9,010 $ 8,075 $ 6,695 4/30/2001 $10,200 $ 8,703 $ 7,515 5/31/2001 $10,140 $ 8,761 $ 7,689 6/30/2001 $10,430 $ 8,548 $ 7,898 7/31/2001 $ 9,940 $ 8,464 $ 7,225 8/31/2001 $ 9,420 $ 7,934 $ 6,773 9/30/2001 $ 7,710 $ 7,293 $ 5,680 10/31/2001 $ 8,510 $ 7,432 $ 6,227 11/30/2001 $ 9,270 $ 8,002 $ 6,747 12/31/2001 $ 9,760 $ 8,072 $ 7,167 1/31/2002 $ 9,610 $ 7,955 $ 6,912 2/28/2002 $ 9,200 $ 7,801 $ 6,464 3/31/2002 $ 9,970 $ 8,095 $ 7,026 4/30/2002 $ 9,660 $ 7,604 $ 6,874 5/31/2002 $ 9,220 $ 7,548 $ 6,472 6/30/2002 $ 8,470 $ 7,010 $ 5,923 7/31/2002 $ 7,130 $ 6,464 $ 5,013 8/31/2002 $ 7,100 $ 6,506 $ 5,011 9/30/2002 $ 6,280 $ 5,799 $ 4,649 10/31/2002 $ 6,870 $ 6,310 $ 4,884 11/30/2002 $ 7,540 $ 6,681 $ 5,368 12/31/2002 $ 7,060 $ 6,288 $ 4,998 1/31/2003 $ 6,980 $ 6,124 $ 4,862 2/28/2003 $ 6,830 $ 6,032 $ 4,733 3/31/2003 $ 6,690 $ 6,090 $ 4,804 4/30/2003 $ 7,330 $ 6,592 $ 5,259 5/31/2003 $ 8,040 $ 6,939 $ 5,851 6/30/2003 $ 8,160 $ 7,028 $ 5,964 7/31/2003 $ 8,560 $ 7,152 $ 6,415 8/31/2003 $ 9,400 $ 7,291 $ 6,760 9/30/2003 $ 8,900 $ 7,214 $ 6,589 10/31/2003 $ 9,950 $ 7,622 $ 7,158 11/30/2003 $10,320 $ 7,689 $ 7,391 12/31/2003 $10,410 $ 8,092 $ 7,424 1/31/2004 $10,780 $ 8,241 $ 7,814 2/29/2004 $10,710 $ 8,355 $ 7,802 3/31/2004 $10,670 $ 8,229 $ 7,839 4/30/2004 $10,270 $ 8,100 $ 7,445 5/31/2004 $10,560 $ 8,211 $ 7,593 6/30/2004 $10,960 $ 8,371 $ 7,846 7/31/2004 $10,070 $ 8,094 $ 7,142 8/31/2004 $ 9,840 $ 8,127 $ 6,988 9/30/2004 $10,350 $ 8,215 $ 7,374 10/31/2004 $10,500 $ 8,340 $ 7,553 11/30/2004 $11,090 $ 8,678 $ 8,192 12/31/2004 $11,470 $ 8,973 $ 8,486 1/31/2005 $10,990 $ 8,754 $ 8,104 2/28/2005 $11,290 $ 8,938 $ 8,215 3/31/2005 $10,960 $ 8,780 $ 7,907 4/30/2005 $10,260 $ 8,614 $ 7,404 5/31/2005 $10,930 $ 8,888 $ 7,926 6/30/2005 $11,280 $ 8,900 $ 8,182 7/31/2005 $11,910 $ 9,231 $ 8,754 8/31/2005 $11,660 $ 9,147 $ 8,631 9/30/2005 $11,750 $ 9,221 $ 8,699 10/31/2005 $11,200 $ 9,067 $ 8,378 11/30/2005 $12,000 $ 9,410 $ 8,852 12/31/2005 $11,890 $ 9,414 $ 8,839 1/31/2006 $12,830 $ 9,663 $ 9,691 2/28/2006 $12,980 $ 9,689 $ 9,640 3/31/2006 $13,380 $ 9,810 $10,108 4/30/2006 $13,320 $ 9,941 $10,079 5/31/2006 $12,420 $ 9,655 $ 9,370 6/30/2006 $12,400 $ 9,668 $ 9,375 7/31/2006 $11,650 $ 9,728 $ 8,888 8/31/2006 $11,940 $ 9,959 $ 9,149 9/30/2006 $11,910 $10,216 $ 9,211 10/31/2006 $12,520 $10,549 $ 9,807 11/30/2006 $12,930 $10,750 $10,042 12/31/2006 $12,920 $10,900 $10,018 1/31/2007 $13,254 $11,065 $10,205 2/28/2007 $13,410 $10,849 $10,172 3/31/2007 $13,444 $10,970 $10,266 4/30/2007 $13,756 $11,456 $10,535 5/31/2007 $14,290 $11,856 $11,016 6/30/2007 $14,134 $11,659 $10,954 7/31/2007 $13,366 $11,297 $10,385 8/31/2007 $13,589 $11,467 $10,646 9/30/2007 $13,956 $11,896 $10,956 10/31/2007 $14,546 $12,085 $11,449 11/30/2007 $13,332 $11,580 $10,658 12/31/2007 $13,231 $11,499 $10,725 1/31/2008 $11,780 $10,810 $ 9,741 2/29/2008 $11,268 $10,458 $ 9,404 3/31/2008 $10,950 $10,413 $ 9,349 4/30/2008 $11,655 $10,920 $ 9,830
30 | Annual Report Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/08 - ------------------------ ------- 1-Year -16.04% 5-Year +9.71% Since Inception (5/1/00) +1.93%
CLASS C (5/1/00-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000 DATE GROWTH FUND - CLASS C INDEX GROWTH INDEX - ---------- --------------------- ------- ------------ 5/1/2000 $10,000 $10,000 $10,000 5/31/2000 $ 9,530 $ 9,795 $ 9,124 6/30/2000 $11,840 $10,036 $10,303 7/31/2000 $11,330 $ 9,879 $ 9,420 8/31/2000 $13,040 $10,493 $10,411 9/30/2000 $12,430 $ 9,939 $ 9,894 10/31/2000 $11,650 $ 9,897 $ 9,091 11/30/2000 $ 9,570 $ 9,117 $ 7,440 12/31/2000 $10,180 $ 9,161 $ 7,895 1/31/2001 $11,310 $ 9,486 $ 8,534 2/28/2001 $ 9,680 $ 8,621 $ 7,365 3/31/2001 $ 9,020 $ 8,075 $ 6,695 4/30/2001 $10,210 $ 8,703 $ 7,515 5/31/2001 $10,150 $ 8,761 $ 7,689 6/30/2001 $10,440 $ 8,548 $ 7,898 7/31/2001 $ 9,950 $ 8,464 $ 7,225 8/31/2001 $ 9,420 $ 7,934 $ 6,773 9/30/2001 $ 7,720 $ 7,293 $ 5,680 10/31/2001 $ 8,520 $ 7,432 $ 6,227 11/30/2001 $ 9,270 $ 8,002 $ 6,747 12/31/2001 $ 9,770 $ 8,072 $ 7,167 1/31/2002 $ 9,620 $ 7,955 $ 6,912 2/28/2002 $ 9,210 $ 7,801 $ 6,464 3/31/2002 $ 9,970 $ 8,095 $ 7,026 4/30/2002 $ 9,670 $ 7,604 $ 6,874 5/31/2002 $ 9,230 $ 7,548 $ 6,472 6/30/2002 $ 8,470 $ 7,010 $ 5,923 7/31/2002 $ 7,130 $ 6,464 $ 5,013 8/31/2002 $ 7,110 $ 6,506 $ 5,011 9/30/2002 $ 6,280 $ 5,799 $ 4,649 10/31/2002 $ 6,870 $ 6,310 $ 4,884 11/30/2002 $ 7,550 $ 6,681 $ 5,368 12/31/2002 $ 7,070 $ 6,288 $ 4,998 1/31/2003 $ 6,990 $ 6,124 $ 4,862 2/28/2003 $ 6,830 $ 6,032 $ 4,733 3/31/2003 $ 6,700 $ 6,090 $ 4,804 4/30/2003 $ 7,330 $ 6,592 $ 5,259 5/31/2003 $ 8,050 $ 6,939 $ 5,851 6/30/2003 $ 8,170 $ 7,028 $ 5,964 7/31/2003 $ 8,570 $ 7,152 $ 6,415 8/31/2003 $ 9,400 $ 7,291 $ 6,760 9/30/2003 $ 8,910 $ 7,214 $ 6,589 10/31/2003 $ 9,960 $ 7,622 $ 7,158 11/30/2003 $10,330 $ 7,689 $ 7,391 12/31/2003 $10,410 $ 8,092 $ 7,424 1/31/2004 $10,780 $ 8,241 $ 7,814 2/29/2004 $10,720 $ 8,355 $ 7,802 3/31/2004 $10,670 $ 8,229 $ 7,839 4/30/2004 $10,270 $ 8,100 $ 7,445 5/31/2004 $10,570 $ 8,211 $ 7,593 6/30/2004 $10,960 $ 8,371 $ 7,846 7/31/2004 $10,080 $ 8,094 $ 7,142 8/31/2004 $ 9,840 $ 8,127 $ 6,988 9/30/2004 $10,360 $ 8,215 $ 7,374 10/31/2004 $10,500 $ 8,340 $ 7,553 11/30/2004 $11,090 $ 8,678 $ 8,192 12/31/2004 $11,480 $ 8,973 $ 8,486 1/31/2005 $11,000 $ 8,754 $ 8,104 2/28/2005 $11,290 $ 8,938 $ 8,215 3/31/2005 $10,970 $ 8,780 $ 7,907 4/30/2005 $10,270 $ 8,614 $ 7,404 5/31/2005 $10,930 $ 8,888 $ 7,926 6/30/2005 $11,280 $ 8,900 $ 8,182 7/31/2005 $11,920 $ 9,231 $ 8,754 8/31/2005 $11,660 $ 9,147 $ 8,631 9/30/2005 $11,760 $ 9,221 $ 8,699 10/31/2005 $11,210 $ 9,067 $ 8,378 11/30/2005 $12,010 $ 9,410 $ 8,852 12/31/2005 $11,900 $ 9,414 $ 8,839 1/31/2006 $12,840 $ 9,663 $ 9,691 2/28/2006 $12,990 $ 9,689 $ 9,640 3/31/2006 $13,380 $ 9,810 $10,108 4/30/2006 $13,330 $ 9,941 $10,079 5/31/2006 $12,430 $ 9,655 $ 9,370 6/30/2006 $12,400 $ 9,668 $ 9,375 7/31/2006 $11,660 $ 9,728 $ 8,888 8/31/2006 $11,950 $ 9,959 $ 9,149 9/30/2006 $11,920 $10,216 $ 9,211 10/31/2006 $12,530 $10,549 $ 9,807 11/30/2006 $12,940 $10,750 $10,042 12/31/2006 $12,919 $10,900 $10,018 1/31/2007 $13,264 $11,065 $10,205 2/28/2007 $13,420 $10,849 $10,172 3/31/2007 $13,454 $10,970 $10,266 4/30/2007 $13,766 $11,456 $10,535 5/31/2007 $14,300 $11,856 $11,016 6/30/2007 $14,144 $11,659 $10,954 7/31/2007 $13,376 $11,297 $10,385 8/31/2007 $13,599 $11,467 $10,646 9/30/2007 $13,966 $11,896 $10,956 10/31/2007 $14,556 $12,085 $11,449 11/30/2007 $13,342 $11,580 $10,658 12/31/2007 $13,241 $11,499 $10,725 1/31/2008 $11,790 $10,810 $ 9,741 2/29/2008 $11,265 $10,458 $ 9,404 3/31/2008 $10,947 $10,413 $ 9,349 4/30/2008 $11,652 $10,920 $ 9,830
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/08 - ------------------------ ------- 1-Year -14.87% 5-Year +10.27% Since Inception (1/1/02) +3.32%
CLASS R (1/1/02-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000 DATE GROWTH FUND - CLASS C INDEX GROWTH INDEX - ---------- --------------------- ------- ------------ 1/1/2002 $10,000 $10,000 $10,000 1/31/2002 $ 9,838 $ 9,854 $ 9,644 2/28/2002 $ 9,423 $ 9,664 $ 9,020 3/31/2002 $10,213 $10,027 $ 9,804 4/30/2002 $ 9,909 $ 9,420 $ 9,592 5/31/2002 $ 9,463 $ 9,350 $ 9,031 6/30/2002 $ 8,694 $ 8,684 $ 8,265 7/31/2002 $ 7,318 $ 8,007 $ 6,995 8/31/2002 $ 7,288 $ 8,060 $ 6,992 9/30/2002 $ 6,447 $ 7,184 $ 6,487 10/31/2002 $ 7,045 $ 7,816 $ 6,815 11/30/2002 $ 7,743 $ 8,276 $ 7,490 12/31/2002 $ 7,257 $ 7,790 $ 6,974 1/31/2003 $ 7,176 $ 7,586 $ 6,784 2/28/2003 $ 7,014 $ 7,472 $ 6,603 3/31/2003 $ 6,883 $ 7,545 $ 6,703 4/30/2003 $ 7,540 $ 8,166 $ 7,338 5/31/2003 $ 8,280 $ 8,596 $ 8,165 6/30/2003 $ 8,400 $ 8,706 $ 8,322 7/31/2003 $ 8,816 $ 8,859 $ 8,951 8/31/2003 $ 9,686 $ 9,032 $ 9,432 9/30/2003 $ 9,180 $ 8,936 $ 9,193 10/31/2003 $10,263 $ 9,442 $ 9,987 11/30/2003 $10,647 $ 9,525 $10,313 12/31/2003 $10,739 $10,024 $10,359 1/31/2004 $11,124 $10,208 $10,903 2/29/2004 $11,063 $10,350 $10,886 3/31/2004 $11,022 $10,194 $10,937 4/30/2004 $10,617 $10,034 $10,388 5/31/2004 $10,921 $10,172 $10,595 6/30/2004 $11,335 $10,370 $10,948 7/31/2004 $10,425 $10,026 $ 9,965 8/31/2004 $10,193 $10,067 $ 9,750 9/30/2004 $10,729 $10,176 $10,289 10/31/2004 $10,881 $10,332 $10,539 11/30/2004 $11,498 $10,750 $11,430 12/31/2004 $11,903 $11,115 $11,841 1/31/2005 $11,406 $10,844 $11,308 2/28/2005 $11,720 $11,073 $11,463 3/31/2005 $11,386 $10,877 $11,033 4/30/2005 $10,668 $10,670 $10,331 5/31/2005 $11,356 $11,010 $11,059 6/30/2005 $11,731 $11,025 $11,417 7/31/2005 $12,388 $11,435 $12,215 8/31/2005 $12,136 $11,331 $12,043 9/30/2005 $12,237 $11,423 $12,138 10/31/2005 $11,670 $11,232 $11,690 11/30/2005 $12,510 $11,657 $12,351 12/31/2005 $12,398 $11,661 $12,333 1/31/2006 $13,390 $11,970 $13,523 2/28/2006 $13,542 $12,003 $13,450 3/31/2006 $13,968 $12,152 $14,104 4/30/2006 $13,917 $12,315 $14,063 5/31/2006 $12,976 $11,961 $13,074 6/30/2006 $12,955 $11,977 $13,082 7/31/2006 $12,186 $12,051 $12,402 8/31/2006 $12,500 $12,338 $12,765 9/30/2006 $12,469 $12,655 $12,852 10/31/2006 $13,118 $13,068 $13,685 11/30/2006 $13,542 $13,316 $14,012 12/31/2006 $13,532 $13,503 $13,979 1/31/2007 $13,891 $13,707 $14,239 2/28/2007 $14,060 $13,439 $14,194 3/31/2007 $14,116 $13,590 $14,325 4/30/2007 $14,441 $14,192 $14,700 5/31/2007 $15,003 $14,687 $15,371 6/30/2007 $14,857 $14,443 $15,284 7/31/2007 $14,049 $13,995 $14,491 8/31/2007 $14,284 $14,205 $14,855 9/30/2007 $14,688 $14,736 $15,287 10/31/2007 $15,306 $14,970 $15,975 11/30/2007 $14,037 $14,344 $14,872 12/31/2007 $13,936 $14,245 $14,965 1/31/2008 $12,418 $13,391 $13,592 2/29/2008 $11,866 $12,956 $13,122 3/31/2008 $11,535 $12,900 $13,046 4/30/2008 $12,294 $13,528 $13,716
Annual Report | 31 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/08 - ------------------------ ------- 1-Year -14.46% 5-Year +10.81% Since Inception (5/1/00) +2.95%
ADVISOR CLASS (5/1/00-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000 DATE GROWTH FUND - ADVISOR CLASS INDEX GROWTH INDEX - ---------- --------------------------- ------- ------------- 5/1/2000 $10,000 $10,000 $10,000 5/31/2000 $ 9,530 $ 9,795 $ 9,124 6/30/2000 $11,870 $10,036 $10,303 7/31/2000 $11,350 $ 9,879 $ 9,420 8/31/2000 $13,080 $10,493 $10,411 9/30/2000 $12,490 $ 9,939 $ 9,894 10/31/2000 $11,710 $ 9,897 $ 9,091 11/30/2000 $ 9,630 $ 9,117 $ 7,440 12/31/2000 $10,240 $ 9,161 $ 7,895 1/31/2001 $11,390 $ 9,486 $ 8,534 2/28/2001 $ 9,760 $ 8,621 $ 7,365 3/31/2001 $ 9,100 $ 8,075 $ 6,695 4/30/2001 $10,310 $ 8,703 $ 7,515 5/31/2001 $10,250 $ 8,761 $ 7,689 6/30/2001 $10,560 $ 8,548 $ 7,898 7/31/2001 $10,070 $ 8,464 $ 7,225 8/31/2001 $ 9,550 $ 7,934 $ 6,773 9/30/2001 $ 7,830 $ 7,293 $ 5,680 10/31/2001 $ 8,640 $ 7,432 $ 6,227 11/30/2001 $ 9,420 $ 8,002 $ 6,747 12/31/2001 $ 9,930 $ 8,072 $ 7,167 1/31/2002 $ 9,780 $ 7,955 $ 6,912 2/28/2002 $ 9,370 $ 7,801 $ 6,464 3/31/2002 $10,160 $ 8,095 $ 7,026 4/30/2002 $ 9,860 $ 7,604 $ 6,874 5/31/2002 $ 9,420 $ 7,548 $ 6,472 6/30/2002 $ 8,660 $ 7,010 $ 5,923 7/31/2002 $ 7,290 $ 6,464 $ 5,013 8/31/2002 $ 7,270 $ 6,506 $ 5,011 9/30/2002 $ 6,430 $ 5,799 $ 4,649 10/31/2002 $ 7,040 $ 6,310 $ 4,884 11/30/2002 $ 7,740 $ 6,681 $ 5,368 12/31/2002 $ 7,250 $ 6,288 $ 4,998 1/31/2003 $ 7,180 $ 6,124 $ 4,862 2/28/2003 $ 7,030 $ 6,032 $ 4,733 3/31/2003 $ 6,890 $ 6,090 $ 4,804 4/30/2003 $ 7,550 $ 6,592 $ 5,259 5/31/2003 $ 8,300 $ 6,939 $ 5,851 6/30/2003 $ 8,430 $ 7,028 $ 5,964 7/31/2003 $ 8,850 $ 7,152 $ 6,415 8/31/2003 $ 9,720 $ 7,291 $ 6,760 9/30/2003 $ 9,220 $ 7,214 $ 6,589 10/31/2003 $10,310 $ 7,622 $ 7,158 11/30/2003 $10,700 $ 7,689 $ 7,391 12/31/2003 $10,800 $ 8,092 $ 7,424 1/31/2004 $11,190 $ 8,241 $ 7,814 2/29/2004 $11,140 $ 8,355 $ 7,802 3/31/2004 $11,100 $ 8,229 $ 7,839 4/30/2004 $10,690 $ 8,100 $ 7,445 5/31/2004 $11,010 $ 8,211 $ 7,593 6/30/2004 $11,430 $ 8,371 $ 7,846 7/31/2004 $10,510 $ 8,094 $ 7,142 8/31/2004 $10,280 $ 8,127 $ 6,988 9/30/2004 $10,820 $ 8,215 $ 7,374 10/31/2004 $10,980 $ 8,340 $ 7,553 11/30/2004 $11,610 $ 8,678 $ 8,192 12/31/2004 $12,020 $ 8,973 $ 8,486 1/31/2005 $11,530 $ 8,754 $ 8,104 2/28/2005 $11,850 $ 8,938 $ 8,215 3/31/2005 $11,520 $ 8,780 $ 7,907 4/30/2005 $10,790 $ 8,614 $ 7,404 5/31/2005 $11,500 $ 8,888 $ 7,926 6/30/2005 $11,880 $ 8,900 $ 8,182 7/31/2005 $12,550 $ 9,231 $ 8,754 8/31/2005 $12,300 $ 9,147 $ 8,631 9/30/2005 $12,410 $ 9,221 $ 8,699 10/31/2005 $11,840 $ 9,067 $ 8,378 11/30/2005 $12,690 $ 9,410 $ 8,852 12/31/2005 $12,590 $ 9,414 $ 8,839 1/31/2006 $13,600 $ 9,663 $ 9,691 2/28/2006 $13,760 $ 9,689 $ 9,640 3/31/2006 $14,200 $ 9,810 $10,108 4/30/2006 $14,150 $ 9,941 $10,079 5/31/2006 $13,200 $ 9,655 $ 9,370 6/30/2006 $13,190 $ 9,668 $ 9,375 7/31/2006 $12,400 $ 9,728 $ 8,888 8/31/2006 $12,730 $ 9,959 $ 9,149 9/30/2006 $12,700 $10,216 $ 9,211 10/31/2006 $13,370 $10,549 $ 9,807 11/30/2006 $13,810 $10,750 $10,042 12/31/2006 $13,810 $10,900 $10,018 1/31/2007 $14,186 $11,065 $10,205 2/28/2007 $14,363 $10,849 $10,172 3/31/2007 $14,418 $10,970 $10,266 4/30/2007 $14,750 $11,456 $10,535 5/31/2007 $15,336 $11,856 $11,016 6/30/2007 $15,192 $11,659 $10,954 7/31/2007 $14,374 $11,297 $10,385 8/31/2007 $14,617 $11,467 $10,646 9/30/2007 $15,037 $11,896 $10,956 10/31/2007 $15,679 $12,085 $11,449 11/30/2007 $14,385 $11,580 $10,658 12/31/2007 $14,300 $11,499 $10,725 1/31/2008 $12,738 $10,810 $ 9,741 2/29/2008 $12,186 $10,458 $ 9,404 3/31/2008 $11,849 $10,413 $ 9,349 4/30/2008 $12,616 $10,920 $ 9,830
ENDNOTES SMALLER AND NEWER COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS. THEIR GROWTH PROSPECTS ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES, AND THEY CAN BE VOLATILE. THE FUND IS INTENDED FOR LONG-TERM INVESTORS WHO ARE COMFORTABLE WITH SHORT-TERM FLUCTUATIONS IN SHARE PRICE. THERE ARE SPECIAL RISKS INVOLVED WITH SIGNIFICANT EXPOSURE TO A PARTICULAR SECTOR, INCLUDING INCREASED SUSCEPTIBILITY RELATED TO ECONOMIC, BUSINESS, OR OTHER DEVELOPMENTS AFFECTING THAT SECTOR. THE FUND INCLUDES INVESTMENTS IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN HIGHLY VOLATILE 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. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. (6.) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The 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. 32 | Annual Report Your Fund's Expenses FRANKLIN SMALL CAP GROWTH FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600/$1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 x $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 33 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 11/1/07 VALUE 4/30/08 PERIOD* 11/1/07-4/30/08 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $ 803.50 $4.93 Hypothetical (5% return before expenses) $1,000 $1,019.39 $5.52 CLASS B Actual $1,000 $ 801.20 $8.33 Hypothetical (5% return before expenses) $1,000 $1,015.61 $9.32 CLASS C Actual $1,000 $ 800.50 $8.28 Hypothetical (5% return before expenses) $1,000 $1,015.66 $9.27 CLASS R Actual $1,000 $ 803.20 $6.10 Hypothetical (5% return before expenses) $1,000 $1,018.10 $6.82 ADVISOR CLASS Actual $1,000 $ 804.70 $3.81 Hypothetical (5% return before expenses) $1,000 $1,020.64 $4.27
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.10%; B: 1.86%; C: 1.85%; R: 1.36%; and Advisor: 0.85%), multiplied by the average account value over the period, multiplied by 182/366 to reflect the one-half year period. 34 | Annual 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-cap and mid-cap companies. The Fund defines small-cap companies as those within the market capitalization range of companies in the Russell 2500(TM) Index at the time of purchase, and mid-cap companies as those within the market capitalization range of the Russell Midcap(R) Index 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 annual report for Franklin Small-Mid Cap Growth Fund covers the fiscal year ended April 30, 2008. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Small-Mid Cap Growth Fund - Class A had a -6.24% cumulative total return. The Fund underperformed its benchmarks, the Russell Midcap Growth Index and the Standard & Poor's 500 Index (S&P 500), which had total returns of -1.93% and -4.68% for the same period.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 38. 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 (1.) The Russell 2500 Index is market capitalization weighted and measures performance of the 2,500 smallest companies in the Russell 3000 Index, which represent approximately 17% of total market capitalization of the Russell 3000 Index. The Russell Midcap Index is market capitalization weighted and measures performance of the 800 smallest companies in the Russell 1000(R) Index, which represent approximately 26% of total market capitalization of the Russell 1000 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 75. Annual Report | 35 PORTFOLIO BREAKDOWN Franklin Small-Mid Cap Growth Fund Based on Total Net Assets as of 4/30/08 Information Technology* 26.5% Industrials 15.7% Energy 15.0% Health Care 13.6% Consumer Discretionary 11.2% Telecommunication Services 4.7% Financials 3.8% Consumer Staples 1.7% Utilities 1.0% Materials 0.1% Short-Term Investments & Other Net Assets 6.7%
* 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. 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 12 months under review, among the holdings that contributed most to Fund performance relative to the Russell Midcap Growth Index were specialized imaging systems manufacturer FLIR Systems;(3) undersea oil and gas drilling and production systems manufacturer FMC Technologies; and oil and gas exploration and production company Bill Barrett.(3) Driven by stock selection, our investments in the energy, consumer discretionary and information technology sectors supported relative Fund performance. In addition to FMC Technologies and Bill Barrett, energy holdings Southwestern Energy, an oil and gas exploration and production company, and National Oilwell Varco, an oil and gas drilling equipment manufacturer, also fared well. An underweighted position in the consumer discretionary sector and owning Chipotle Mexican Grill,(3) a fast-food operator in almost 30 states, helped Fund returns. Additional contributors in the information technology sector included solar energy systems manufacturer SunPower and navigational systems and software maker Trimble Navigation. By contrast, major detractors from relative Fund performance during the reporting period included semiconductor company FormFactor,(3) military armored land vehicles manufacturer Force Protection,(3) and online brokerage E*TRADE Financial (sold by period-end). On a sector basis, stock selection in financials weighed on relative Fund performance, and detractors besides E*TRADE Financial included regional bank East West Bancorp(sold by period-end) and real estate investment trust iStar Financial.(3) Stock selection also negatively impacted the industrials sector, where our positions in railcar and construction equipment manufacturer Trinity Industries (sold by period-end) and European discount airline Ryanair Holdings (3) declined in value. In the telecommunication services sector, an overweighted allocation hurt relative Fund performance, and underperformers included wireless services providers NII Holdings and Leap Wireless International (sold by period-end). (3.) Not an index component. 36 | Annual Report Thank you for your continued participation in Franklin Small-Mid Cap Growth Fund. We look forward to serving your future investment needs. (PHOTO OF EDWARD B. JAMIESON) /s/ Edward B. Jamieson Edward B. Jamieson Portfolio Manager Franklin Small-Mid Cap Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF APRIL 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. TOP 10 HOLDINGS Franklin Small-Mid Cap Growth Fund 4/30/08
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------- ---------- Smith International Inc. 3.3% ENERGY FLIR Systems Inc. 3.2% INFORMATION TECHNOLOGY FMC Technologies 2.6% ENERGY AMTEK Inc. 2.5% INDUSTRIALS Harris Corp. 2.5% INFORMATION TECHNOLOGY Noble Energy Inc. 2.4% ENERGY Precision Castparts Corp. 2.4% INDUSTRIALS Microsemi Corp. 2.1% INFORMATION TECHNOLOGY Silicon Laboratories Inc. 2.1% INFORMATION TECHNOLOGY Nuance Communications Inc. 2.0% INFORMATION TECHNOLOGY
Annual Report | 37 Performance Summary as of 4/30/08 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 and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FRSGX) CHANGE 4/30/08 4/30/07 - ------------------------------- ------ ------- ------- Net Asset Value (NAV) -$8.84 $32.70 $41.54 DISTRIBUTIONS (5/1/07-4/30/08) Short-Term Capital Gain $0.2258 Long-Term Capital Gain $6.4943 TOTAL $6.7201
CLASS B (SYMBOL: FBSMX) CHANGE 4/30/08 4/30/07 - ------------------------------- ------ ------- ------- Net Asset Value (NAV) -$9.00 $31.00 $40.00 DISTRIBUTIONS (5/1/07-4/30/08) Short-Term Capital Gain $0.2258 Long-Term Capital Gain $6.4943 TOTAL $6.7201
CLASS C (SYMBOL: FRSIX) CHANGE 4/30/08 4/30/07 - ------------------------------- ------ ------- ------- Net Asset Value (NAV) -$8.93 $29.92 $38.85 DISTRIBUTIONS (5/1/07-4/30/08) Short-Term Capital Gain $0.2258 Long-Term Capital Gain $6.4943 TOTAL $6.7201
CLASS R (SYMBOL: FSMRX) CHANGE 4/30/08 4/30/07 - ------------------------------- ------ ------- ------- Net Asset Value (NAV) -$8.90 $32.06 $40.96 DISTRIBUTIONS (5/1/07-4/30/08) Short-Term Capital Gain $0.2258 Long-Term Capital Gain $6.4943 TOTAL $6.7201
ADVISOR CLASS (SYMBOL: FSGAX) CHANGE 4/30/08 4/30/07 - ------------------------------- ------ ------- ------- Net Asset Value (NAV) -$8.79 $33.43 $42.22 DISTRIBUTIONS (5/1/07-4/30/08) Short-Term Capital Gain $0.2258 Long-Term Capital Gain $6.4943 TOTAL $6.7201
38 | Annual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETU RNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.UNTIL AUGUST 31, 2008, THEFUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYSOF PURCHASE.
CLASS A 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- ------- ------- Cumulative Total Return(1) -6.24% +80.95% +67.79% Average Annual Total Return(2) -11.62% +11.27% +4.69% Value of $10,000 Investment(3) $ 8,838 $17,055 $15,815 Avg. Ann. Total Return (3/31/08)(4) -15.41% +11.17% +4.02% Total Annual Operating Expenses(5) 1.00%
CLASS B 1-YEAR 5-YEAR INCEPTION (7/1/02) - ------------------------------------- ------- ------- ------------------ Cumulative Total Return(1) -6.92% +74.25% +64.73% Average Annual Total Return(2) -10.02% +11.49% +8.82% Value of $10,000 Investment(3) $ 8,998 $17,225 $16,373 Avg. Ann. Total Return (3/31/08)(4) -13.87% +11.40% +7.42% Total Annual Operating Expenses(5) 1.75%
CLASS C 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- ------- ------- Cumulative Total Return(1) -6.94% +74.33% +55.80% Average Annual Total Return(2) -7.71% +11.76% +4.53% Value of $10,000 Investment(3) $ 9,229 $17,433 $15,580 Avg. Ann. Total Return (3/31/08)(4) -11.64% +11.68% +3.86% Total Annual Operating Expenses(5) 1.74%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------------------------------------- ------- ------- ------------------ Cumulative Total Return(1) -6.48% +78.64% +32.20% Average Annual Total Return(2) -6.48% +12.30% +4.51% Value of $10,000 Investment(3) $ 9,352 $17,864 $16,353 Avg. Ann. Total Return (3/31/08)(4) -10.47% +12.21% +3.22% Total Annual Operating Expenses(5) 1.25%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- ------- ------- Cumulative Total Return(1) -6.00% +83.21% +72.07% Average Annual Total Return(2) -6.00% +12.87% +5.58% Value of $10,000 Investment(3) $ 9,400 $18,321 $17,207 Avg. Ann. Total Return (3/31/08)(4) -10.02% +12.78% +4.91% Total Annual Operating Expenses(5) 0.75%
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. Annual Report | 39 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/08 - ------- ------- 1-Year -11.62% 5-Year +11.27% 10-Year +4.69%
CLASS A (5/1/98-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP RUSSELL MIDCAP DATE GROWTH FUND - CLASS A S&P 500 INDEX GROWTH INDEX - ---------- ---------------------- ------------- -------------- 5/1/1998 $ 9,426 $10,000 $10,000 5/31/1998 $ 8,797 $ 9,828 $ 9,589 6/30/1998 $ 8,840 $10,227 $ 9,860 7/31/1998 $ 7,986 $10,118 $ 9,438 8/31/1998 $ 6,194 $ 8,656 $ 7,636 9/30/1998 $ 6,758 $ 9,210 $ 8,214 10/31/1998 $ 7,183 $ 9,959 $ 8,819 11/30/1998 $ 7,743 $10,563 $ 9,414 12/31/1998 $ 8,333 $11,171 $10,389 1/31/1999 $ 8,795 $11,639 $10,700 2/28/1999 $ 8,016 $11,277 $10,177 3/31/1999 $ 8,485 $11,728 $10,744 4/30/1999 $ 9,101 $12,182 $11,233 5/31/1999 $ 9,064 $11,895 $11,089 6/30/1999 $ 9,821 $12,555 $11,863 7/31/1999 $ 9,770 $12,163 $11,485 8/31/1999 $ 9,917 $12,102 $11,366 9/30/1999 $10,279 $11,771 $11,269 10/31/1999 $11,483 $12,516 $12,140 11/30/1999 $13,196 $12,770 $13,397 12/31/1999 $16,424 $13,522 $15,717 1/31/2000 $16,174 $12,843 $15,714 2/29/2000 $20,398 $12,600 $19,018 3/31/2000 $18,675 $13,832 $19,037 4/30/2000 $16,926 $13,416 $17,189 5/31/2000 $15,813 $13,141 $15,936 6/30/2000 $18,262 $13,465 $17,627 7/31/2000 $17,157 $13,254 $16,511 8/31/2000 $19,513 $14,078 $19,001 9/30/2000 $18,861 $13,334 $18,072 10/31/2000 $17,402 $13,278 $16,835 11/30/2000 $13,673 $12,231 $13,177 12/31/2000 $14,814 $12,291 $13,871 1/31/2001 $15,545 $12,727 $14,663 2/28/2001 $12,607 $11,567 $12,127 3/31/2001 $11,243 $10,834 $10,391 4/30/2001 $12,863 $11,676 $12,123 5/31/2001 $12,750 $11,754 $12,066 6/30/2001 $12,614 $11,468 $12,073 7/31/2001 $11,955 $11,355 $11,258 8/31/2001 $11,138 $10,644 $10,442 9/30/2001 $ 9,443 $ 9,785 $ 8,717 10/31/2001 $10,249 $ 9,971 $ 9,633 11/30/2001 $11,194 $10,736 $10,670 12/31/2001 $11,773 $10,830 $11,075 1/31/2002 $11,316 $10,672 $10,716 2/28/2002 $10,674 $10,466 $10,108 3/31/2002 $11,448 $10,860 $10,880 4/30/2002 $10,897 $10,201 $10,304 5/31/2002 $10,546 $10,126 $ 9,996 6/30/2002 $ 9,545 $ 9,405 $ 8,893 7/31/2002 $ 8,332 $ 8,672 $ 8,029 8/31/2002 $ 8,287 $ 8,729 $ 8,001 9/30/2002 $ 7,558 $ 7,780 $ 7,366 10/31/2002 $ 8,215 $ 8,465 $ 7,936 11/30/2002 $ 8,925 $ 8,963 $ 8,557 12/31/2002 $ 8,291 $ 8,437 $ 8,040 1/31/2003 $ 8,181 $ 8,216 $ 7,961 2/28/2003 $ 8,079 $ 8,092 $ 7,892 3/31/2003 $ 8,091 $ 8,171 $ 8,039 4/30/2003 $ 8,740 $ 8,844 $ 8,586 5/31/2003 $ 9,560 $ 9,310 $ 9,413 6/30/2003 $ 9,613 $ 9,429 $ 9,547 7/31/2003 $ 9,854 $ 9,595 $ 9,888 8/31/2003 $10,364 $ 9,782 $10,432 9/30/2003 $10,036 $ 9,678 $10,230 10/31/2003 $10,837 $10,226 $11,055 11/30/2003 $11,207 $10,316 $11,350 12/31/2003 $11,414 $10,857 $11,474 1/31/2004 $11,739 $11,056 $11,853 2/29/2004 $11,747 $11,210 $12,052 3/31/2004 $11,671 $11,040 $12,029 4/30/2004 $11,214 $10,867 $11,689 5/31/2004 $11,566 $11,016 $11,965 6/30/2004 $11,913 $11,230 $12,156 7/31/2004 $11,116 $10,859 $11,351 8/31/2004 $10,969 $10,903 $11,211 9/30/2004 $11,411 $11,021 $11,629 10/31/2004 $11,811 $11,189 $12,024 11/30/2004 $12,404 $11,642 $12,645 12/31/2004 $12,903 $12,038 $13,250 1/31/2005 $12,548 $11,745 $12,896 2/28/2005 $12,853 $11,992 $13,222 3/31/2005 $12,423 $11,779 $13,029 4/30/2005 $11,826 $11,556 $12,514 5/31/2005 $12,544 $11,924 $13,230 6/30/2005 $12,921 $11,941 $13,476 7/31/2005 $13,707 $12,385 $14,263 8/31/2005 $13,696 $12,272 $14,176 9/30/2005 $13,832 $12,371 $14,359 10/31/2005 $13,514 $12,165 $13,936 11/30/2005 $14,225 $12,625 $14,693 12/31/2005 $14,263 $12,629 $14,854 1/31/2006 $15,057 $12,964 $15,743 2/28/2006 $15,027 $12,999 $15,549 3/31/2006 $15,330 $13,161 $15,984 4/30/2006 $15,280 $13,337 $16,052 5/31/2006 $14,452 $12,954 $15,296 6/30/2006 $14,414 $12,971 $15,234 7/31/2006 $13,949 $13,051 $14,688 8/31/2006 $14,305 $13,362 $15,026 9/30/2006 $14,437 $13,706 $15,369 10/31/2006 $14,895 $14,153 $15,959 11/30/2006 $15,481 $14,422 $16,585 12/31/2006 $15,336 $14,624 $16,437 1/31/2007 $15,799 $14,845 $17,035 2/28/2007 $15,977 $14,555 $16,998 3/31/2007 $16,241 $14,718 $17,087 4/30/2007 $16,867 $15,370 $17,837 5/31/2007 $17,610 $15,906 $18,561 6/30/2007 $17,407 $15,642 $18,239 7/31/2007 $16,984 $15,157 $17,831 8/31/2007 $17,277 $15,384 $17,927 9/30/2007 $18,259 $15,959 $18,631 10/31/2007 $18,747 $16,213 $19,106 11/30/2007 $17,131 $15,535 $18,265 12/31/2007 $17,126 $15,427 $18,315 1/31/2008 $15,351 $14,502 $16,859 2/29/2008 $14,915 $14,031 $16,602 3/31/2008 $14,577 $13,970 $16,309 4/30/2008 $15,815 $14,651 $17,493
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/08 - ------------------------ ------- 1-Year -10.02% 5-Year +11.49% Since Inception (7/1/02) +8.82%
CLASS B (7/1/02-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP RUSSELL MIDCAP DATE GROWTH FUND - CLASS B S&P 500 INDEX GROWTH INDEX - ---------- ---------------------- ------------- -------------- 7/1/2002 $10,000 $10,000 $10,000 7/31/2002 $ 9,063 $ 9,220 $ 9,028 8/31/2002 $ 9,001 $ 9,281 $ 8,997 9/30/2002 $ 8,208 $ 8,272 $ 8,282 10/31/2002 $ 8,915 $ 9,000 $ 8,924 11/30/2002 $ 9,684 $ 9,530 $ 9,622 12/31/2002 $ 8,989 $ 8,970 $ 9,041 1/31/2003 $ 8,861 $ 8,735 $ 8,952 2/28/2003 $ 8,751 $ 8,604 $ 8,874 3/31/2003 $ 8,755 $ 8,688 $ 9,039 4/30/2003 $ 9,453 $ 9,403 $ 9,655 5/31/2003 $10,329 $ 9,899 $10,584 6/30/2003 $10,382 $10,025 $10,735 7/31/2003 $10,637 $10,202 $11,119 8/31/2003 $11,180 $10,401 $11,731 9/30/2003 $10,814 $10,290 $11,503 10/31/2003 $11,673 $10,873 $12,430 11/30/2003 $12,063 $10,968 $12,763 12/31/2003 $12,277 $11,543 $12,902 1/31/2004 $12,618 $11,755 $13,328 2/29/2004 $12,622 $11,919 $13,552 3/31/2004 $12,532 $11,739 $13,526 4/30/2004 $12,035 $11,555 $13,144 5/31/2004 $12,400 $11,713 $13,454 6/30/2004 $12,766 $11,941 $13,669 7/31/2004 $11,903 $11,546 $12,763 8/31/2004 $11,739 $11,592 $12,606 9/30/2004 $12,207 $11,718 $13,077 10/31/2004 $12,626 $11,897 $13,520 11/30/2004 $13,251 $12,378 $14,218 12/31/2004 $13,777 $12,800 $14,900 1/31/2005 $13,391 $12,488 $14,501 2/28/2005 $13,707 $12,750 $14,868 3/31/2005 $13,239 $12,525 $14,651 4/30/2005 $12,598 $12,287 $14,071 5/31/2005 $13,350 $12,678 $14,877 6/30/2005 $13,744 $12,696 $15,153 7/31/2005 $14,570 $13,168 $16,038 8/31/2005 $14,550 $13,048 $15,940 9/30/2005 $14,686 $13,154 $16,146 10/31/2005 $14,340 $12,934 $15,671 11/30/2005 $15,080 $13,424 $16,521 12/31/2005 $15,113 $13,428 $16,702 1/31/2006 $15,943 $13,784 $17,702 2/28/2006 $15,902 $13,821 $17,485 3/31/2006 $16,219 $13,993 $17,973 4/30/2006 $16,157 $14,181 $18,049 5/31/2006 $15,269 $13,773 $17,200 6/30/2006 $15,216 $13,792 $17,130 7/31/2006 $14,718 $13,877 $16,516 8/31/2006 $15,080 $14,207 $16,896 9/30/2006 $15,212 $14,573 $17,282 10/31/2006 $15,688 $15,048 $17,945 11/30/2006 $16,293 $15,334 $18,649 12/31/2006 $16,131 $15,549 $18,482 1/31/2007 $16,608 $15,784 $19,155 2/28/2007 $16,785 $15,476 $19,113 3/31/2007 $17,051 $15,649 $19,214 4/30/2007 $17,697 $16,342 $20,057 5/31/2007 $18,467 $16,912 $20,871 6/30/2007 $18,241 $16,631 $20,509 7/31/2007 $17,790 $16,116 $20,050 8/31/2007 $18,082 $16,357 $20,158 9/30/2007 $19,099 $16,969 $20,949 10/31/2007 $19,595 $17,239 $21,484 11/30/2007 $17,896 $16,518 $20,538 12/31/2007 $17,876 $16,403 $20,594 1/31/2008 $16,016 $15,420 $18,958 2/29/2008 $15,554 $14,919 $18,669 3/31/2008 $15,192 $14,854 $18,339 4/30/2008 $16,373 $15,578 $19,670
40 | Annual Report Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/08 - ------- ------- 1-Year -7.71% 5-Year +11.76% 10-Year +4.53%
CLASS C (5/1/98-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP S&P 500 RUSSELL MIDCAP DATE GROWTH FUND - CLASS C INDEX GROWTH INDEX - ---------- ---------------------- ------- -------------- 5/1/1998 $10,000 $10,000 $10,000 5/31/1998 $ 9,328 $ 9,828 $ 9,589 6/30/1998 $ 9,367 $10,227 $ 9,860 7/31/1998 $ 8,456 $10,118 $ 9,438 8/31/1998 $ 6,556 $ 8,656 $ 7,636 9/30/1998 $ 7,150 $ 9,210 $ 8,214 10/31/1998 $ 7,596 $ 9,959 $ 8,819 11/30/1998 $ 8,178 $10,563 $ 9,414 12/31/1998 $ 8,803 $11,171 $10,389 1/31/1999 $ 9,280 $11,639 $10,700 2/28/1999 $ 8,456 $11,277 $10,177 3/31/1999 $ 8,949 $11,728 $10,744 4/30/1999 $ 9,592 $12,182 $11,233 5/31/1999 $ 9,548 $11,895 $11,089 6/30/1999 $10,337 $12,555 $11,863 7/31/1999 $10,278 $12,163 $11,485 8/31/1999 $10,424 $12,102 $11,366 9/30/1999 $10,799 $11,771 $11,269 10/31/1999 $12,057 $12,516 $12,140 11/30/1999 $13,847 $12,770 $13,397 12/31/1999 $17,220 $13,522 $15,717 1/31/2000 $16,950 $12,843 $15,714 2/29/2000 $21,366 $12,600 $19,018 3/31/2000 $19,547 $13,832 $19,037 4/30/2000 $17,705 $13,416 $17,189 5/31/2000 $16,529 $13,141 $15,936 6/30/2000 $19,079 $13,465 $17,627 7/31/2000 $17,911 $13,254 $16,511 8/31/2000 $20,357 $14,078 $19,001 9/30/2000 $19,666 $13,334 $18,072 10/31/2000 $18,133 $13,278 $16,835 11/30/2000 $14,238 $12,231 $13,177 12/31/2000 $15,413 $12,291 $13,871 1/31/2001 $16,169 $12,727 $14,663 2/28/2001 $13,100 $11,567 $12,127 3/31/2001 $11,678 $10,834 $10,391 4/30/2001 $13,348 $11,676 $12,123 5/31/2001 $13,228 $11,754 $12,066 6/30/2001 $13,076 $11,468 $12,073 7/31/2001 $12,385 $11,355 $11,258 8/31/2001 $11,534 $10,644 $10,442 9/30/2001 $ 9,768 $ 9,785 $ 8,717 10/31/2001 $10,599 $ 9,971 $ 9,633 11/30/2001 $11,566 $10,736 $10,670 12/31/2001 $12,157 $10,830 $11,075 1/31/2002 $11,678 $10,672 $10,716 2/28/2002 $11,011 $10,466 $10,108 3/31/2002 $11,802 $10,860 $10,880 4/30/2002 $11,222 $10,201 $10,304 5/31/2002 $10,855 $10,126 $ 9,996 6/30/2002 $ 9,820 $ 9,405 $ 8,893 7/31/2002 $ 8,570 $ 8,672 $ 8,029 8/31/2002 $ 8,514 $ 8,729 $ 8,001 9/30/2002 $ 7,763 $ 7,780 $ 7,366 10/31/2002 $ 8,430 $ 8,465 $ 7,936 11/30/2002 $ 9,153 $ 8,963 $ 8,557 12/31/2002 $ 8,498 $ 8,437 $ 8,040 1/31/2003 $ 8,378 $ 8,216 $ 7,961 2/28/2003 $ 8,270 $ 8,092 $ 7,892 3/31/2003 $ 8,274 $ 8,171 $ 8,039 4/30/2003 $ 8,937 $ 8,844 $ 8,586 5/31/2003 $ 9,768 $ 9,310 $ 9,413 6/30/2003 $ 9,816 $ 9,429 $ 9,547 7/31/2003 $10,060 $ 9,595 $ 9,888 8/31/2003 $10,571 $ 9,782 $10,432 9/30/2003 $10,228 $ 9,678 $10,230 10/31/2003 $11,039 $10,226 $11,055 11/30/2003 $11,406 $10,316 $11,350 12/31/2003 $11,610 $10,857 $11,474 1/31/2004 $11,934 $11,056 $11,853 2/29/2004 $11,938 $11,210 $12,052 3/31/2004 $11,854 $11,040 $12,029 4/30/2004 $11,382 $10,867 $11,689 5/31/2004 $11,730 $11,016 $11,965 6/30/2004 $12,081 $11,230 $12,156 7/31/2004 $11,266 $10,859 $11,351 8/31/2004 $11,111 $10,903 $11,211 9/30/2004 $11,554 $11,021 $11,629 10/31/2004 $11,954 $11,189 $12,024 11/30/2004 $12,545 $11,642 $12,645 12/31/2004 $13,032 $12,038 $13,250 1/31/2005 $12,665 $11,745 $12,896 2/28/2005 $12,968 $11,992 $13,222 3/31/2005 $12,521 $11,779 $13,029 4/30/2005 $11,914 $11,556 $12,514 5/31/2005 $12,629 $11,924 $13,230 6/30/2005 $13,000 $11,941 $13,476 7/31/2005 $13,783 $12,385 $14,263 8/31/2005 $13,763 $12,272 $14,176 9/30/2005 $13,891 $12,371 $14,359 10/31/2005 $13,564 $12,165 $13,936 11/30/2005 $14,267 $12,625 $14,693 12/31/2005 $14,299 $12,629 $14,854 1/31/2006 $15,082 $12,964 $15,743 2/28/2006 $15,046 $12,999 $15,549 3/31/2006 $15,342 $13,161 $15,984 4/30/2006 $15,282 $13,337 $16,052 5/31/2006 $14,443 $12,954 $15,296 6/30/2006 $14,395 $12,971 $15,234 7/31/2006 $13,923 $13,051 $14,688 8/31/2006 $14,267 $13,362 $15,026 9/30/2006 $14,391 $13,706 $15,369 10/31/2006 $14,838 $14,153 $15,959 11/30/2006 $15,413 $14,422 $16,585 12/31/2006 $15,256 $14,624 $16,437 1/31/2007 $15,713 $14,845 $17,035 2/28/2007 $15,881 $14,555 $16,998 3/31/2007 $16,131 $14,718 $17,087 4/30/2007 $16,743 $15,370 $17,837 5/31/2007 $17,467 $15,906 $18,561 6/30/2007 $17,256 $15,642 $18,239 7/31/2007 $16,829 $15,157 $17,831 8/31/2007 $17,105 $15,384 $17,927 9/30/2007 $18,066 $15,959 $18,631 10/31/2007 $18,540 $16,213 $19,106 11/30/2007 $16,928 $15,535 $18,265 12/31/2007 $16,913 $15,427 $18,315 1/31/2008 $15,153 $14,502 $16,859 2/29/2008 $14,711 $14,031 $16,602 3/31/2008 $14,372 $13,970 $16,309 4/30/2008 $15,580 $14,651 $17,493
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/08 - ------------------------ ------- 1-Year -6.48% 5-Year +12.30% Since Inception (1/1/02) +4.51%
CLASS R (1/1/02-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP S&P 500 RUSSELL MIDCAP DATE GROWTH FUND - CLASS R INDEX GROWTH INDEX - ---------- ---------------------- ------- -------------- 1/1/2002 $10,000 $10,000 $10,000 1/31/2002 $ 9,612 $ 9,854 $ 9,675 2/28/2002 $ 9,067 $ 9,664 $ 9,127 3/31/2002 $ 9,722 $10,027 $ 9,823 4/30/2002 $ 9,247 $ 9,420 $ 9,303 5/31/2002 $ 8,952 $ 9,350 $ 9,026 6/30/2002 $ 8,104 $ 8,684 $ 8,030 7/31/2002 $ 7,074 $ 8,007 $ 7,250 8/31/2002 $ 7,029 $ 8,060 $ 7,224 9/30/2002 $ 6,413 $ 7,184 $ 6,650 10/31/2002 $ 6,965 $ 7,816 $ 7,165 11/30/2002 $ 7,568 $ 8,276 $ 7,726 12/31/2002 $ 7,026 $ 7,790 $ 7,259 1/31/2003 $ 6,933 $ 7,586 $ 7,188 2/28/2003 $ 6,846 $ 7,472 $ 7,126 3/31/2003 $ 6,852 $ 7,545 $ 7,258 4/30/2003 $ 7,401 $ 8,166 $ 7,753 5/31/2003 $ 8,094 $ 8,596 $ 8,499 6/30/2003 $ 8,132 $ 8,706 $ 8,620 7/31/2003 $ 8,338 $ 8,859 $ 8,928 8/31/2003 $ 8,766 $ 9,032 $ 9,419 9/30/2003 $ 8,486 $ 8,936 $ 9,237 10/31/2003 $ 9,163 $ 9,442 $ 9,981 11/30/2003 $ 9,471 $ 9,525 $10,248 12/31/2003 $ 9,645 $10,024 $10,360 1/31/2004 $ 9,917 $10,208 $10,702 2/29/2004 $ 9,924 $10,350 $10,882 3/31/2004 $ 9,856 $10,194 $10,861 4/30/2004 $ 9,468 $10,034 $10,554 5/31/2004 $ 9,763 $10,172 $10,803 6/30/2004 $10,052 $10,370 $10,975 7/31/2004 $ 9,378 $10,026 $10,248 8/31/2004 $ 9,253 $10,067 $10,122 9/30/2004 $ 9,625 $10,176 $10,500 10/31/2004 $ 9,962 $10,332 $10,856 11/30/2004 $10,456 $10,750 $11,417 12/31/2004 $10,877 $11,115 $11,964 1/31/2005 $10,575 $10,844 $11,644 2/28/2005 $10,833 $11,073 $11,938 3/31/2005 $10,466 $10,877 $11,764 4/30/2005 $ 9,962 $10,670 $11,298 5/31/2005 $10,562 $11,010 $11,946 6/30/2005 $10,881 $11,025 $12,168 7/31/2005 $11,538 $11,435 $12,878 8/31/2005 $11,526 $11,331 $12,799 9/30/2005 $11,638 $11,423 $12,965 10/31/2005 $11,368 $11,232 $12,583 11/30/2005 $11,962 $11,657 $13,266 12/31/2005 $11,995 $11,661 $13,411 1/31/2006 $12,656 $11,970 $14,214 2/28/2006 $12,630 $12,003 $14,040 3/31/2006 $12,884 $12,152 $14,432 4/30/2006 $12,839 $12,315 $14,493 5/31/2006 $12,143 $11,961 $13,811 6/30/2006 $12,104 $11,977 $13,754 7/31/2006 $11,716 $12,051 $13,261 8/31/2006 $12,008 $12,338 $13,567 9/30/2006 $12,117 $12,655 $13,877 10/31/2006 $12,502 $13,068 $14,409 11/30/2006 $12,990 $13,316 $14,975 12/31/2006 $12,864 $13,503 $14,840 1/31/2007 $13,251 $13,707 $15,381 2/28/2007 $13,396 $13,439 $15,347 3/31/2007 $13,617 $13,590 $15,428 4/30/2007 $14,138 $14,192 $16,105 5/31/2007 $14,756 $14,687 $16,759 6/30/2007 $14,583 $14,443 $16,468 7/31/2007 $14,228 $13,995 $16,099 8/31/2007 $14,469 $14,205 $16,186 9/30/2007 $15,287 $14,736 $16,822 10/31/2007 $15,692 $14,970 $17,251 11/30/2007 $14,335 $14,344 $16,491 12/31/2007 $14,331 $14,245 $16,536 1/31/2008 $12,842 $13,391 $15,222 2/29/2008 $12,475 $12,956 $14,990 3/31/2008 $12,190 $12,900 $14,726 4/30/2008 $13,220 $13,528 $15,794
Annual Report | 41 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/08 - ------------- ------- 1-Year -6.00% 5-Year +12.87% 10-Year +5.58%
ADVISOR CLASS (5/1/98-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP S&P 500 RUSSELL MIDCAP DATE GROWTH FUND - ADVISOR CLASS INDEX GROWTH INDEX - ---------- --------------------------- ------- -------------- 5/1/1998 $10,000 $10,000 $10,000 5/31/1998 $ 9,335 $ 9,828 $ 9,589 6/30/1998 $ 9,385 $10,227 $ 9,860 7/31/1998 $ 8,481 $10,118 $ 9,438 8/31/1998 $ 6,577 $ 8,656 $ 7,636 9/30/1998 $ 7,177 $ 9,210 $ 8,214 10/31/1998 $ 7,635 $ 9,959 $ 8,819 11/30/1998 $ 8,227 $10,563 $ 9,414 12/31/1998 $ 8,858 $11,171 $10,389 1/31/1999 $ 9,351 $11,639 $10,700 2/28/1999 $ 8,525 $11,277 $10,177 3/31/1999 $ 9,034 $11,728 $10,744 4/30/1999 $ 9,688 $12,182 $11,233 5/31/1999 $ 9,649 $11,895 $11,089 6/30/1999 $10,455 $12,555 $11,863 7/31/1999 $10,405 $12,163 $11,485 8/31/1999 $10,561 $12,102 $11,366 9/30/1999 $10,949 $11,771 $11,269 10/31/1999 $12,237 $12,516 $12,140 11/30/1999 $14,070 $12,770 $13,397 12/31/1999 $17,508 $13,522 $15,717 1/31/2000 $17,248 $12,843 $15,714 2/29/2000 $21,753 $12,600 $19,018 3/31/2000 $19,921 $13,832 $19,037 4/30/2000 $18,061 $13,416 $17,189 5/31/2000 $16,881 $13,141 $15,936 6/30/2000 $19,499 $13,465 $17,627 7/31/2000 $18,322 $13,254 $16,511 8/31/2000 $20,841 $14,078 $19,001 9/30/2000 $20,150 $13,334 $18,072 10/31/2000 $18,594 $13,278 $16,835 11/30/2000 $14,614 $12,231 $13,177 12/31/2000 $15,835 $12,291 $13,871 1/31/2001 $16,623 $12,727 $14,663 2/28/2001 $13,477 $11,567 $12,127 3/31/2001 $12,024 $10,834 $10,391 4/30/2001 $13,757 $11,676 $12,123 5/31/2001 $13,641 $11,754 $12,066 6/30/2001 $13,497 $11,468 $12,073 7/31/2001 $12,797 $11,355 $11,258 8/31/2001 $11,920 $10,644 $10,442 9/30/2001 $10,107 $ 9,785 $ 8,717 10/31/2001 $10,971 $ 9,971 $ 9,633 11/30/2001 $11,984 $10,736 $10,670 12/31/2001 $12,610 $10,830 $11,075 1/31/2002 $12,119 $10,672 $10,716 2/28/2002 $11,438 $10,466 $10,108 3/31/2002 $12,268 $10,860 $10,880 4/30/2002 $11,680 $10,201 $10,304 5/31/2002 $11,305 $10,126 $ 9,996 6/30/2002 $10,234 $ 9,405 $ 8,893 7/31/2002 $ 8,937 $ 8,672 $ 8,029 8/31/2002 $ 8,889 $ 8,729 $ 8,001 9/30/2002 $ 8,111 $ 7,780 $ 7,366 10/31/2002 $ 8,812 $ 8,465 $ 7,936 11/30/2002 $ 9,581 $ 8,963 $ 8,557 12/31/2002 $ 8,901 $ 8,437 $ 8,040 1/31/2003 $ 8,784 $ 8,216 $ 7,961 2/28/2003 $ 8,679 $ 8,092 $ 7,892 3/31/2003 $ 8,691 $ 8,171 $ 8,039 4/30/2003 $ 9,392 $ 8,844 $ 8,586 5/31/2003 $10,274 $ 9,310 $ 9,413 6/30/2003 $10,334 $ 9,429 $ 9,547 7/31/2003 $10,596 $ 9,595 $ 9,888 8/31/2003 $11,148 $ 9,782 $10,432 9/30/2003 $10,794 $ 9,678 $10,230 10/31/2003 $11,659 $10,226 $11,055 11/30/2003 $12,058 $10,316 $11,350 12/31/2003 $12,284 $10,857 $11,474 1/31/2004 $12,638 $11,056 $11,853 2/29/2004 $12,650 $11,210 $12,052 3/31/2004 $12,570 $11,040 $12,029 4/30/2004 $12,078 $10,867 $11,689 5/31/2004 $12,461 $11,016 $11,965 6/30/2004 $12,835 $11,230 $12,156 7/31/2004 $11,982 $10,859 $11,351 8/31/2004 $11,825 $10,903 $11,211 9/30/2004 $12,304 $11,021 $11,629 10/31/2004 $12,739 $11,189 $12,024 11/30/2004 $13,379 $11,642 $12,645 12/31/2004 $13,923 $12,038 $13,250 1/31/2005 $13,544 $11,745 $12,896 2/28/2005 $13,874 $11,992 $13,222 3/31/2005 $13,411 $11,779 $13,029 4/30/2005 $12,771 $11,556 $12,514 5/31/2005 $13,548 $11,924 $13,230 6/30/2005 $13,959 $11,941 $13,476 7/31/2005 $14,809 $12,385 $14,263 8/31/2005 $14,801 $12,272 $14,176 9/30/2005 $14,954 $12,371 $14,359 10/31/2005 $14,612 $12,165 $13,936 11/30/2005 $15,381 $12,625 $14,693 12/31/2005 $15,429 $12,629 $14,854 1/31/2006 $16,290 $12,964 $15,743 2/28/2006 $16,257 $12,999 $15,549 3/31/2006 $16,593 $13,161 $15,984 4/30/2006 $16,544 $13,337 $16,052 5/31/2006 $15,651 $12,954 $15,296 6/30/2006 $15,611 $12,971 $15,234 7/31/2006 $15,113 $13,051 $14,688 8/31/2006 $15,497 $13,362 $15,026 9/30/2006 $15,647 $13,706 $15,369 10/31/2006 $16,148 $14,153 $15,959 11/30/2006 $16,783 $14,422 $16,585 12/31/2006 $16,628 $14,624 $16,437 1/31/2007 $17,140 $14,845 $17,035 2/28/2007 $17,335 $14,555 $16,998 3/31/2007 $17,625 $14,718 $17,087 4/30/2007 $18,306 $15,370 $17,837 5/31/2007 $19,117 $15,906 $18,561 6/30/2007 $18,904 $15,642 $18,239 7/31/2007 $18,449 $15,157 $17,831 8/31/2007 $18,770 $15,384 $17,927 9/30/2007 $19,841 $15,959 $18,631 10/31/2007 $20,374 $16,213 $19,106 11/30/2007 $18,618 $15,535 $18,265 12/31/2007 $18,618 $15,427 $18,315 1/31/2008 $16,693 $14,502 $16,859 2/29/2008 $16,224 $14,031 $16,602 3/31/2008 $15,859 $13,970 $16,309 4/30/2008 $17,207 $14,651 $17,493
ENDNOTES SMALL- AND MIDSIZED-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 INCLUDES INVESTMENTS IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN 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. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. (6.) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The 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. 42 | Annual Report Your Fund's Expenses FRANKLIN SMALL-MID CAP GROWTH FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600/$1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 x $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 43 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 11/1/07 VALUE 4/30/08 PERIOD* 11/1/07-4/30/08 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $ 843.60 $4.90 Hypothetical (5% return before expenses) $1,000 $1,019.54 $5.37 CLASS B Actual $1,000 $ 840.70 $8.38 Hypothetical (5% return before expenses) $1,000 $1,015.76 $9.17 CLASS C Actual $1,000 $ 840.40 $8.33 Hypothetical (5% return before expenses) $1,000 $1,015.81 $9.12 CLASS R Actual $1,000 $ 842.60 $6.09 Hypothetical (5% return before expenses) $1,000 $1,018.25 $6.67 ADVISOR CLASS Actual $1,000 $ 844.60 $3.76 Hypothetical (5% return before expenses) $1,000 $1,020.79 $4.12
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.07%; B: 1.83%; C: 1.82%; R: 1.33%; and Advisor: 0.82%), multiplied by the average account value over the period, multiplied by 182/366 to reflect the one-half year period. 44 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30, ---------------------------------------------------------------------- CLASS A 2008 2007 2006 2005 2004 - ----------------------------------------------------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year................... $ 45.15 $ 42.45 $ 35.26 $ 33.76 $ 25.56 ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income (loss)(b)................... (0.05) 0.06 0.11 (0.10) (0.09) Net realized and unrealized gains (losses)........ 1.43 2.70 7.08 1.60 8.29 ---------- ---------- ---------- ---------- ---------- Total from investment operations..................... 1.38 2.76 7.19 1.50 8.20 ---------- ---------- ---------- ---------- ---------- Less distributions from: Net investment income............................. (0.02) (0.06) -- -- -- Net realized gains................................ (0.74) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Total distributions.................................. (0.76) (0.06) -- -- -- ---------- ---------- ---------- ---------- ---------- Redemption fees...................................... --(d) --(d) --(d) --(d) -- ---------- ---------- ---------- ---------- ---------- Net asset value, end of year......................... $ 45.77 $ 45.15 $ 42.45 $ 35.26 $ 33.76 ========== ========== ========== ========== ========== Total return(c)...................................... 2.98% 6.50% 20.39% 4.44% 32.08% RATIOS TO AVERAGE NET ASSETS Expenses before waiver and payments by affiliates.... 0.94% 0.96% 0.93% 0.96% 1.01% Expenses net of waiver and payments by affiliates.... 0.93%(e) 0.96%(e) 0.93%(e) 0.96%(e) 1.01% Net investment income (loss)......................... (0.10)% 0.15% 0.27% (0.29)% (0.29)% SUPPLEMENTAL DATA Net assets, end of year (000's)...................... $2,011,348 $1,977,605 $2,070,364 $1,505,342 $1,456,685 Portfolio turnover rate.............................. 36.70% 62.54% 66.63% 41.91% 39.92%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 45 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30, ---------------------------------------------------------- CLASS B 2008 2007 2006 2005 2004 - ----------------------------------------------------- ------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year................... $ 42.43 $ 40.14 $ 33.59 $ 32.40 $ 24.72 ------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b)................... (0.37) (0.23) (0.19) (0.35) (0.31) Net realized and unrealized gains (losses)........ 1.34 2.52 6.74 1.54 7.99 ------- -------- -------- -------- -------- Total from investment operations..................... 0.97 2.29 6.55 1.19 7.68 ------- -------- -------- -------- -------- Less distributions from net realized gains........... (0.74) -- -- -- -- ------- -------- -------- -------- -------- Redemption fees...................................... --(d) --(d) --(d) --(d) -- ------- -------- -------- -------- -------- Net asset value, end of year......................... $ 42.66 $ 42.43 $ 40.14 $ 33.59 $ 32.40 ======= ======== ======== ======== ======== Total return(c)...................................... 2.19% 5.71% 19.50% 3.67% 31.07% RATIOS TO AVERAGE NET ASSETS Expenses before waiver and payments by affiliates.... 1.69% 1.71% 1.68% 1.70% 1.76% Expenses net of waiver and payments by affiliates.... 1.68%(e) 1.71%(e) 1.68%(e) 1.70%(e) 1.76% Net investment income (loss)......................... (0.85)% (0.60)% (0.48)% (1.03)% (1.04)% SUPPLEMENTAL DATA Net assets, end of year (000's)...................... $95,600 $118,806 $143,477 $136,052 $134,589 Portfolio turnover rate.............................. 36.70% 62.54% 66.63% 41.91% 39.92%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. 46 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30, ---------------------------------------------------------------- CLASS C 2008 2007 2006 2005 2004 - ---------------------------------------------------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year.................. $ 42.52 $ 40.22 $ 33.66 $ 32.47 $ 24.77 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b).................. (0.37) (0.23) (0.18) (0.35) (0.31) Net realized and unrealized gains (losses)....... 1.35 2.53 6.74 1.54 8.01 -------- -------- -------- -------- -------- Total from investment operations.................... 0.98 2.30 6.56 1.19 7.70 -------- -------- -------- -------- -------- Less distributions from net realized gains.......... (0.74) -- -- -- -- -------- -------- -------- -------- -------- Redemption fees..................................... --(d) --(d) --(d) --(d) -- -------- -------- -------- -------- -------- Net asset value, end of year........................ $ 42.76 $ 42.52 $ 40.22 $ 33.66 $ 32.47 ======== ======== ======== ======== ======== Total return(c)..................................... 2.21% 5.72% 19.49% 3.67% 31.09% RATIOS TO AVERAGE NET ASSETS Expenses before waiver and payments by affiliates... 1.69% 1.69% 1.68% 1.71% 1.76% Expenses net of waiver and payments by affiliates... 1.68%(e) 1.69%(e) 1.68%(e) 1.71%(e) 1.76% Net investment income (loss)........................ (0.85)% (0.58)% (0.48)% (1.04)% (1.04)% SUPPLEMENTAL DATA Net assets, end of year (000's)..................... $375,822 $371,164 $388,478 $296,868 $298,114 Portfolio turnover rate............................. 36.70% 62.54% 66.63% 41.91% 39.92%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 47 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30, ----------------------------------------------------------- CLASS R 2008 2007 2006 2005 2004 - ---------------------------------------------------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year.................. $ 44.61 $ 42.01 $ 34.98 $ 33.57 $ 25.49 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b).................. (0.16) (0.04) 0.01 (0.19) (0.18) Net realized and unrealized gains (losses)....... 1.41 2.66 7.02 1.60 8.26 ------- ------- ------- ------- ------- Total from investment operations.................... 1.25 2.62 7.03 1.41 8.08 ------- ------- ------- ------- ------- Less distributions from: Net investment income............................ (0.02) (0.02) -- -- -- Net realized gains............................... (0.74) -- -- -- -- ------- ------- ------- ------- ------- Total distributions................................. (0.76) (0.02) -- -- -- ------- ------- ------- ------- ------- Redemption fees..................................... --(d) --(d) --(d) --(d) -- ------- ------- ------- ------- ------- Net asset value, end of year........................ $ 45.10 $ 44.61 $ 42.01 $ 34.98 $ 33.57 ======= ======= ======= ======= ======= Total return(c)..................................... 2.73% 6.25% 20.07% 4.20% 31.70% RATIOS TO AVERAGE NET ASSETS Expenses before waiver and payments by affiliates... 1.19% 1.21% 1.18% 1.21% 1.26% Expenses net of waiver and payments by affiliates... 1.18%(e) 1.21%(e) 1.18%(e) 1.21%(e) 1.26% Net investment income (loss)........................ (0.35)% (0.10)% 0.02% (0.54)% (0.54)% SUPPLEMENTAL DATA Net assets, end of year (000's)..................... $66,250 $81,398 $91,229 $69,103 $44,988 Portfolio turnover rate............................. 36.70% 62.54% 66.63% 41.91% 39.92%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. 48 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30, ------------------------------------------------- ADVISOR CLASS 2008 2007 2006 2005(f) - ---------------------------------------------------- -------- -------- -------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year.................. $ 45.41 $ 42.63 $ 35.32 $ 33.35 -------- -------- -------- ------- Income from investment operations(a): Net investment income (loss)(b).................. 0.07 0.16 0.23 (0.01) Net realized and unrealized gains (losses)....... 1.43 2.71 7.08 1.98 -------- -------- -------- ------- Total from investment operations.................... 1.50 2.87 7.31 1.97 -------- -------- -------- ------- Less distributions from: Net investment income............................ (0.02) (0.09) -- -- Net realized gains............................... (0.74) -- -- -- -------- -------- -------- ------- Total distributions................................. (0.76) (0.09) -- -- -------- -------- -------- ------- Redemption fees..................................... --(d) --(d) --(d) --(d) -------- -------- -------- ------- Net asset value, end of year........................ $ 46.15 $ 45.41 $ 42.63 $ 35.32 ======== ======== ======== ======= Total return........................................ 3.23% 6.77% 20.67% 5.91% RATIOS TO AVERAGE NET ASSETS(c) Expenses before waiver and payments by affiliates... 0.69% 0.71% 0.68% 0.71% Expenses net of waiver and payments by affiliates... 0.68%(e) 0.71%(e) 0.68%(e) 0.71%(e) Net investment income (loss)........................ 0.15% 0.40% 0.52% (0.04)%(f) SUPPLEMENTAL DATA Net assets, end of year (000's)..................... $348,245 $297,856 $209,680 $71,193 Portfolio turnover rate............................. 36.70% 62.54% 66.63% 41.91%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Ratios are annualized for periods less than one year. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. (f) For the period August 2, 2004 (effective date) to April 30, 2005. Annual Report | The accompanying notes are an integral part of these financial statements. | 49 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------ ---------- -------------- LONG TERM INVESTMENTS 98.3% COMMON STOCKS 97.9% BANKS 0.6% Wells Fargo & Co. ..................................................... 600,000 $ 17,850,000 -------------- CAPITAL GOODS 5.7% Danaher Corp. ......................................................... 550,000 42,911,000 Precision Castparts Corp. ............................................. 350,000 41,146,000 (a) SunPower Corp., A ..................................................... 250,000 21,817,500 (a) Terex Corp. ........................................................... 325,000 22,646,000 United Technologies Corp. ............................................. 494,300 35,821,921 -------------- 164,342,421 -------------- COMMERCIAL SERVICES & SUPPLIES 1.2% (a) Stericycle Inc. ....................................................... 650,000 34,697,000 -------------- CONSUMER DURABLES & APPAREL 0.6% Harman International Industries Inc. .................................. 400,000 16,348,000 -------------- CONSUMER SERVICES 0.7% (a, b) Chipotle Mexican Grill Inc., A ........................................ 200,000 19,626,000 -------------- DIVERSIFIED FINANCIALS 3.4% CME Group Inc. ........................................................ 45,000 20,585,250 The Goldman Sachs Group Inc. .......................................... 125,000 23,921,250 SEI Investments Co. ................................................... 600,000 13,962,000 T. Rowe Price Group Inc. .............................................. 675,000 39,528,000 -------------- 97,996,500 -------------- ENERGY 4.0% Devon Energy Corp. .................................................... 350,000 39,690,000 Schlumberger Ltd. ..................................................... 350,000 35,192,500 Smith International Inc. .............................................. 550,000 42,080,500 -------------- 116,963,000 -------------- FOOD & STAPLES RETAILING 1.9% CVS Caremark Corp. .................................................... 1,400,000 56,518,000 -------------- FOOD, BEVERAGE & TOBACCO 2.9% (a) Hansen Natural Corp. .................................................. 1,125,000 39,813,750 PepsiCo Inc. .......................................................... 650,000 44,544,500 -------------- 84,358,250 -------------- HEALTH CARE EQUIPMENT & SERVICES 4.8% (a) Hologic Inc. .......................................................... 450,000 13,135,500 (a) Masimo Corp. .......................................................... 1,043,181 30,408,726 (a) ResMed Inc. ........................................................... 350,000 15,092,000 Stryker Corp. ......................................................... 500,000 32,415,000 (a) Varian Medical Systems Inc. ........................................... 300,000 14,064,000 (a) VCA Antech Inc. ....................................................... 1,050,000 33,988,500 -------------- 139,103,726 --------------
50 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------ ---------- -------------- LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) HOUSEHOLD & PERSONAL PRODUCTS 2.1% Clorox Co. ............................................................ 400,000 $ 21,200,000 The Procter & Gamble Co. .............................................. 600,000 40,230,000 -------------- 61,430,000 -------------- INSURANCE 1.9% AFLAC Inc. ............................................................ 525,000 35,001,750 Assurant Inc. ......................................................... 300,000 19,500,000 -------------- 54,501,750 -------------- MATERIALS 3.2% Ecolab Inc. ........................................................... 700,000 32,172,000 (a) Intrepid Potash Inc. .................................................. 56,100 2,664,189 Praxair Inc. .......................................................... 642,600 58,675,806 -------------- 93,511,995 -------------- MEDIA 0.6% The Walt Disney Co. ................................................... 500,000 16,215,000 -------------- PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 11.7% (a) Celgene Corp. ......................................................... 800,000 49,712,000 (a) Covance Inc. .......................................................... 500,000 41,895,000 (a) Genentech Inc. ........................................................ 600,000 40,920,000 (a) Gilead Sciences Inc. .................................................. 1,600,000 82,816,000 Johnson & Johnson ..................................................... 600,000 40,254,000 Roche Holding AG, ADR (Switzerland) ................................... 300,000 24,915,000 Schering-Plough Corp. ................................................. 1,800,000 33,138,000 (a) Waters Corp. .......................................................... 400,000 24,584,000 -------------- 338,234,000 -------------- RETAILING 2.6% (a) Dick's Sporting Goods Inc. ............................................ 1,100,000 31,460,000 PetSmart Inc. ......................................................... 1,000,000 22,380,000 Target Corp. .......................................................... 400,000 21,252,000 -------------- 75,092,000 -------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 5.0% (a) Lam Research Corp. .................................................... 350,000 14,294,000 Microchip Technology Inc. ............................................. 1,150,000 42,262,500 (a) Microsemi Corp. ....................................................... 1,514,600 37,107,700 (a) NVIDIA Corp. .......................................................... 1,100,000 22,605,000 Texas Instruments Inc. ................................................ 988,700 28,830,492 -------------- 145,099,692 -------------- SOFTWARE & SERVICES 18.9% (a) Activision Inc. ....................................................... 1,400,000 37,870,000 (a) Adobe Systems Inc. .................................................... 939,200 35,022,768 (a) Autodesk Inc. ......................................................... 600,000 22,800,000
Annual Report | 51 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------ ---------- -------------- LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) SOFTWARE & SERVICES (CONTINUED) (a) Cognizant Technology Solutions Corp., A ............................... 500,000 $ 16,125,000 (a) Concur Technologies Inc. .............................................. 400,000 13,256,000 FactSet Research Systems Inc. ......................................... 725,000 43,521,750 (a) Google Inc., A ........................................................ 140,000 80,400,600 MasterCard Inc., A .................................................... 175,000 48,678,000 (a) Omniture Inc. ......................................................... 600,000 13,692,000 (a) Oracle Corp. .......................................................... 2,175,000 45,348,750 Paychex Inc. .......................................................... 1,050,000 38,188,500 (a) Salesforce.com Inc. ................................................... 550,000 36,701,500 (a) VeriSign Inc. ......................................................... 350,000 12,617,500 (a) Visa Inc., A .......................................................... 1,250,000 104,312,500 -------------- 548,534,868 -------------- TECHNOLOGY HARDWARE & EQUIPMENT 15.5% (a) Apple Inc. ............................................................ 450,000 78,277,500 (a) Cisco Systems Inc. .................................................... 2,700,000 69,228,000 (a) FLIR Systems Inc. ..................................................... 1,878,400 64,485,472 Harris Corp. .......................................................... 800,000 43,224,000 Hewlett-Packard Co. ................................................... 1,300,000 60,255,000 QUALCOMM Inc. ......................................................... 1,300,000 56,147,000 (a) Research In Motion Ltd. (Canada) ...................................... 350,000 42,570,500 (a) Trimble Navigation Ltd. ............................................... 1,050,000 34,429,500 -------------- 448,616,972 -------------- TELECOMMUNICATION SERVICES 6.3% America Movil SAB de CV, L, ADR (Mexico) .............................. 850,000 49,266,000 (a) American Tower Corp., A ............................................... 1,500,000 65,130,000 (a, c) Anda Networks ......................................................... 36,443 68,877 AT&T Inc. ............................................................. 600,000 23,226,000 (a) NII Holdings Inc. ..................................................... 988,700 45,223,138 -------------- 182,914,015 -------------- TRANSPORTATION 4.3% C.H. Robinson Worldwide Inc. .......................................... 741,500 46,477,220 Canadian National Railway Co. (Canada) ................................ 550,000 28,814,500 Expeditors International of Washington Inc. ........................... 1,050,000 48,919,500 -------------- 124,211,220 -------------- TOTAL COMMON STOCKS (COST $2,082,731,183) ............................. 2,836,164,409 -------------- PREFERRED STOCK (COST $9,999,998) 0.4% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.4% (a, c) Fibrogen Inc., pfd., E ................................................ 2,227,171 13,140,309 -------------- TOTAL LONG TERM INVESTMENTS (COST $2,092,731,181) ..................... 2,849,304,718 --------------
52 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------ ---------- -------------- SHORT TERM INVESTMENTS 2.4% MONEY MARKET FUND (COST $49,018,782) 1.7% (d) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.29%... 49,018,782 $ 49,018,782 -------------- (e) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES MONEY MARKET FUND (COST $20,200,000) 0.7% (f) Bank of New York Institutional Cash Reserve Fund, 2.71% ............... 20,200,000 20,200,000 -------------- TOTAL INVESTMENTS (COST $2,161,949,963) 100.7% ........................ 2,918,523,500 OTHER ASSETS, LESS LIABILITIES (0.7)% ................................. (21,258,850) -------------- NET ASSETS 100.0% ..................................................... $2,897,264,650 ==============
See Selected Portfolio Abbreviations on page 79. (a) Non-income producing for the twelve months ended April 30, 2008. (b) A portion or all of the security is on loan as of April 30, 2008. See Note 1(f). (c) See Note 8 regarding restricted securities. (d) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (e) See Note 1(f) regarding securities on loan. (f) The rate shown is the annualized seven-day yield at period end. Annual Report | The accompanying notes are an integral part of these financial statements. | 53 Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30, ------------------------------------------------------------- CLASS A 2008 2007 2006 2005 2004 - ------------------------------------------------ -------- -------- -------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 18.54 $ 18.30 $ 13.33 $ 12.57 $ 9.50 -------- -------- -------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) ............. (0.15) (0.12) (0.15) (0.14) (0.15) Net realized and unrealized gains (losses) .. 1.67 0.36 5.12 0.90 3.22 -------- -------- -------- ------- ------- Total from investment operations ............... 1.52 0.24 4.97 0.76 3.07 -------- -------- -------- ------- ------- Redemption fees ................................ --(d) --(d) --(d) --(d) -- -------- -------- -------- ------- ------- Net asset value, end of year ................... $ 20.06 $ 18.54 $ 18.30 $ 13.33 $ 12.57 ======== ======== ======== ======= ======= Total return(c) ................................ 8.20% 1.31% 37.28% 6.05% 32.32% RATIOS TO AVERAGE NET ASSETS Expenses ....................................... 1.27%(e) 1.38%(e) 1.39%(e) 1.51%(e) 1.62% Net investment income (loss) ................... (0.77)% (0.70)% (0.92)% (1.05)% (1.26)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $137,313 $105,407 $113,713 $80,611 $86,983 Portfolio turnover rate ........................ 133.58% 176.15% 183.31% 157.48% 114.66%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. 54 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30, ----------------------------------------------------------- CLASS B 2008 2007 2006 2005 2004 - ------------------------------------------------ ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 17.64 $ 17.53 $ 12.87 $ 12.22 $ 9.30 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) ............. (0.28) (0.23) (0.26) (0.23) (0.22) Net realized and unrealized gains (losses) .. 1.59 0.34 4.92 0.88 3.14 ------- ------- ------- ------- ------- Total from investment operations ............... 1.31 0.11 4.66 0.65 2.92 ------- ------- ------- ------- ------- Redemption fees ................................ --(d) --(d) --(d) --(d) -- ------- ------- ------- ------- ------- Net asset value, end of year ................... $ 18.95 $ 17.64 $ 17.53 $ 12.87 $ 12.22 ======= ======= ======= ======= ======= Total return(c) ................................ 7.43% 0.63% 36.21% 5.32% 31.40% RATIOS TO AVERAGE NET ASSETS Expenses ....................................... 1.99%(e) 2.08%(e) 2.13%(e) 2.21%(e) 2.28% Net investment income (loss) ................... (1.49)% (1.40)% (1.66)% (1.75)% (1.92)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $11,528 $15,638 $19,508 $17,017 $18,059 Portfolio turnover rate ........................ 133.58% 176.15% 183.31% 157.48% 114.66%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 55 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30, ----------------------------------------------------------- CLASS C 2008 2007 2006 2005 2004 - ----------------------------------------------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............ $ 17.61 $ 17.49 $ 12.84 $ 12.19 $ 9.28 ------- ------- ------- ------- ------- Income from investment operations (a): Net investment income (loss)(b) ............ (0.28) (0.23) (0.26) (0.23) (0.22) Net realized and unrealized gains (losses).. 1.58 0.35 4.91 0.88 3.13 ------- ------- ------- ------- ------- Total from investment operations .............. 1.30 0.12 4.65 0.65 2.91 ------- ------- ------- ------- ------- Redemption fees ............................... --(d) --(d) --(d) --(d) -- ------- ------- ------- ------- ------- Net asset value, end of year .................. $ 18.91 $ 17.61 $ 17.49 $ 12.84 $ 12.19 ======= ======= ======= ======= ======= Total return(c) ............................... 7.38% 0.69% 36.21% 5.33% 31.36% RATIOS TO AVERAGE NET ASSETS Expenses ...................................... 1.99%(e) 2.09%(e) 2.14%(e) 2.22%(e) 2.29% Net investment income (loss) .................. (1.49)% (1.41)% (1.67)% (1.76)% (1.93)% SUPPLEMENTAL DATA Net assets, end of year (000's) ............... $40,253 $31,518 $31,167 $24,450 $30,054 Portfolio turnover rate ....................... 133.58% 176.15% 183.31% 157.48% 114.66%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. 56 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30, ----------------------------------------------------------- CLASS R 2008 2007 2006 2005 2004 - ----------------------------------------------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............ $ 18.33 $ 18.12 $ 13.24 $ 12.51 $ 9.47 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) ............ (0.20) (0.16) (0.19) (0.17) (0.17) Net realized and unrealized gains (losses).. 1.67 0.37 5.07 0.90 3.21 ------- ------- ------- ------- ------- Total from investment operations .............. 1.47 0.21 4.88 0.73 3.04 ------- ------- ------- ------- ------- Redemption fees ............................... --(d) --(d) --(d) --(d) -- ------- ------- ------- ------- ------- Net asset value, end of year .................. $ 19.80 $ 18.33 $ 18.12 $ 13.24 $ 12.51 ======= ======= ======= ======= ======= Total return(c) ............................... 8.02% 1.16% 36.86% 5.84% 32.10% RATIOS TO AVERAGE NET ASSETS Expenses ...................................... 1.49%(e) 1.59%(e) 1.64%(e) 1.72%(e) 1.79% Net investment income (loss) .................. (0.99)% (0.91)% (1.17)% (1.26)% (1.43)% SUPPLEMENTAL DATA Net assets, end of year (000's) ............... $ 7,863 $ 7,413 $ 5,171 $ 3,041 $ 1,761 Portfolio turnover rate ....................... 133.58% 176.15% 183.31% 157.48% 114.66%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01% Annual Report | The accompanying notes are an integral part of these financial statements. | 57 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30, ----------------------------------------------------------- ADVISOR CLASS 2008 2007 2006 2005 2004 -------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............ $ 18.99 $ 18.68 $ 13.58 $ 12.77 $ 9.62 -------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) ............ (0.10) (0.07) (0.11) (0.10) (0.11) Net realized and unrealized gains (losses) 1.71 0.38 5.21 0.91 3.26 -------- ------- ------- ------- ------- Total from investment operations .............. 1.61 0.31 5.10 0.81 3.15 -------- ------- ------- ------- ------- Redemption fees ............................... --(c) --(c) --(c) --(c) -- -------- ------- ------- ------- ------- Net asset value, end of year .................. $ 20.60 $ 18.99 $ 18.68 $ 13.58 $ 12.77 ======== ======= ======= ======= ======= Total return .................................. 8.48% 1.66% 37.56% 6.34% 32.74% RATIOS TO AVERAGE NET ASSETS Expenses ...................................... 0.99%(d) 1.09%(d) 1.14%(d) 1.22%(d) 1.29% Net investment income (loss) .................. (0.49)% (0.41)% (0.67)% (0.76)% (0.93)% SUPPLEMENTAL DATA Net assets, end of year (000's) ............... $101,885 $85,486 $36,744 $22,731 $22,374 Portfolio turnover rate ....................... 133.58% 176.15% 183.31% 157.48% 114.66%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Benefit of expense reduction rounds to less than 0.01%. 58 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------ ------------- --------- ------------ LONG TERM INVESTMENTS 98.5% COMMON STOCKS 98.1% CONSUMER DISCRETIONARY 9.0% (a) Amazon.com Inc......................................................... United States 18,400 $ 1,446,792 (a) Chipotle Mexican Grill Inc., B......................................... United States 79,000 6,712,630 (a) Dick's Sporting Goods Inc.............................................. United States 87,500 2,502,500 Guess? Inc............................................................. United States 134,800 5,160,144 (a) Lululemon Athletica Inc................................................ Canada 44,900 1,390,553 Strayer Education Inc.................................................. United States 32,800 6,090,632 (a) Under Armour Inc., A................................................... United States 43,200 1,439,856 (a) Zumiez Inc............................................................. United States 106,090 2,222,585 ----------- 26,965,692 ----------- CONSUMER STAPLES 2.1% (a) Hansen Natural Corp.................................................... United States 177,500 6,281,725 ----------- ENERGY 8.0% (a) FMC Technologies Inc................................................... United States 107,580 7,229,376 (a) Petrohawk Energy Corp.................................................. United States 140,800 3,328,512 Schlumberger Ltd....................................................... United States 58,280 5,860,054 (a) Weatherford International Ltd.......................................... United States 93,600 7,550,712 ----------- 23,968,654 ----------- FINANCIALS 3.8% BlackRock Inc.......................................................... United States 24,880 5,020,535 The Goldman Sachs Group Inc............................................ United States 11,850 2,267,735 iStar Financial Inc.................................................... United States 158,100 3,043,425 (a) MSCI Inc. Class A...................................................... United States 35,300 1,095,006 ----------- 11,426,701 ----------- HEALTH CARE 12.6% (a) Celgene Corp........................................................... United States 139,000 8,637,460 (a) Covance Inc............................................................ United States 30,460 2,552,243 (a) Gilead Sciences Inc.................................................... United States 170,660 8,833,361 (a) Hologic Inc............................................................ United States 157,000 4,582,830 (a) MWI Veterinary Supply Inc.............................................. United States 36,344 1,252,778 (a) Myriad Genetics Inc.................................................... United States 125,790 5,225,317 Roche Holding AG, ADR.................................................. Switzerland 50,800 4,218,940 Schering-Plough Corp................................................... United States 132,000 2,430,120 ----------- 37,733,049 ----------- INDUSTRIALS 18.8% ABB Ltd., ADR.......................................................... Switzerland 192,700 5,910,109 (a) AGCO Corp.............................................................. United States 53,700 3,228,981 AMTEK Inc.............................................................. United States 94,600 4,589,992 C.H. Robinson Worldwide Inc............................................ United States 93,230 5,843,656 DryShips Inc........................................................... Greece 32,800 2,706,000 (a) Energy Conversion Devices Inc.......................................... United States 13,800 449,742 (a) First Solar Inc........................................................ United States 10,500 3,065,895 (a, b) Force Protection Inc., 144A, PIPES..................................... United States 76,500 228,735
Annual Report | 59 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------ ------------- --------- ------------ LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) INDUSTRIALS (CONTINUED) (a) Foster Wheeler Ltd..................................................... United States 43,600 $ 2,776,884 (a) Huron Consulting Group Inc............................................. United States 86,700 3,629,262 (a) Jacobs Engineering Group Inc........................................... United States 33,700 2,909,321 (a) Orbital Sciences Corp.................................................. United States 139,200 3,745,872 Precision Castparts Corp............................................... United States 71,830 8,444,335 (a, c) SunPower Corp., A...................................................... United States 41,300 3,604,251 (a) Terex Corp............................................................. United States 72,900 5,079,672 ------------ 56,212,707 ------------ INFORMATION TECHNOLOGY 33.4% (a) Activision Inc......................................................... United States 289,200 7,822,860 (a) Adobe Systems Inc...................................................... United States 57,000 2,125,530 (a) Apple Inc.............................................................. United States 65,300 11,358,935 (a) Cisco Systems Inc...................................................... United States 113,200 2,902,448 (a) Concur Technologies Inc................................................ United States 183,950 6,096,103 (a) DealerTrack Holdings Inc............................................... United States 76,200 1,466,088 (a) Equinix Inc............................................................ United States 57,300 5,181,066 (a) F5 Networks Inc........................................................ United States 151,200 3,421,656 (a) FLIR Systems Inc....................................................... United States 255,800 8,781,614 (a) FormFactor Inc......................................................... United States 69,300 1,335,411 (a) Google Inc., A......................................................... United States 18,490 10,618,622 Harris Corp............................................................ United States 56,930 3,075,928 MasterCard Inc., A..................................................... United States 7,100 1,974,936 (a) MEMC Electronic Materials Inc.......................................... United States 18,900 1,190,133 (a) MercadoLibre Inc....................................................... Argentina 60,100 3,039,858 Nintendo Co. Ltd....................................................... Japan 4,000 2,195,626 (a) Omniture Inc........................................................... United States 193,300 4,411,106 QUALCOMM Inc........................................................... United States 178,580 7,712,870 (a) Riverbed Technology Inc................................................ United States 179,885 2,459,028 (a) Trimble Navigation Ltd................................................. United States 128,640 4,218,106 (a) Visa Inc., A........................................................... United States 99,000 8,261,550 ------------ 99,649,474 ------------ MATERIALS 2.6% Monsanto Co............................................................ United States 40,500 4,617,810 Potash Corp. of Saskatchewan Inc....................................... Canada 16,600 3,053,570 ------------ 7,671,380 ------------ TELECOMMUNICATION SERVICES 7.8% America Movil SAB de CV, L, ADR........................................ Mexico 43,500 2,521,260 (a) MetroPCS Communications Inc............................................ United States 169,200 3,323,088 (a) NII Holdings Inc....................................................... United States 185,080 8,465,559 (a) SBA Communications Corp................................................ United States 275,260 8,901,909 ------------ 23,211,816 ------------ TOTAL COMMON STOCKS (COST $241,067,905)................................ 293,121,198 ------------
60 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------ ------------- --------- ------------ LONG TERM INVESTMENTS (CONTINUED) PREFERRED STOCK (COST $873,300) 0.4% INFORMATION TECHNOLOGY 0.4% (a, d) Dilithium Networks Inc., depository receipt, D, pfd., 144A, PIPES ..... United States 374,806 $ 1,293,081 ------------ TOTAL LONG TERM INVESTMENTS (COST $241,941,205)........................ 294,414,279 ------------ SHORT TERM INVESTMENTS 2.5% MONEY MARKET FUND (COST $3,189,780) 1.1% (e) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.29% .. United States 3,189,780 3,189,780 ------------ (f) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES MONEY MARKET FUND (COST $4,150,000) 1.4% (g) Bank of New York Institutional Cash Reserve Fund, 2.71%................ United States 4,150,000 4,150,000 ------------ TOTAL INVESTMENTS (COST $249,280,985) 101.0%........................... 301,754,059 OTHER ASSETS, LESS LIABILITIES (1.0)%.................................. (2,912,638) ------------ NET ASSETS 100.0%...................................................... $298,841,421 ============
See Selected Portfolio Abbreviations on page 79. (a) Non-income producing for the twelve months ended April 30, 2008. (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.This security has been deemed liquid under guidelines approved by the Trust's Board of Trustees. At April 30, 2008, the value of this security was $228,735, representing 0.08% of net assets. (c) A portion or all of the security is on loan as of April 30, 2008. See Note 1(f). (d) See Note 8 regarding restricted securities. (e) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (f) See Note 1(f) regarding securities on loan. (g) The rate shown is the annualized seven-day yield at period end. Annual Report | The accompanying notes are an integral part of these financial statements. | 61 Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30, ------------------------------------------------------------ CLASS A 2008 2007 2006 2005 2004 - ------------------------------------------------ -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year.............. $ 13.05 $ 13.90 $ 10.63 $ 10.55 $ 7.46 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b).............. (0.09) (0.10) (0.08) (0.09) (0.07) Net realized and unrealized gains (losses) .. (1.59) 0.58 3.35 0.17 3.16 -------- -------- -------- -------- -------- Total from investment operations................ (1.68) 0.48 3.27 0.08 3.09 -------- -------- -------- -------- -------- Less distributions from net realized gains...... (2.28) (1.33) -- -- -- -------- -------- -------- -------- -------- Redemption fees................................. --(d) --(d) --(d) --d -- -------- -------- -------- -------- -------- Net asset value, end of year.................... $ 9.09 $ 13.05 $ 13.90 $ 10.63 $ 10.55 ======== ======== ======== ======== ======== Total return(c)................................. (14.73)% 4.02% 30.76% 0.76% 41.42% RATIOS TO AVERAGE NET ASSETS Expenses........................................ 1.17%(e) 1.20%(e) 1.16%(e) 1.15%(e) 1.08% Net investment income (loss).................... (0.72)% (0.77)% (0.61)% (0.84)% (0.70)% SUPPLEMENTAL DATA Net assets, end of year (000's)................. $274,142 $549,733 $693,084 $765,216 $908,599 Portfolio turnover rate......................... 48.52% 51.49% 44.34% 46.35% 47.08%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. 62 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30, -------------------------------------------------------------- CLASS B 2008 2007 2006 2005 2004 - ---------------------------------------------------- ------- ------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.35 $ 13.32 $ 10.26 $ 10.27 $ 7.33 ------- ------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ................. (0.16) (0.18) (0.16) (0.17) (0.15) Net realized and unrealized gains (losses) ...... (1.48) 0.54 3.22 0.16 3.09 ------- ------- -------- -------- -------- Total from investment operations ................... (1.64) 0.36 3.06 (0.01) 2.94 ------- ------- -------- -------- -------- Less distributions from net realized gains ......... (2.28) (1.33) -- -- -- ------- ------- -------- -------- -------- Redemption fees .................................... --(d) --(d) --(d) --(d) -- ------- ------- -------- -------- -------- Net asset value, end of year ....................... $ 8.43 $ 12.35 $ 13.32 $ 10.26 $ 10.27 ======= ======= ======== ======== ======== Total return(c) .................................... (15.27)% 3.27% 29.82% (0.10)% 40.11% RATIOS TO AVERAGE NET ASSETS Expenses ........................................... 1.92%(e) 1.96%(e) 1.91%(e) 1.91%(e) 1.92% Net investment income (loss) ....................... (1.47)% (1.53)% (1.36)% (1.60)% (1.54)% SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $52,465 $85,684 $111,458 $105,070 $122,004 Portfolio turnover rate ............................ 48.52% 51.49% 44.34% 46.35% 47.08%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 63 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30, --------------------------------------------------------------- CLASS C 2008 2007 2006 2005 2004 - ---------------------------------------------------- ------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.36 $ 13.33 $ 10.27 $ 10.27 $ 7.33 ------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) .................. (0.16) (0.18) (0.16) (0.17) (0.15) Net realized and unrealized gains (losses) ....... (1.49) 0.54 3.22 0.17 3.09 ------- -------- -------- -------- -------- Total from investment operations ................... (1.65) 0.36 3.06 -- 2.94 ------- -------- -------- -------- -------- Less distributions from net realized gains ......... (2.28) (1.33) -- -- -- ------- -------- -------- -------- -------- Redemption fees .................................... --(d) --(d) --(d) --(d) -- ------- -------- -------- -------- -------- Net asset value, end of year ....................... $ 8.43 $ 12.36 $ 13.33 $ 10.27 $ 10.27 ======= ======== ======== ======== ======== Total return(c) .................................... (15.35)% 3.27% 29.80% --% 40.11% RATIOS TO AVERAGE NET ASSETS Expenses ........................................... 1.92%(e) 1.95%(e) 1.92%(e) 1.91%(e) 1.92% Net investment income (loss) ....................... (1.47)% (1.52)% (1.37)% (1.60)% (1.54)% SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $75,846 $120,900 $170,159 $164,117 $200,037 Portfolio turnover rate ............................ 48.52% 51.49% 44.34% 46.35% 47.08%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. 64 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30, ------------------------------------------------------- CLASS R 2008 2007 2006 2005 2004 - ---------------------------------------------------- ------- ------ ------ ------ ------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.86 $13.75 $10.54 $10.49 $ 7.45 ------- ------ ------ ------ ------ Income from investment operations(a): Net investment income (loss)(b) ................. (0.11) (0.13) (0.11) (0.12) (0.10) Net realized and unrealized gains (losses) ...... (1.56) 0.57 3.32 0.17 3.14 ------- ------ ------ ------ ------ Total from investment operations ................... (1.67) 0.44 3.21 0.05 3.04 ------- ------ ------ ------ ------ Less distributions from net realized gains ......... (2.28) (1.33) -- -- -- ------- ------ ------ ------ ------ Redemption fees .................................... --(d) --(d) --(d) --(d) -- ------- ------ ------ ------ ------ Net asset value, end of year ....................... $ 8.91 $12.86 $13.75 $10.54 $10.49 ======= ====== ====== ====== ====== Total return(c) .................................... (14.87)% 3.77% 30.46% 0.48% 40.81% RATIOS TO AVERAGE NET ASSETS Expenses ........................................... 1.42%(e) 1.46%(e) 1.42%(e) 1.41%(e) 1.42% Net investment income (loss) ....................... (0.97)% (1.03)% (0.87)% (1.10)% (1.04)% SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 3,166 $5,759 $6,328 $4,392 $4,542 Portfolio turnover rate ............................ 48.52% 51.49% 44.34% 46.35% 47.08%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 65 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30, ----------------------------------------------------------------- ADVISOR CLASS 2008 2007 2006 2005 2004 - ---------------------------------------------------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 13.34 $ 14.15 $ 10.79 $ 10.69 $ 7.55 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ................. (0.05) (0.07) (0.05) (0.07) (0.05) Net realized and unrealized gains (losses) ...... (1.64) 0.59 3.41 0.17 3.19 -------- -------- -------- -------- -------- Total from investment operations ................... (1.69) 0.52 3.36 0.10 3.14 -------- -------- -------- -------- -------- Less distributions from net realized gains ......... (2.28) (1.33) -- -- -- -------- -------- -------- -------- -------- Redemption fees .................................... --(c) --(c) --(c) --(c) -- -------- -------- -------- -------- -------- Net asset value, end of year ....................... $ 9.37 $ 13.34 $ 14.15 $ 10.79 $ 10.69 ======== ======== ======== ======== ======== Total return ....................................... (14.46)% 4.24% 31.14% 0.94% 41.59% RATIOS TO AVERAGE NET ASSETS Expenses ........................................... 0.92%(d) 0.96%(d) 0.92%(d) 0.91%(d) 0.92% Net investment income (loss) ....................... (0.47)% (0.53)% (0.37)% (0.60)% (0.54)% SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $220,857 $325,425 $326,475 $235,101 $211,271 Portfolio turnover rate ............................ 48.52% 51.49% 44.34% 46.35% 47.08%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Benefit of expense reduction rounds to less than 0.01%. 66 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE - -------------------------------------------------------------------------- ---------- ------------ COMMON STOCKS 96.9% CONSUMER DISCRETIONARY 18.2% (a) Aeropostale Inc. ................................................... 134,800 $ 4,285,293 (a) BJ's Restaurants Inc. .............................................. 378,800 5,280,472 (a) Chipotle Mexican Grill Inc., B ..................................... 130,700 11,105,579 (a) Drew Industries Inc. ............................................... 358,900 8,753,571 (a) FGX International Holdings Ltd. (Virgin Islands (British)) ......... 538,700 7,030,035 (a) Hibbett Sports Inc. ................................................ 60,300 1,101,078 (a) Lions Gate Entertainment Corp. ..................................... 903,700 9,280,999 (a,b) Lululemon Athletica Inc. (Canada) .................................. 135,300 4,190,241 The Men's Wearhouse Inc. ........................................... 151,500 4,034,445 Orient-Express Hotels Ltd., A ...................................... 168,500 7,843,675 (a,b) Panera Bread Co. ................................................... 130,700 6,830,382 (a) Shuffle Master Inc. ................................................ 980,600 4,814,746 (a) Shutterfly Inc. .................................................... 222,600 3,639,510 Strayer Education Inc. ............................................. 46,600 8,653,154 (a) Tenneco Inc. ....................................................... 303,400 7,760,972 (a) Tractor Supply Co. ................................................. 219,900 7,819,644 (a) Universal Technical Institute Inc. ................................. 441,700 5,008,878 (a) Zumiez Inc. ........................................................ 316,800 6,636,960 ------------ 114,069,634 ------------ CONSUMER STAPLES 2.3% (a) Hain Celestial Group Inc. .......................................... 347,700 8,581,236 (a) Hansen Natural Corp. ............................................... 167,700 5,934,903 ------------ 14,516,139 ------------ ENERGY 8.5% (a) Bill Barrett Corp. ................................................. 211,500 10,877,445 (a) Dril-Quip Inc. ..................................................... 145,800 8,333,928 (a) Helix Energy Solutions Group Inc. .................................. 173,700 6,001,335 (a) Mariner Energy Inc. ................................................ 447,600 12,335,856 (a) Petrohawk Energy Corp. ............................................. 163,700 3,869,868 (a) Superior Energy Services Inc. ...................................... 265,600 11,787,328 ------------ 53,205,760 ------------ FINANCIALS 4.5% (a) Clayton Holdings Inc. .............................................. 794,799 4,593,938 FelCor Lodging Trust Inc. .......................................... 623,600 7,851,124 iStar Financial Inc. ............................................... 345,200 6,645,100 (a) MSCI Inc. Class A .................................................. 108,100 3,353,262 (a) NewStar Financial Inc. ............................................. 332,900 1,791,002 optionsXpress Holdings Inc. ........................................ 177,100 3,802,337 ------------ 28,036,763 ------------ HEALTH CARE 14.3% (a) American Medical Systems Holdings Inc. ............................. 649,100 9,152,310 (a) Angiotech Pharmaceuticals Inc. ..................................... 1,666,900 5,150,721 (a) Cadence Pharmaceuticals Inc. ....................................... 438,700 2,877,872 (a) Dexcom Inc. ........................................................ 681,700 5,249,090 (a) Impax Laboratories Inc. ............................................ 257,100 2,378,175
Annual Report | 67 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE - -------------------------------------------------------------------------- ---------- ------------ COMMON STOCKS (CONTINUED) HEALTH CARE (CONTINUED) (a) The Medicines Co. .................................................. 312,200 $ 6,165,950 (a) MWI Veterinary Supply Inc. ......................................... 114,100 3,933,027 (a) Myriad Genetics Inc. ............................................... 196,700 8,170,918 (a) PAREXEL International Corp. ........................................ 252,400 6,410,960 (a) Penwest Pharmaceuticals Co. ........................................ 571,600 1,709,084 (a) Psychiatric Solutions Inc. ......................................... 368,600 12,794,106 (a) Sciele Pharma Inc. ................................................. 81,800 1,576,286 (a) Sequenom Inc. ...................................................... 67,900 429,128 (a) Tomotherapy Inc. ................................................... 359,800 3,511,648 (a) TriZetto Group Inc. ................................................ 255,700 5,382,485 (a) Varian Inc. ........................................................ 130,800 6,661,644 (a) VCA Antech Inc. .................................................... 253,500 8,205,795 ------------ 89,759,199 ------------ INDUSTRIALS 8.8% (a) Allegiant Travel Co. ............................................... 273,400 7,450,150 (a) Force Protection Inc. .............................................. 393,300 1,175,967 (a,c) Force Protection Inc., 144A, PIPES.................................. 601,000 1,796,990 (a) Huron Consulting Group Inc. ........................................ 204,400 8,556,184 Manitowoc Co. Inc. ................................................. 123,400 4,666,988 (a) Mobile Mini Inc. ................................................... 392,200 8,334,250 (a) Orbital Sciences Corp. ............................................. 458,900 12,348,999 Pacer International Inc. ........................................... 301,800 5,601,408 (a) Stanley Inc. ....................................................... 195,800 4,940,034 ------------ 54,870,970 ------------ INFORMATION TECHNOLOGY 37.2% (a) ANSYS Inc. ......................................................... 160,300 6,448,869 (a) Atheros Communications.............................................. 257,500 6,854,650 (a) Bottomline Technologies Inc. ....................................... 774,100 8,244,165 (a) Coherent Inc. ...................................................... 300,900 8,966,820 (a) Compellent Technologies Inc. ....................................... 368,936 4,703,934 (a) CyberSource Corp. .................................................. 437,200 7,935,180 (a) DealerTrack Holdings Inc. .......................................... 253,700 4,881,188 (a) EPIQ Systems Inc. .................................................. 204,300 3,154,392 (a) FARO Technologies Inc. ............................................. 279,200 9,839,008 (a) FLIR Systems Inc. .................................................. 324,400 11,136,652 (a) FormFactor Inc. .................................................... 413,700 7,971,999 Heartland Payment Systems Inc. ..................................... 186,300 4,079,970 (a) Internap Network Services Corp. .................................... 645,400 3,104,374 (a) Ixia................................................................ 1,318,502 9,348,179 (a) Microsemi Corp. .................................................... 445,800 10,922,100 (a) Microtune Inc. ..................................................... 1,318,700 4,655,011 National Instruments Corp. ......................................... 166,202 4,889,663 (a) Netlogic Microsystems Inc. ......................................... 350,000 11,476,500 (a) Nuance Communications Inc. ......................................... 522,800 10,602,384 (a) Omniture Inc. ...................................................... 264,400 6,033,608 (a) Power Integrations Inc. ............................................ 433,500 13,512,195
68 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE - -------------------------------------------------------------------------- ---------- ------------ COMMON STOCKS (CONTINUED) INFORMATION TECHNOLOGY (CONTINUED) (a) Quest Software Inc. ................................................ 768,700 $ 10,239,084 (a) RightNow Technologies Inc. ......................................... 131,400 1,572,858 (a) Riverbed Technology Inc. ........................................... 406,400 5,555,488 (a) Sapient Corp. ...................................................... 1,631,100 11,613,432 (a) Silicon Laboratories Inc. .......................................... 262,700 8,871,379 (a) Trimble Navigation Ltd.............................................. 312,000 10,230,480 (a) Varian Semiconductor Equipment Associates Inc. ..................... 224,475 8,222,519 (a) ViaSat Inc. ........................................................ 440,400 9,732,840 (a) Voltaire Ltd. (Israel).............................................. 206,809 1,036,113 (a) Xyratex Ltd. (Bermuda).............................................. 369,100 7,260,197 ------------ 233,095,231 ------------ MATERIALS 1.8% FMC Corp. .......................................................... 152,800 9,592,784 Minerals Technologies Inc. ......................................... 22,700 1,537,698 ------------ 11,130,482 ------------ TELECOMMUNICATION SERVICES 1.3% (a) SBA Communications Corp. ........................................... 250,000 8,085,000 ------------ TOTAL COMMON STOCKS (COST $561,217,406)............................. 606,769,178 ------------ SHORT TERM INVESTMENTS 5.0% MONEY MARKET FUND (COST $20,916,527) 3.3% (d) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.29% ........................................................... 20,916,527 20,916,527 ------------ (e) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES MONEY MARKET FUND (COST $10,444,000) 1.7% (f) Bank of New York Institutional Cash Reserve Fund, 2.71%............. 10,444,000 10,444,000 ------------ TOTAL INVESTMENTS (COST $592,577,933) 101.9%........................ 638,129,705 OTHER ASSETS, LESS LIABILITIES (1.9)%............................... (11,653,467) ------------ NET ASSETS 100.0%................................................... $626,476,238 ============
See Selected Portfolio Abbreviations on page 79. (a) Non-income producing for the twelve months ended April 30, 2008. (b) A portion or all of the security is on loan as of April 30, 2008. See Note 1(f). (c) 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. This security has been deemed liquid under guidelines approved by the Trust's Board of Trustees. At April 30, 2008, the value of this security was $1,796,990, representing 0.29% of net assets. (d) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (e) See Note 1(f) regarding securities on loan. (f) The rate shown is the annualized seven-day yield at period end. Annual Report | The accompanying notes are an integral part of these financial statements. | 69 Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30, ---------------------------------------------------------------------- CLASS A 2008 2007 2006 2005 2004 - --------------------------------------------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year........... $ 41.54 $ 40.42 $ 31.31 $ 29.69 $ 23.14 ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income (loss)(b)........... (0.19) (0.13) --(d) (0.08) (0.14) Net realized and unrealized gains (losses) .............................. (1.93) 4.09 9.15 1.70 6.69 ---------- ---------- ---------- ---------- ---------- Total from investment operations............. (2.12) 3.96 9.15 1.62 6.55 ---------- ---------- ---------- ---------- ---------- Less distributions from: Net investment income..................... -- -- (0.04) -- -- Net realized gains........................ (6.72) (2.84) -- -- -- ---------- ---------- ---------- ---------- ---------- Total distributions.......................... (6.72) (2.84) (0.04) -- -- ---------- ---------- ---------- ---------- ---------- Redemption fees.............................. --(d) --(d) --(d) --(d) --(d) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year................. $ 32.70 $ 41.54 $ 40.42 $ 31.31 $ 29.69 ========== ========== ========== ========== ========== Total return(c).............................. (6.24)% 10.38% 29.21% 5.46% 28.31% RATIOS TO AVERAGE NET ASSETS Expenses..................................... 1.02%(e) 0.98%(e) 0.96%(e) 0.97%(e) 0.98% Net investment income (loss)................. (0.50)% (0.33)% --%(f) (0.27)% (0.51)% SUPPLEMENTAL DATA Net assets, end of year (000's).............. $4,331,657 $5,619,694 $6,532,284 $6,636,792 $7,355,269 Portfolio turnover rate...................... 55.09% 52.76% 39.84% 42.96% 52.84%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. (f) Rounds to less than 0.01%. 70 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30, ------------------------------------------------------- CLASS B 2008 2007 2006 2005 2004 - ------------------------------------------------ ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year.............. $ 40.00 $ 39.31 $ 30.65 $ 29.28 $ 23.00 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b).............. (0.46) (0.40) (0.27) (0.31) (0.36) Net realized and unrealized gains (losses)... (1.82) 3.93 8.93 1.68 6.64 ------- ------- ------- ------- ------- Total from investment operations................ (2.28) 3.53 8.66 1.37 6.28 ------- ------- ------- ------- ------- Less distributions from net realized gains...... (6.72) (2.84) -- -- -- ------- ------- ------- ------- ------- Redemption fees................................. --(d) --(d) --(d) --(d) --(d) ------- ------- ------- ------- ------- Net asset value, end of year.................... $ 31.00 $ 40.00 $ 39.31 $ 30.65 $ 29.28 ======= ======= ======= ======= ======= Total return(c)................................. (6.92)% 9.53% 28.25% 4.68% 27.30% RATIOS TO AVERAGE NET ASSETS Expenses........................................ 1.77%(e) 1.73%(e) 1.71%(e) 1.72%(e) 1.73% Net investment income (loss).................... (1.25)% (1.08)% (0.75)% (1.02)% (1.26)% SUPPLEMENTAL DATA Net assets, end of year (000's)................. $25,457 $32,570 $36,911 $31,733 $26,161 Portfolio turnover rate......................... 55.09% 52.76% 39.84% 42.96% 52.84%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 71 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30, ---------------------------------------------------------------- CLASS C 2008 2007 2006 2005 2004 - ------------------------------------------------ -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year.............. $ 38.85 $ 38.25 $ 29.82 $ 28.49 $ 22.37 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b).............. (0.45) (0.39) (0.26) (0.31) (0.34) Net realized and unrealized gains (losses)... (1.76) 3.83 8.69 1.64 6.46 -------- -------- -------- -------- -------- Total from investment operations................ (2.21) 3.44 8.43 1.33 6.12 -------- -------- -------- -------- -------- Less distributions from net realized gains...... (6.72) (2.84) -- -- -- -------- -------- -------- -------- -------- Redemption fees................................. --(d) --(d) --(d) --(d) --(d) -------- -------- -------- -------- -------- Net asset value, end of year.................... $ 29.92 $ 38.85 $ 38.25 $ 29.82 $ 28.49 ======== ======== ======== ======== ======== Total return(c) ................................ (6.94)% 9.56% 28.27% 4.67% 27.36% RATIOS TO AVERAGE NET ASSETS Expenses........................................ 1.77%(e) 1.72%(e) 1.71%(e) 1.72%(e) 1.71% Net investment income (loss).................... (1.25)% (1.07)% (0.75)% (1.02)% (1.24)% SUPPLEMENTAL DATA Net assets, end of year (000's)................. $523,040 $653,529 $728,710 $654,549 $762,602 Portfolio turnover rate......................... 55.09% 52.76% 39.84% 42.96% 52.84%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. 72 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30, ------------------------------------------------------------ CLASS R 2008 2007 2006 2005 2004 - ----------------------------------------------- ------- -------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year............. $ 40.96 $ 39.98 $ 31.04 $ 29.50 $ 23.06 ------- -------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b)............. (0.29) (0.23) (0.08) (0.15) (0.22) Net realized and unrealized gains (losses) (1.89) 4.05 9.04 1.69 6.66 ------- -------- ------- ------- ------- Total from investment operations............... (2.18) 3.82 8.96 1.54 6.44 ------- -------- ------- ------- ------- Less distributions from: Net investment income....................... -- -- (0.02) -- -- Net realized gains.......................... (6.72) (2.84) -- -- -- ------- -------- ------- ------- ------- Total distributions............................ (6.72) (2.84) (0.02) -- -- ------- -------- ------- ------- ------- Redemption fees................................ --(d) --(d) --(d) --(d) --(d) ------- -------- ------- ------- ------- Net asset value, end of year................... $ 32.06 $ 40.96 $ 39.98 $ 31.04 $ 29.50 ======= ======== ======= ======= ======= Total return(c)................................ (6.48)% 10.11% 28.88% 5.22% 27.93% RATIOS TO AVERAGE NET ASSETS Expenses....................................... 1.27%(e) 1.23%(e) 1.21%(e) 1.22%(e) 1.23% Net investment income (loss)................... (0.75)% (0.58)% (0.25)% (0.52)% (0.76)% SUPPLEMENTAL DATA Net assets, end of year (000's)................ $94,334 $118,387 $93,916 $54,139 $41,404 Portfolio turnover rate........................ 55.09% 52.76% 39.84% 42.96% 52.84%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 73 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30, ---------------------------------------------------------------- ADVISOR CLASS 2008 2007 2006 2005 2004 - ------------------------------------------------ -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year.............. $ 42.22 $ 40.93 $ 31.71 $ 29.99 $ 23.32 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b).............. (0.10) (0.03) 0.10 --(c) (0.07) Net realized and unrealized gains (losses)... (1.97) 4.16 9.26 1.72 6.74 -------- -------- -------- -------- -------- Total from investment operations................ (2.07) 4.13 9.36 1.72 6.67 -------- -------- -------- -------- -------- Less distributions from: Net investment income........................ -- -- (0.14) -- -- Net realized gains........................... (6.72) (2.84) -- -- -- -------- -------- -------- -------- -------- Total distributions............................. (6.72) (2.84) (0.14) -- -- -------- -------- -------- -------- -------- Redemption fees................................. --(c) --(c) --(c) --(c) --(c) -------- -------- -------- -------- -------- Net asset value, end of year.................... $ 33.43 $ 42.22 $ 40.93 $ 31.71 $ 29.99 ======== ======== ======== ======== ======== Total return.................................... (6.00)% 10.65% 29.55% 5.74% 28.60% RATIOS TO AVERAGE NET ASSETS Expenses........................................ 0.77%(d) 0.73%(d) 0.71%(d) 0.72%(d) 0.73% Net investment income (loss).................... (0.25)% (0.08)% 0.25% (0.02)% (0.26)% SUPPLEMENTAL DATA Net assets, end of year (000's)................. $812,503 $803,365 $794,395 $347,518 $320,154 Portfolio turnover rate......................... 55.09% 52.76% 39.84% 42.96% 52.84%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Benefit of expense reduction rounds to less than 0.01%. 74 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------------------- ------------ -------------- LONG TERM INVESTMENTS 93.3% COMMON STOCKS 93.3% CONSUMER DISCRETIONARY 11.2% (a) Chipotle Mexican Grill Inc., B..................................................... 727,210 $ 61,791,035 (a) Dick's Sporting Goods Inc.......................................................... 2,176,400 62,245,040 Garmin Ltd. (Cayman Islands)....................................................... 554,500 22,679,050 Guess? Inc......................................................................... 2,466,100 94,402,308 International Game Technology...................................................... 939,600 32,641,704 (b) The Men's Wearhouse Inc............................................................ 3,301,000 87,905,630 Nordstrom Inc...................................................................... 1,385,300 48,845,678 PetSmart Inc....................................................................... 2,370,760 53,057,609 (a) Tractor Supply Co.................................................................. 1,432,500 50,939,700 (b) Wolverine World Wide Inc........................................................... 3,792,210 108,988,115 (a) Zumiez Inc......................................................................... 1,289,700 27,019,215 -------------- 650,515,084 -------------- CONSUMER STAPLES 1.7% (a) Hansen Natural Corp................................................................ 2,802,300 99,173,397 -------------- ENERGY 15.0% (a) Bill Barrett Corp.................................................................. 2,103,800 108,198,434 (a) FMC Technologies Inc............................................................... 2,205,156 148,186,483 (a) Mariner Energy Inc................................................................. 4,049,600 111,606,976 (a) National-Oilwell Varco Inc......................................................... 1,318,592 90,257,623 Noble Energy Inc................................................................... 1,610,840 140,143,080 Smith International Inc............................................................ 2,502,000 191,428,020 (a) Southwestern Energy Co............................................................. 1,865,200 78,916,612 -------------- 868,737,228 -------------- FINANCIALS 3.8% (a) Affiliated Managers Group Inc...................................................... 1,153,300 114,568,822 FelCor Lodging Trust Inc........................................................... 2,072,500 26,092,775 iStar Financial Inc................................................................ 4,204,200 80,930,850 -------------- 221,592,447 -------------- HEALTH CARE 13.6% (a,b) American Medical Systems Holdings Inc.............................................. 3,689,900 52,027,590 C. R. Bard Inc..................................................................... 593,000 55,842,810 (a) Cerner Corp........................................................................ 322,912 14,941,138 (a) Community Health Systems Inc....................................................... 1,186,864 44,543,006 (a) Coventry Health Care Inc........................................................... 941,500 42,113,295 (a) Express Scripts Inc................................................................ 1,071,000 74,991,420 (a) Henry Schein Inc................................................................... 1,185,500 65,641,135 (a) Hologic Inc........................................................................ 1,832,660 53,495,345 (a) Millennium Pharmaceuticals Inc..................................................... 3,435,500 85,440,885 (a) Myriad Genetics Inc................................................................ 628,500 26,107,890 Pharmaceutical Product Development Inc............................................. 904,800 37,476,816 (a) QIAGEN NV (Netherlands)............................................................ 2,737,100 60,790,991 (a,c) Stereotaxis Inc.................................................................... 1,463,200 9,964,392 (a) Varian Medical Systems Inc......................................................... 1,384,800 64,919,424 (a) Waters Corp........................................................................ 1,569,600 96,467,616 -------------- 784,763,753 --------------
Annual Report | 75 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------------------- ------------ -------------- LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) INDUSTRIALS 15.7% AMTEK Inc.......................................................................... 2,968,500 $ 144,031,620 C.H Robinson Worldwide Inc......................................................... 1,776,000 111,319,680 Expeditors International of Washington Inc......................................... 788,100 36,717,579 (a,b,d) Force Protection Inc., 144A, PIPES................................................. 3,734,600 11,166,454 (a) Foster Wheeler Ltd................................................................. 1,080,000 68,785,200 (a,b) Orbital Sciences Corp.............................................................. 3,420,100 92,034,891 Precision Castparts Corp........................................................... 1,183,510 139,133,436 Robert Half International Inc...................................................... 2,036,800 48,272,160 (a) Ryanair Holdings PLC, ADR (Ireland)................................................ 1,549,500 42,006,945 (a,c) SunPower Corp., A.................................................................. 1,253,100 109,358,037 (a) Terex Corp......................................................................... 1,499,000 104,450,320 -------------- 907,276,322 -------------- INFORMATION TECHNOLOGY 26.5% (a) Activision Inc..................................................................... 3,900,300 105,503,115 (a) Alliance Data Systems Corp......................................................... 284,100 16,310,181 (a) Concur Technologies Inc............................................................ 542,800 17,988,392 (a) Equinix Inc........................................................................ 644,400 58,266,648 FactSet Research Systems Inc....................................................... 1,750,400 105,076,512 (a,c) FLIR Systems Inc................................................................... 5,433,800 186,542,354 (a,b) FormFactor Inc..................................................................... 3,689,300 71,092,811 Global Payments Inc................................................................ 1,721,000 76,171,460 Harris Corp........................................................................ 2,634,600 142,347,438 (a) Lam Research Corp.................................................................. 1,088,000 44,433,920 (a) Logitech International SA (Switzerland)............................................ 1,621,540 48,921,862 Maxim Integrated Products Inc...................................................... 2,701,800 56,818,854 (a) Mettler-Toledo International Inc.(Switzerland)..................................... 699,126 66,598,743 (a,b) Microsemi Corp..................................................................... 5,007,300 122,678,850 (a) Nuance Communications Inc.......................................................... 5,804,500 117,715,260 (a) Omniture Inc....................................................................... 786,000 17,936,520 (a) Salesforce.com Inc................................................................. 497,400 33,191,502 (a,b) Silicon Laboratories Inc........................................................... 3,561,500 120,271,855 (a) Trimble Navigation Ltd............................................................. 2,862,360 93,856,784 (a,e) UbiSoft Entertainment SA (France).................................................. 293,800 29,633,610 -------------- 1,531,356,671 -------------- MATERIALS 0.1% (a) Intrepid Potash Inc................................................................ 113,800 5,404,362 -------------- TELECOMMUNICATION SERVICES 4.7% (a,f) Anda Networks...................................................................... 91,107 172,192 (a) Crown Castle International Corp.................................................... 1,179,400 45,819,690 (a) MetroPCS Communications Inc........................................................ 4,018,200 78,917,448 (a) NII Holdings Inc................................................................... 2,239,340 102,427,412 (a) SBA Communications Corp............................................................ 1,396,800 45,172,512 (a) TeleCorp PCS Inc., Escrow Account.................................................. 4,569,500 -- -------------- 272,509,254 --------------
76 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------------------------- ------------ -------------- LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) UTILITIES 1.0% International Power PLC (United Kingdom)........................................... 6,343,700 $ 55,403,389 -------------- TOTAL COMMON STOCKS (COST $4,355,791,691) 5,396,731,907 -------------- CONVERTIBLE PREFERRED STOCKS 0.0%(g) INDUSTRIALS 0.0%(g) (a,f) Foveon Inc., cvt pfd., D, 144A.................................................... 1,792,573 17,926 (a,f) Foveon Inc., cvt pfd., E, 144A.................................................... 2,597,593 2,822,544 -------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $16,635,019) 2,840,470 -------------- TOTAL LONG TERM INVESTMENTS (COST $4,372,426,710) 5,399,572,377 -------------- SHORT TERM INVESTMENTS 9.2% MONEY MARKET FUND (COST $210,909,624) 3.7% (h) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.29%............... 210,909,624 210,909,624 -------------- PRINCIPAL AMOUNT ------------ REPURCHASE AGREEMENT (COST $196,440,038) 3.4% (i) Joint Repurchase Agreement, 1.910%, 5/01/08 (Maturity Value $196,450,462).......... $196,440,038 196,440,038 ABN AMRO BankNV, New York Branch (Maturity Value $18,012,543) Banc of America Securities LLC (Maturity Value $16,951,710) Barclays Capital Inc. (Maturity Value $16,951,710) BNP Paribas Securities Corp. (Maturity Value $16,951,710) Credit Suisse Securities (USA) LLC (Maturity Value $14,126,753) Deutsche Bank Securities Inc. (Maturity Value $16,951,710) Goldman, Sachs & Co. (Maturity Value $16,951,710) Greenwich Capital Markets Inc. (Maturity Value $19,071,411) Lehman Brothers Inc. (Maturity Value $13,507,934) Merrill Lynch Government Securities Inc. (Maturity Value $16,951,710) Morgan Stanley & Co. Inc. (Maturity Value $13,069,851) UBS Securities LLC (Maturity Value $16,951,710) Collateralized by U.S. Government Agency Securities, 1.96%-6.375%, 5/13/08-2/21/13; (j) U.S Government Agency Discount Notes, 5/05/08-6/06/08; and U.S. Treasury Notes, 3.00%-5.00%, 7/31/08-5/41/12 SHARES ------------ (k) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES MONEY MARKET FUND (COST $123,813,000) 2.1% (l) Bank of New York Institutional Cash Reserve Fund, 2.71%............................ 123,813,000 123,813,000 -------------- TOTAL INVESTMENTS (COST $4,903,589,372) 102.5%..................................... 5,930,735,039 OTHER ASSETS, LESS LIABILITIES (2.5)%.............................................. (143,744,004) -------------- NET ASSETS 100.0%.................................................................. $5,786,991,035 ==============
Annual Report | 77 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND See Selected Portfolio Abbreviations on page 79. (a) Non-income producing for the twelve months ended April 30, 2008. (b) See Note 9 regarding holdings of 5% voting securities. (c) A portion or all of the security is on loan as of April 30, 2008 See Note 1(f). (d) 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.This security has been deemed liquid under guidelines approved by the Trust's Board of Trustees At April 30, 2008, the value of this security was $11,166,454, representing 0.19% of net assets. (e) A portion or all of the security purchased on a when-issued or delayed delivery basis See Note 1(d). (f) See Note 8 regarding restricted securities. (g) Rounds to less than 0.1% of net assets. (h) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio The rate shown is the annualized seven-day yield at period end. (i) See Note 1(c) regarding joint repurchase agreement. (j) The security is traded on a discount basis with no stated coupon rate. (k) See Note 1(f) regarding securities on loan. (l) The rate shown is the annualized seven-day yield at period end. 78 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt PIPES - Private Investment in Public Equity Security Annual Report | The accompanying notes are an integral part of these financial statements. | 79 Franklin Strategic Series FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES April 30, 2008
FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN FLEX CAP OPPORTUNITIES SMALL CAP SMALL-MID CAP GROWTH FUND FUND GROWTH FUND GROWTH FUND -------------- ------------- ------------ -------------- Assets: Investments in securities: Cost - Unaffiliated issuers ......................... $2,112,931,181 $ 246,091,205 $571,661,406 $3,782,177,147 Cost - Non-controlled affiliated issuers (Note 9) ... -- -- -- 714,062,563 Cost - Sweep Money Fund (Note 7) .................... 49,018,782 3,189,780 20,916,527 210,909,624 Cost - Repurchase agreements ........................ -- -- -- 196,440,038 -------------- ------------- ------------ -------------- Total cost of investments ........................... $2,161,949,963 $ 249,280,985 $592,577,933 $4,903,589,372 ============== ============= ============ ============== Value - Unaffiliated issuers ........................ $2,869,504,718 $ 298,564,279 $617,213,178 $4,857,219,181 Value - Non-controlled affiliated issuers (Note 9) .. -- -- -- 666,166,196 Value - Sweep Money Fund (Note 7) ................... 49,018,782 3,189,780 20,916,527 210,909,624 Value - Repurchase agreements ....................... -- -- -- 196,440,038 -------------- ------------- ------------ -------------- Total value of investments(a) ....................... 2,918,523,500 301,754,059 638,129,705 5,930,735,039 Foreign currency, at value (cost $30,082) .............. -- -- -- 46,142 Receivables: Investment securities sold .......................... 1,733,153 1,319,327 6,341,982 29,415,336 Capital shares sold ................................. 3,397,599 846,485 263,352 3,589,973 Dividends and interest .............................. 1,358,378 92,748 143,518 1,116,227 -------------- ------------- ------------ -------------- Total assets ..................................... 2,925,012,630 304,012,619 644,878,557 5,964,902,717 -------------- ------------- ------------ -------------- Liabilities: Payables: Investment securities purchased ..................... -- 552,859 2,502,708 23,462,648 Capital shares redeemed ............................. 4,751,910 130,213 4,603,200 23,860,784 Affiliates .......................................... 2,154,005 274,673 607,877 4,326,495 Payable upon return of securities loaned ............... 20,200,000 4,150,000 10,444,000 123,813,000 Accrued expenses and other liabilities ................. 642,065 63,453 244,534 2,448,755 -------------- ------------- ------------ -------------- Total liabilities ................................ 27,747,980 5,171,198 18,402,319 177,911,682 -------------- ------------- ------------ -------------- Net assets, at value .......................... $2,897,264,650 $ 298,841,421 $626,476,238 $5,786,991,035 ============== ============= ============ ============== Net assets consist of: Paid-in capital ..................................... $2,150,608,067 $ 380,543,257 $597,583,122 $4,753,978,554 Net unrealized appreciation (depreciation) .......... 756,573,537 52,470,652 45,551,772 1,027,161,727 Accumulated net realized gain (loss) ................ (9,916,954) (134,172,488) (16,658,656) 5,850,754 -------------- ------------- ------------ -------------- Net assets, at value .......................... $2,897,264,650 $ 298,841,421 $626,476,238 $5,786,991,035 ============== ============= ============ ============== (a) Includes securities loaned ............................. $ 19,626,000 $ 4,058,055 $ 10,957,911 $ 121,014,946
80 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) April 30, 2008
FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN FLEX CAP OPPORTUNITIES SMALL CAP SMALL-MID CAP GROWTH FUND FUND GROWTH FUND GROWTH FUND -------------- ------------ ------------ -------------- CLASS A: Net assets, at value ...................................... $2,011,347,545 $137,312,693 $274,142,329 $4,331,657,423 -------------- ------------ ------------ -------------- Shares outstanding ........................................ 43,946,436 6,844,794 30,142,965 132,458,115 -------------- ------------ ------------ -------------- Net asset value per share(a) ................................. $ 45.77 $ 20.06 $ 9.09 $ 32.70 -------------- ------------ ------------ -------------- Maximum offering price per share (net asset value per share/94.25%)....................................... $ 48.56 $ 21.28 $ 9.64 $ 34.69 -------------- ------------ ------------ -------------- CLASS B: Net assets, at value ...................................... $ 95,600,106 $ 11,528,492 $ 52,465,362 $ 25,456,768 -------------- ------------ ------------ -------------- Shares outstanding ........................................ 2,240,763 608,303 6,226,915 821,234 -------------- ------------ ------------ -------------- Net asset value and maximum offering price per share(a) ... $ 42.66 $ 18.95 $ 8.43 $ 31.00 -------------- ------------ ------------ -------------- CLASS C: Net assets, at value ...................................... $ 375,821,962 $ 40,252,789 $ 75,846,257 $ 523,040,081 -------------- ------------ ------------ -------------- Shares outstanding ........................................ 8,789,522 2,128,782 8,993,472 17,480,027 -------------- ------------ ------------ -------------- Net asset value and maximum offering price per share(a).... $ 42.76 $ 18.91 $ 8.43 $ 29.92 -------------- ------------ ------------ -------------- CLASS R: Net assets, at value ...................................... $ 66,249,601 $ 7,862,691 $ 3,165,692 $ 94,334,221 -------------- ------------ ------------ -------------- Shares outstanding ......................................... 1,468,949 397,090 355,466 2,942,151 -------------- ------------ ------------ -------------- Net asset value and maximum offering price per share(a).... $ 45.10 $ 19.80 $ 8.91 $ 32.06 -------------- ------------ ------------ -------------- ADVISOR CLASS: Net assets, at value ...................................... $ 348,245,436 $101,884,756 $220,856,598 $ 812,502,542 -------------- ------------ ------------ -------------- Shares outstanding ........................................ 7,545,671 4,945,086 23,558,580 24,301,900 -------------- ------------ ------------ -------------- Net asset value and maximum offering price per share(a).... $ 46.15 $ 20.60 $ 9.37 $ 33.43 -------------- ------------ ------------ --------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. Annual Report | The accompanying notes are an integral part of these financial statements. | 81 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the year ended April 30, 2008
FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN FLEX CAP OPPORTUNITIES SMALL CAP SMALL-MID CAP GROWTH FUND FUND GROWTH FUND GROWTH FUND ----------- ------------- ------------- ------------- Investment income: Dividends: Unaffiliated issuers ................................... $19,922,232 $ 1,006,117 $ 2,982,885 $ 25,241,707 Non-controlled affiliated issuers (Note 9) ............. -- -- -- 1,509,261 Sweep Money Fund (Note 7) .............................. 3,905,470 262,469 451,257 5,607,814 Interest .................................................. 846 41 714 597,406 Income from securities loaned ............................. 145,950 92,697 546,321 1,202,288 ----------- ------------- ------------- ------------- Total investment income ............................. 23,974,498 1,361,324 3,981,177 34,158,476 ----------- ------------- ------------- ------------- Expenses: Management fees (Note 3a) ................................. 13,020,395 1,349,639 4,473,383 29,560,759 Administrative fees (Note 3b) ............................. -- 548,621 1,788,954 -- Distribution fees: (Note 3c) Class A ................................................ 5,059,575 347,897 1,077,395 12,509,013 Class B ................................................ 1,103,819 147,497 703,978 301,190 Class C ................................................ 3,784,109 352,581 1,006,255 6,041,470 Class R ................................................ 383,289 39,602 21,546 538,754 Transfer agent fees (Note 3e) ............................. 5,994,769 647,373 1,629,577 20,012,734 Custodian fees (Note 4) ................................... 47,661 12,983 18,880 127,492 Reports to shareholders ................................... 363,336 48,674 106,478 516,888 Registration and filing fees .............................. 146,189 66,029 105,606 222,274 Professional fees ......................................... 47,908 29,106 32,993 81,817 Trustees' fees and expenses ............................... 44,653 4,169 16,029 49,537 Other ..................................................... 356,309 11,772 27,606 142,203 ----------- ------------- ------------- ------------- Total expenses ...................................... 30,352,012 3,605,943 11,008,680 70,104,131 Expense reductions (Note 4) ......................... (1,548) (1,106) (676) (3,055) Expenses waived/paid by affiliates (Note 3f) ........ (293,647) -- -- -- ----------- ------------- ------------- ------------- Net expenses ..................................... 30,056,817 3,604,837 11,008,004 70,101,076 ----------- ------------- ------------- ------------- Net investment income (loss) .................. (6,082,319) (2,243,513) (7,026,827) (35,942,600) ----------- ------------ ------------- ------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments: Unaffiliated issuers ................................ 73,813,957 12,033,234 89,522,745 541,621,920 Non-controlled affiliated issuers (Note 9) .......... -- -- -- (6,157,652) Foreign currency transactions .......................... 67,916 (30,746) -- 81,836 ----------- ------------- ------------- ------------- Net realized gain (loss) ...................... 73,881,873 12,002,488 89,522,745 535,546,104 ----------- ------------- ------------- ------------- Net change in unrealized appreciation (depreciation) on: Investments ............................................ 11,048,494 7,497,884 (204,815,321) (898,497,680) Translation of assets and liabilities denominated in foreign currencies .................................. -- (1,865) -- 16,060 Net change in unrealized appreciation (depreciation) ... 11,048,494 7,496,019 (204,815,321) (898,481,620) ----------- ------------- ------------- ------------- Net realized and unrealized gain (loss) ...................... 84,930,367 19,498,507 (115,292,576) (362,935,516) ----------- ------------- ------------- ------------- Net increase (decrease) in net assets resulting from operations ........................................... $78,848,048 $17,254,994 $(122,319,403) $(398,878,116) =========== ============= ============= =============
82 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN FLEX CAP FRANKLIN GROWTH GROWTH FUND OPPORTUNITIES FUND YEAR ENDED APRIL 30, YEAR ENDED APRIL 30, ------------------------------- --------------------------- 2008 2007 2008 2007 -------------- -------------- ------------ ------------ Increase (decrease) in net assets: Operations: Net investment income (loss) ...................... $ (6,082,319) $ 1,063,071 $ (2,243,513) $ (1,735,359) Net realized gain (loss) from investments and foreign currency transactions .................. 73,881,873 155,318,535 12,002,488 5,779,240 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ............................. 11,048,494 17,121,276 7,496,019 2,601,548 -------------- -------------- ------------ ------------ Net increase (decrease) in net assets resulting from operations ................ 78,848,048 173,502,882 17,254,994 6,645,429 -------------- -------------- ------------ ------------ Distributions to shareholders from: Net investment income: Class A ........................................ (1,062,345) (2,590,377) -- -- Class R ........................................ (43,876) (31,880) -- -- Advisor Class .................................. (161,537) (689,783) -- -- Net realized gains: Class A ........................................ (32,084,220) -- -- -- Class B ........................................ (1,853,887) -- -- -- Class C ........................................ (6,486,834) -- -- -- Class R ........................................ (1,221,188) -- -- -- Advisor Class .................................. (5,050,987) -- -- -- -------------- -------------- ------------ ------------ Total distributions to shareholders .................. (47,964,874) (3,312,040) -- -- -------------- -------------- ------------ ------------ Capital share transactions: (Note 2) Class A ........................................... 10,019,089 (213,191,173) 25,504,203 (9,162,668) Class B ........................................... (23,776,783) (30,582,659) (5,044,139) (3,780,075) Class C ........................................... 4,256,506 (36,808,204) 6,765,860 279,209 Class R ........................................... (15,994,000) (14,456,927) (69,825) 2,016,694 Advisor Class ..................................... 45,026,229 68,440,245 8,963,605 43,161,590 -------------- -------------- ------------ ------------ Total capital share transactions ..................... 19,531,041 (226,598,718) 36,119,704 32,514,750 -------------- -------------- ------------ ------------ Redemption fees ...................................... 20,391 8,359 3,208 957 -------------- -------------- ------------ ------------ Net increase (decrease) in net assets ....... 50,434,606 (56,399,517) 53,377,906 39,161,136 -------------- -------------- ------------ ------------ Net assets: Beginning of year .................................... 2,846,830,044 2,903,229,561 245,463,515 206,302,379 -------------- -------------- ------------ ------------ End of year .......................................... $2,897,264,650 $2,846,830,044 $298,841,421 $245,463,515 ============== ============== ============ ============ Undistributed net investment income included in net assets: End of year .......................................... $ -- $ 1,262,749 $ -- $ 6,480 ============== ============== ============ ============
Annual Report | The accompanying notes are an integral part of these financial statements. | 83 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN SMALL CAP FRANKLIN SMALL-MID CAP GROWTH FUND GROWTH FUND YEAR ENDED APRIL 30, YEAR ENDED APRIL 30, ------------------------------- --------------------------------- 2008 2007 2008 2007 -------------- -------------- --------------- --------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ...................... $ (7,026,827) $ (9,577,948) $ (35,942,600) $ (27,283,400) Net realized gain (loss) from investments and foreign currency transactions .................. 89,522,745 140,281,066 535,546,104 699,240,769 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies .............. (204,815,321) (102,034,052) (898,481,620) (23,627,634) -------------- -------------- --------------- --------------- Net increase (decrease) in net assets resulting from operations ................ (122,319,403) 28,669,066 (398,878,116) 648,329,735 -------------- -------------- --------------- --------------- Distributions to shareholders from net realized gains: Class A ........................................ (80,597,900) (54,986,996) (790,889,652) (396,182,023) Class B ........................................ (13,185,309) (9,457,325) (5,111,384) (2,356,258) Class C ........................................ (19,085,424) (13,365,094) (105,273,976) (48,066,828) Class R ........................................ (619,705) (591,340) (16,775,519) (8,369,958) Advisor Class .................................. (40,266,927) (29,874,687) (160,138,265) (51,154,142) -------------- -------------- --------------- --------------- Total distributions to shareholders .................. (153,755,265) (108,275,442) (1,078,188,796) (506,129,209) -------------- -------------- --------------- --------------- Capital share transactions: (Note 2) Class A ........................................... (131,750,498) (101,711,711) (221,023,942) (1,022,578,329) Class B ........................................... (9,331,447) (17,641,525) 132,361 (4,688,884) Class C ........................................... (10,395,508) (36,691,357) 16,278,421 (81,677,506) Class R ........................................... (1,529,576) (170,452) (1,881,624) 20,580,598 Advisor Class ..................................... (31,944,950) 15,813,676 242,909,931 (12,559,860) -------------- -------------- --------------- --------------- Total capital share transactions ..................... (184,951,979) (140,401,369) 36,415,147 (1,100,923,981) -------------- -------------- --------------- --------------- Redemption fees ................................... 3,008 4,293 97,409 53,592 -------------- -------------- --------------- --------------- Net increase (decrease) in net assets ....... (461,023,639) (220,003,452) (1,440,554,356) (958,669,863) Net assets(there is no undistributed net investment income at beginning or end of year): Beginning of year ................................. 1,087,499,877 1,307,503,329 7,227,545,391 8,186,215,254 -------------- -------------- --------------- --------------- End of year ....................................... $ 626,476,238 $1,087,499,877 $ 5,786,991,035 $ 7,227,545,391 ============== ============== =============== ===============
84 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of eleven separate funds. All funds included in this report (Funds) are diversified. The financial statements of the remaining funds in the Trust are presented separately. The Funds offer five classes of shares: Class A, Class B, Class C, Class R, and Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege. The Franklin Aggressive Growth Fund was renamed the Franklin Growth Opportunities Fund effective November 1, 2007. The Franklin Small Cap Growth Fund II was renamed the Franklin Small Cap Growth Fund and reopened to new investors effective March 31, 2008. 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. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist Annual Report | 85 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the 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. 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. JOINT REPURCHASE AGREEMENT 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. 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%. The joint repurchase agreement held by the Funds at year end had been entered into on April 30, 2008. The joint repurchase agreement is valued at cost. 86 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS The Funds may purchase securities on a when-issued or delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Funds will generally purchase these securities with the intention of holding the securities, they may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. E. FOREIGN CURRENCY CONTRACTS When the Funds purchase or sell foreign securities they may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate at a future 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. F. SECURITIES LENDING The Funds may loan securities to certain brokers through a securities lending agent for which they receive initial cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the market value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the fund on the next business day. The collateral is invested in short-term instruments as noted in the Statement of Investments. The fund receives interest income from the investment of cash collateral, adjusted by lender fees and broker rebates. The fund bears the risk of loss with respect to the investment of the collateral and the securities loaned. The securities lending agent has agreed to indemnify the fund in the case of default of any securities borrower. G. INCOME TAXES No provision has been made for U.S. income taxes because it is each fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. Annual Report | 87 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. INCOME TAXES (CONTINUED) The Funds have reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of April 30, 2008, and have determined that no provision for income tax is required in the Funds' financial statements. Foreign securities held by the Funds may be subject to foreign taxation on dividend income received. 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 except that certain dividends from foreign securities are recognized as soon as the Funds are notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. Distributions received by the Trust from certain 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. 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. 88 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST At April 30, 2008, there were an unlimited number of shares authorized (without par value). Transactions in the Funds' shares were as follows:
FRANKLIN FRANKLIN FLEX CAP GROWTH FUND GROWTH OPPORTUNITIES FUND --------------------------- ------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ---------- ------------ CLASS A SHARES: Year ended April 30, 2008 Shares sold ................. 8,860,704 $ 412,850,677 3,288,291 $ 67,103,617 Shares issued in reinvestment of distributions ......... 564,076 27,302,324 -- -- Shares redeemed ............. (9,275,872) (430,133,912) (2,127,947) (41,599,414) ----------- ------------- ---------- ------------ Net increase (decrease) ..... 148,908 $ 10,019,089 1,160,344 $ 25,504,203 =========== ============= ========== ============ Year ended April 30, 2007 Shares sold ................. 8,485,071 $ 352,610,680 1,439,647 $ 25,226,865 Shares issued in reinvestment of distributions ......... 49,920 2,157,532 -- -- Shares redeemed ............. (13,503,990) (567,959,385) (1,970,580) (34,389,533) ----------- ------------- ---------- ------------ Net increase (decrease) ..... (4,968,999) $(213,191,173) (530,933) $ (9,162,668) =========== ============= ========== ============ CLASS B SHARES: Year ended April 30, 2008 Shares sold ................. 185,826 $ 8,281,945 82,357 $ 1,608,358 Shares issued in reinvestment of distributions ......... 38,247 1,733,727 -- -- Shares redeemed ............. (783,309) (33,792,455) (360,405) (6,652,497) ----------- ------------- ---------- ------------ Net increase (decrease) ..... (559,236) $ (23,776,783) (278,048) $ (5,044,139) =========== ============= ========== ============ Year ended April 30, 2007 Shares sold ................. 91,261 $ 3,584,497 73,515 $ 1,225,983 Shares redeemed ............. (865,451) (34,167,156) (300,150) (5,006,058) ----------- ------------- ---------- ------------ Net increase (decrease) ..... (774,190) $ (30,582,659) (226,635) $ (3,780,075) =========== ============= ========== ============
Annual Report | 89 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN FRANKLIN FLEX CAP GROWTH FUND GROWTH OPPORTUNITIES FUND --------------------------- ----------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ----------- --------------- CLASS C SHARES: Year ended April 30, 2008 Shares sold.................. 1,643,470 $ 72,227,327 767,351 $ 14,696,919 Shares issued in reinvestment of distributions.......... 131,515 5,973,410 -- -- Shares redeemed.............. (1,714,226) (73,944,231) (428,732) (7,931,059) ----------- ------------- ----------- --------------- Net increase (decrease)...... 60,759 $ 4,256,506 338,619 $ 6,765,860 =========== ============= =========== =============== Year ended April 30, 2007 Shares sold.................. 1,233,577 $ 48,625,278 556,467 $ 9,330,339 Shares redeemed.............. (2,162,839) (85,433,482) (548,163) (9,051,130) ----------- ------------- ----------- --------------- Net increase (decrease)...... (929,262) $ (36,808,204) 8,304 $ 279,209 =========== ============= =========== =============== CLASS R SHARES: Year ended April 30, 2008 Shares sold.................. 357,376 $ 16,514,361 174,256 $ 3,443,236 Shares issued in reinvestment of distributions.......... 26,436 1,261,987 -- -- Shares redeemed.............. (739,403) (33,770,348) (181,695) (3,513,061) ----------- ------------- ----------- --------------- Net increase (decrease)...... (355,591) $ (15,994,000) (7,439) $ (69,825) =========== ============= =========== =============== Year ended April 30, 2007 Shares sold.................. 410,766 $ 16,932,262 234,993 $ 4,037,779 Shares issued in reinvestment of distributions.......... 743 31,742 -- -- Shares redeemed.............. (758,468) (31,420,931) (115,853) (2,021,085) ----------- ------------- ----------- --------------- Net increase (decrease)...... (346,959) $ (14,456,927) 119,140 $ 2,016,694 =========== ============= =========== =============== ADVISOR CLASS SHARES: Year ended April 30, 2008 Shares sold.................. 1,150,962 $ 52,420,394 780,151 $ 15,851,341 Shares issued in reinvestment of distributions.......... 106,767 5,206,091 -- -- Shares redeemed.............. (270,893) (12,600,256) (335,773) (6,887,736) ----------- ------------- ----------- --------------- Net increase (decrease)...... 986,836 $ 45,026,229 444,378 $ 8,963,605 =========== ============= =========== =============== Year ended April 30, 2007 Shares sold.................. 2,893,712 $ 123,038,695 2,882,354 $ 49,364,281 Shares issued in reinvestment of distributions.......... 15,840 687,926 -- -- Shares redeemed.............. (1,269,489) (55,286,376) (348,285) (6,202,691) ----------- ------------- ----------- --------------- Net increase (decrease)...... 1,640,063 $ 68,440,245 2,534,069 $ 43,161,590 =========== ============= =========== ===============
90 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN FRANKLIN SMALL CAP GROWTH FUND SMALL-MID CAP GROWTH FUND --------------------------- ----------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ----------- --------------- CLASS A SHARES: Year ended April 30, 2008 Shares sold.................. 5,142,888 $ 57,782,843 27,344,993 $ 1,030,832,137 Shares issued in reinvestment of distributions.......... 7,209,636 73,177,801 17,940,000 630,770,384 Shares redeemed.............. (24,350,461) (262,711,142) (48,105,487) (1,882,626,463) ----------- ------------- ----------- --------------- Net increase (decrease)...... (11,997,937) $(131,750,498) (2,820,494) $ (221,023,942) =========== ============= =========== =============== Year ended April 30, 2007 Shares sold.................. 6,601,245 $ 84,054,237 23,221,061 $ 901,953,205 Shares issued in reinvestment of distributions.......... 4,022,258 49,634,667 8,628,896 332,212,487 Shares redeemed.............. (18,348,107) (235,400,615) (58,200,426) (2,256,744,021) ----------- ------------- ----------- --------------- Net increase (decrease)...... (7,724,604) $(101,711,711) (26,350,469) $(1,022,578,329) =========== ============= =========== =============== CLASS B SHARES: Year ended April 30, 2008 Shares sold.................. 123,014 $ 1,243,897 58,760 $ 2,259,539 Shares issued in reinvestment of distributions.......... 1,228,476 11,584,529 142,174 4,751,473 Shares redeemed.............. (2,064,247) (22,159,873) (193,900) (6,878,651) ----------- ------------- ----------- --------------- Net increase (decrease)...... (712,757) $ (9,331,447) 7,034 $ 132,361 =========== ============= =========== =============== Year ended April 30, 2007 Shares sold.................. 67,198 $ 796,471 38,764 $ 1,457,181 Shares issued in reinvestment of distributions.......... 704,083 8,244,812 58,200 2,163,878 Shares redeemed.............. (2,196,607) (26,682,808) (221,805) (8,309,943) ----------- ------------- ----------- --------------- Net increase (decrease)...... (1,425,326) $ (17,641,525) (124,841) $ (4,688,884) =========== ============= =========== =============== CLASS C SHARES: Year ended April 30, 2008 Shares sold.................. 305,315 $ 3,089,377 1,327,722 $ 46,812,879 Shares issued in reinvestment of distributions.......... 1,822,622 17,205,554 2,777,328 89,596,613 Shares redeemed.............. (2,919,162) (30,690,439) (3,447,379) (120,131,071) ----------- ------------- ----------- --------------- Net increase (decrease)...... (791,225) $ (10,395,508) 657,671 $ 16,278,421 =========== ============= =========== =============== Year ended April 30, 2007 Shares sold.................. 324,860 $ 3,897,185 1,093,536 $ 39,872,961 Shares issued in reinvestment of distributions.......... 1,020,013 11,954,555 1,121,575 40,488,859 Shares redeemed.............. (4,323,598) (52,543,097) (4,443,643) (162,039,326) ----------- ------------- ----------- --------------- Net increase (decrease)...... (2,978,725) $ (36,691,357) (2,228,532) $ (81,677,506) =========== ============= =========== ===============
Annual Report | 91 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN FRANKLIN SMALL CAP GROWTH FUND SMALL-MID CAP GROWTH FUND --------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ----------- -------------- CLASS R SHARES: Year ended April 30, 2008 Shares sold.................. 102,048 $ 1,100,387 1,064,140 $ 39,882,854 Shares issued in reinvestment of distributions.......... 62,282 619,705 475,058 16,389,509 Shares redeemed.............. (256,839) (3,249,668) (1,487,464) (58,153,987) ----------- ------------- ----------- ------------- Net increase (decrease)...... (92,509) $ (1,529,576) 51,734 $ (1,881,624) =========== ============= =========== ============= Year ended April 30, 2007 Shares sold.................. 155,318 $ 1,957,827 1,479,310 $ 56,718,701 Shares issued in reinvestment of distributions.......... 48,590 591,340 216,659 8,230,890 Shares redeemed.............. (216,160) (2,719,619) (1,154,391) (44,368,993) ----------- ------------- ----------- ------------- Net increase (decrease)...... (12,252) $ (170,452) 541,578 $ 20,580,598 =========== ============= =========== ============= ADVISOR CLASS SHARES: Year ended April 30, 2008 Shares sold.................. 7,904,170 $ 87,488,790 11,838,328 $ 479,997,430 Shares issued in reinvestment of distributions.......... 3,652,414 38,167,731 3,474,301 124,762,163 Shares redeemed.............. (12,389,907) (157,601,471) (10,036,923) (361,849,662) ----------- ------------- ----------- ------------- Net increase (decrease)...... (833,323) $ (31,944,950) 5,275,706 $ 242,909,931 =========== ============= =========== ============= Year ended April 30, 2007 Shares sold.................. 4,241,617 $ 55,466,570 7,266,710 $ 286,200,648 Shares issued in reinvestment of distributions.......... 2,227,334 28,086,677 942,970 36,860,696 Shares redeemed.............. (5,147,534) (67,739,571) (8,592,362) (335,621,204) ----------- ------------- ----------- ------------- Net increase (decrease)...... 1,321,417 $ 15,813,676 (382,682) $ (12,559,860) =========== ============= =========== =============
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
92 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES Effective January 1, 2008, 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 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 $7.5 billion 0.440% Over $7.5 billion, up to and including $10 billion 0.430% 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
Prior to January 1, 2008, the Franklin Flex Cap Growth Fund and the Franklin Small-Mid Cap Growth Fund paid fees 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 Growth Opportunities Fund pays an investment management fee to Advisers based on the average daily net assets 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
Annual Report | 93 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES (CONTINUED) The Franklin Small Cap Growth Fund pays an investment management fee to Advisers based on the average daily net assets 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 Growth Opportunities Fund and the Franklin Small Cap Growth Fund pay an administrative fee to FT Services of 0.20% per year of the average daily net assets of each of the funds. 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, and is not an additional expense of the funds. C. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the funds' Class A reimbursement distribution plans, the funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the funds' compensation distribution plans, the funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. 94 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. DISTRIBUTION FEES (CONTINUED) The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN FLEX CAP OPPORTUNITIES SMALL CAP SMALL-MID CAP GROWTH FUND FUND GROWTH FUND GROWTH FUND ----------- ------------- ----------- ------------- Reimbursement Plans: Class A .............................. 0.25% 0.35% -- 0.25% Compensation Plans: 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%
Distributors has agreed to limit the current rate to 0.30% per year for Class A share for the Franklin Growth Opportunities Fund for the period of March 1, 2008 through January 1, 2009. Prior to the Franklin Small Cap Growth Fund opening to new investors on March 31, 2008, Distributors limited the current rate to 0.25% per year for Class A shares. Distributors has agreed to limit the current 12b-1 rate to 0.30% per year for Class A shares for the Franklin Small Cap Growth Fund for the period of March 31, 2008 through January 1, 2009. D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the year:
FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN FLEX CAP OPPORTUNITIES SMALL CAP SMALL-MID CAP GROWTH FUND FUND GROWTH FUND GROWTH FUND ----------- ------------- ----------- ------------- Sales charges retained net of commissions paid to unaffiliated broker/dealers .. $770,390 $111,630 $12,860 $344,818 Contingent deferred sales charges retained ............................. $109,216 $ 49,577 $23,752 $ 52,813
E. TRANSFER AGENT FEES For the year ended April 30, 2008, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN FLEX CAP OPPORTUNITIES SMALL CAP SMALL-MID CAP GROWTH FUND FUND GROWTH FUND GROWTH FUND ----------- ------------- ----------- ------------- Transfer agent fees ..................... $3,717,872 $470,099 $942,537 $10,570,917
Annual Report | 95 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) F. WAIVER AND EXPENSE REIMBURSEMENTS The Franklin Flex Cap Growth Fund incurred interest and penalties of $293,647 related to a deficiency dividend which FT Services voluntarily agreed to reimburse. 4. EXPENSE OFFSET ARRANGEMENT The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds' custodian expenses. During the year ended April 30, 2008, the custodian fees were reduced as noted in the Statements of Operations. 5. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At April 30, 2008, the capital loss carryforwards were as follows:
FRANKLIN GROWTH OPPORTUNITIES FUND ------------- Capital loss carryforwards expiring in: 2010 ............................... $ 82,519,960 2011 ............................... 47,112,100 ------------ $129,632,060 ============
During the year ended April 30, 2008, the Franklin Flex Cap Growth Fund and the Franklin Growth Opportunities Fund utilized $35,830,233 and $15,432,540, respectively, of capital loss carryforwards. For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At April 30, 2008, the Franklin Flex Cap Growth Fund and the Franklin Small Cap Growth Fund deferred realized capital losses of $8,785,285and $17,763,909, respectively. At April 30, 2008, the Franklin Growth Opportunities Fund deferred realized currency losses of $21,792. 96 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) The tax character of distributions paid during the years ended April 30, 2008 and 2007, was as follows:
FRANKLIN FLEX CAP FRANKLIN SMALL CAP GROWTH FUND GROWTH FUND ------------------------ --------------------------- 2008 2007 2008 2007 ----------- ---------- ------------ ------------ Distributions paid from: Ordinary income ......... $ 1,267,758 $3,312,040 $ 5,157,068 $ 11,202,529 Long term capital gain .. 46,697,116 -- 148,598,197 97,072,913 ----------- ---------- ------------ ------------ $47,964,874 $3,312,040 $153,755,265 $108,275,442 =========== ========== ============ ============
FRANKLIN SMALL-MID CAP GROWTH FUND ----------------------------- 2008 2007 -------------- ------------ Distributions paid from: Ordinary income ......... $ 36,223,776 $ -- Long term capital gain .. 1,041,965,020 506,129,209 -------------- ------------ $1,078,188,796 $506,129,209 ============== ============
At April 30, 2008, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:
FRANKLIN FRANKLIN GROWTH FLEX CAP OPPORTUNITIES GROWTH FUND FUND -------------- ------------- Cost of investments ........................ $2,163,081,632 $253,799,621 ============== ============= Unrealized appreciation .................... $ 800,617,808 $ 59,687,611 Unrealized depreciation .................... (45,175,940) (11,733,173) -------------- ------------- Net unrealized appreciation (depreciation).. $ 755,441,868 $ 47,954,438 ============== =============
FRANKLIN FRANKLIN SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND ------------- -------------- Cost of investments ........................ $ 595,477,753 $4,906,832,165 ============= ============== Unrealized appreciation .................... $ 144,700,087 $1,352,656,169 Unrealized depreciation .................... (102,048,135) (328,753,295) ------------- -------------- Net unrealized appreciation (depreciation).. $ 42,651,952 $1,023,902,874 ============= ============== Undistributed ordinary income .............. $ 3,622,140 $ -- Undistributed long term capital gains ...... 382,929 9,093,550 ------------- -------------- Distributable earnings ..................... $ 4,005,069 $ 9,093,550 ============= ==============
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, partnership distributions, recognition of partnership income and return of capital. Annual Report | 97 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, partnership distributions, recognition of partnership income and return of capital. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended April 30, 2008, were as follows:
FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN FLEX CAP OPPORTUNITIES SMALL CAP SMALL-MID CAP GROWTH FUND FUND GROWTH FUND GROWTH FUND -------------- ------------- ------------ -------------- Purchases... $1,053,097,691 $393,335,468 $428,148,936 $3,575,117,080 Sales....... $1,042,784,996 $362,409,357 $774,760,093 $4,862,164,575
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (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 SECURITIES The Funds may invest in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Funds may have registration rights for restricted securities. The issuer generally incurs all registration costs. 98 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. RESTRICTED SECURITIES (CONTINUED) At April 30, 2008, the funds held investments in restricted securities, excluding 144A securities deemed to be liquid, 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 36,443 Anda Networks ........................................ 3/24/00 $ 2,000,000 $ 68,877 2,227,171 Fibrogen Inc., pfd., E ............................... 5/19/00 9,999,998 13,140,309 ----------- TOTAL RESTRICTED SECURITIES (0.46% of Net Assets).. $13,209,186 =========== FRANKLIN GROWTH OPPORTUNITIES FUND 374,806 Dilithium Networks Inc., depository receipt, D, pfd., 144A, PIPES ................................. 7/13/06 $ 873,300 $ 1,293,081 =========== TOTAL RESTRICTED SECURITIES (0.43% of Net Assets) FRANKLIN SMALL-MID CAP GROWTH FUND 91,107 Anda Networks ........................................ 3/24/00 $ 5,000,000 $ 172,192 1,792,573 Foveon Inc., cvt. pfd., D, 144A ...................... 4/08/02 13,999,995 17,926 2,597,593 Foveon Inc., cvt. pfd., E, 144A ...................... 5/31/05 2,635,024 2,822,544 ----------- TOTAL RESTRICTED SECURITIES (0.05% of Net Assets).. $ 3,012,662 ===========
9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The 1940 Act defines "affiliated companies" to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" for the Franklin Small-Mid Cap Growth Fund for the year ended April 30, 2008, 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 YEAR ADDITIONS REDUCTIONS YEAR END OF YEAR INCOME GAIN (LOSS) - --------------------------------------- --------- --------- ---------- --------- ------------ ---------- ----------- FRANKLIN SMALL-MID CAP GROWTH FUND NON-CONTROLLED AFFILIATES Allscripts Healthcare Solutions Inc.... 3,259,900 -- 3,259,900 -- $ (a) $ -- $ -- American Medical Systems Holdings Inc.. 3,689,900 -- -- 3,689,900 52,027,590 -- -- Force Protection Inc., 144A, PIPES .... 4,316,100 -- 581,500 3,734,600 11,166,454 -- (4,735,554) FormFactor Inc......................... 1,917,400 1,771,900 -- 3,689,300 71,092,811 -- -- Microsemi Corp......................... 5,279,800 1,284,500 1,557,000 5,007,300 122,678,850 -- (5,194,558) Orbital Sciences Corp.................. -- 3,420,100 -- 3,420,100 92,034,891 -- -- Silicon Laboratories Inc............... 1,708,600 2,269,300 416,400 3,561,500 120,271,855 -- 2,943,926 Tektronix Inc.......................... 2,214,298 -- 2,214,298 -- (a) -- -- The Men's Wearhouse Inc................ 1,295,100 2,005,900 -- 3,301,000 87,905,630 432,812 -- Wolverine World Wide Inc............... 2,824,210 1,298,900 330,900 3,792,210 108,988,115 1,076,449 828,534 ------------ ---------- ----------- TOTAL AFFILIATED SECURITIES (11.51% of Net Assets).............. $666,166,196 $1,509,261 $(6,157,652) ============ ========== ===========
(a) As of April 30, 2008, no longer an affiliate. Annual Report | 99 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. NEW ACCOUNTING PRONOUNCEMENTS In September 2006,the Financial Accounting Standard Board (FASB)issued FASB Statement No. 157, "Fair Value Measurement" (SFAS 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Trust believes the adoption of SFAS 157 will have no material impact on its financial statements. In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Funds are currently evaluating the impact, if any, of applying the various provisions of SFAS 161. 100 | Annual Report Franklin Strategic Series REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN STRATEGIC SERIES In our opinion, the accompanying statements of assets and liabilities, including the statements of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Flex Cap Growth Fund, Franklin Growth Opportunities Fund (formerly, Franklin Aggressive Growth Fund), Franklin Small Cap Growth Fund(formerly, Franklin Small Cap Growth Fund II)and Franklin Small-Mid Cap Growth Fund (separate portfolios of Franklin Strategic Series, hereafter referred to as the "Funds") at April 30, 2008, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at April 30, 2008 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California June 18, 2008 Annual Report | 101 Franklin Strategic Series TAX DESIGNATION (UNAUDITED) Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Funds designate the maximum amount allowable but no less than the following amounts as long term capital gain dividends for the fiscal year ended April 30, 2008:
FRANKLIN FRANKLIN FRANKLIN FLEX CAP SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND GROWTH FUND - ----------- ----------- ------------- $46,687,686 $98,525,214 $507,980,760
Under Section 871(k)(2)(C) of the Code, the Franklin Small Cap Growth Fund designate the maximum amount allowable but not less than $3,625,783as short term capital gain dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended April 30, 2008. Under Section 854(b)(2) of the Code, the Franklin Small Cap Growth Fund and Franklin Small-Mid Cap Growth Fund designate 35.95% and 49.86%, respectively, of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended April 30, 2008. Under Section 854(b)(2) of the Code, the Funds designate the maximum amount allowable but no less than the following amounts as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended April 30, 2008.
FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN FLEX CAP OPPORTUNITIES SMALL CAP SMALL-MID CAP GROWTH FUND FUND GROWTH FUND GROWTH FUND - ----------- --------------- ----------- ------------- $20,202,629 $865,654 $1,853,711 $20,123,253
Distributions, including qualified dividend income, paid during calendar year 2008 will be reported to shareholders on Form 1099-DIV in January 2009. Shareholders are advised to check with their tax advisors for information on the treatment of the amounts on their individual income tax returns. 102 | Annual Report Franklin Strategic Series BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member serves until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------- ------------------ --------------------- ----------------------- --------------------------- HARRIS J. ASHTON (1932) Trustee Since 1991 143 Bar-S Foods (meat packing One Franklin Parkway company). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ROBERT F. CARLSON (1928) Trustee Since 2007 122 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Retired; and FORMERLY, Vice President, senior member and past President, Board of Administration, California Public Employees Retirement Systems (CALPERS) (1971-January 2008); member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield of California; and Chief Counsel, California Department of Transportation. SAM GINN (1937) Trustee Since 2007 122 Chevron Corporation (global One Franklin Parkway energy company) and ICO San Mateo, CA 94403-1906 Global Communications (Holdings) Limited (satellite company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding company) (1988-1994). EDITH E. HOLIDAY (1952) Trustee Since 1998 143 Hess Corporation One Franklin Parkway (exploration and refining San Mateo, CA 94403-1906 of oil and gas), H.J. Heinz Company (processed foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
Annual Report | 103
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------- ------------------ --------------------- ----------------------- --------------------------- FRANK W.T. LAHAYE (1929) Trustee Since 1991 122 Center for Creative Land One Franklin Parkway Recycling (brownfield San Mateo, CA 94403-1906 redevelopment). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital). FRANK A. OLSON (1932) Trustee Since 2007 143 Hess Corporation One Franklin Parkway (exploration and refining San Mateo, CA 94403-1906 of oil and gas) and Sentient Jet (private jet service). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). LARRY D. THOMPSON (1945) Trustee Since 2007 143 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President-Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). JOHN B. WILSON (1959) Lead Independent Trustee since 2006 122 None One Franklin Parkway Trustee and Lead Independent San Mateo, CA 94403-1906 Trustee since January 2008 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Executive Vice President - Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm) (1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------- ------------------ --------------------- ----------------------- --------------------------- **CHARLES B. JOHNSON (1933) Trustee and Trustee since 1991 143 None One Franklin Parkway Chairman of the and Chairman of the San Mateo, CA 94403-1906 Board Board since 1993 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member-Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments.
104 | Annual Report
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------- ------------------ --------------------- ----------------------- --------------------------- **RUPERT H. JOHNSON, JR. (1940) Trustee, President Trustee since 1991 56 None One Franklin Parkway and Chief and President and San Mateo, CA 94403-1906 Executive Officer Chief Executive - Investment Officer - Investment Management Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member-Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. JAMES M. DAVIS (1952) Chief Compliance Chief Compliance Not Applicable Not Applicable One Franklin Parkway Officer and Vice Officer since 2004 San Mateo, CA 94403-1906 President - AML and Vice President - Compliance AML Compliance since 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). LAURA F. FERGERSON (1962) Treasurer, Chief Treasurer since 2004, Not Applicable Not Applicable One Franklin Parkway Financial Officer Chief Financial San Mateo, CA 94403-1906 and Chief Officer and Chief Accounting Officer Accounting Officer since February 2008 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003). JIMMY D. GAMBILL (1947) Vice President Since February 2008 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
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NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------- ------------------ --------------------- ----------------------- --------------------------- DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments. EDWARD B. JAMIESON (1948) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of four of the investment companies in Franklin Templeton Investments. CHRISTOPHER J. MOLUMPHY (1962) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director and Executive Vice President, Franklin Advisers, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments. KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable One Franklin Parkway and Secretary San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin Templeton Investments. CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
106 | Annual Report
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------- ------------------ --------------------- ----------------------- --------------------------- GALEN G. VETTER (1951) Senior Vice Since February Not Applicable Not Applicable 500 East Broward Blvd. President and 2008 Suite 2100 Chief Executive Fort Lauderdale, FL 33394-3091 Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004).
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested persons of the Trust under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc., which is the parent company of the Trust's investment manager and distributor. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI. Annual Report | 107 Franklin Strategic Series SHAREHOLDER INFORMATION BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT At a meeting held April 15, 2008, the Board of Trustees (Board), including a majority of non-interested or independent Trustees, approved renewal of the investment management agreement for each of the separate funds within Franklin Strategic Series (Fund(s)). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for each Fund, as well as periodic reports on shareholder services, legal, compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager (Manager) and its affiliates. Information furnished specifically in connection with the renewal process included a report for each Fund prepared by Lipper, Inc. (Lipper), an independent organization, as well as a Fund profitability analysis report prepared by management. The Lipper reports compared each Fund's investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Included with such profitability analysis report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates including management's explanation of differences where relevant and a three-year expense analysis with an explanation for any increase in expense ratios. Additional material accompanying such report was a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Funds by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale and a comparative analysis concerning transfer agent fees charged each Fund. In considering such materials, the independent Trustees received assistance and advice from and met separately with independent counsel. While the investment management agreements for all Funds were considered at the same Board meeting, the Board dealt with each Fund separately. In approving continuance of the investment management agreement for each Fund, the Board, including a majority of independent Trustees, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of each Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board's decision. NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Funds and their shareholders. In addition to investment performance and expenses discussed later, the Board's opinion was based, in part, upon periodic reports furnished them showing that the investment policies and restrictions for each Fund were consistently complied with as well as other reports periodically furnished the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adopted throughout the Franklin Templeton fund 108 | Annual Report Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. The Board also noted the extent of benefits provided Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management's continuous efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted that such systems and procedures had functioned smoothly during the Florida hurricanes and blackouts experienced in recent years. Among other factors taken into account by the Board were the Manager's best execution trading policies, including a favorable report by an independent portfolio trading analytical firm. Consideration was also given to the experience of each Fund's portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management's determination of a portfolio manager's bonus compensation was the relative investment performance of the funds he or she managed and that a portion of such bonus was required to be invested in a predesignated list of funds within such person's fund management area so as to be aligned with the interests of Fund shareholders. The Board also took into account the quality of transfer agent and shareholder services provided Fund shareholders by an affiliate of the Manager, noting continuing expenditures by management to increase and improve the scope of such services, periodic favorable reports on such service conducted by third parties, the high industry ranking given to the Franklin Templeton website, and the firsthand experience of individual Board members who deal with the shareholder services department in their capacities as shareholders in one or more of the various Franklin Templeton funds. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of the Funds in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings throughout the year, particular attention in assessing performance was given to the Lipper reports furnished for the agreement renewals. The Lipper reports prepared for each Fund showed its investment performance or that of its Class A shares for those having multiple share classes in comparison to a performance universe selected by Lipper. Comparative performance for each Fund was shown for the one-year period ended January 31, 2008, and previous periods ended that date of up to 10 years depending on when a particular Fund commenced operations. The following summarizes the performance results for each of these Funds and the Board's view of such performance. FRANKLIN FLEX CAP GROWTH FUND - The performance universe for this Fund consisted of the Fund and all retail and institutional multi-cap growth funds as selected by Lipper. The Lipper report showed the Fund's total return to be in the middle quintile of such performance universe for the one-year period. Such report also showed the Fund's total return on an annualized basis to be in the second-lowest quintile of the performance universe during the previous three-year period, the Annual Report | 109 Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) middle quintile of such universe during the previous five-year period and the highest quintile of such universe during the previous 10-year period. The Board found such performance to be acceptable. FRANKLIN GROWTH OPPORTUNITIES FUND - The performance universe for this Fund consisted of the Fund and all retail and institutional multi-cap growth funds as selected by Lipper. The Lipper report comparison showed the Fund's total return for the one-year period to be in the second-highest quintile of its performance universe, and on an annualized basis to be in the second-highest and highest quintiles of such universe during the previous three- and five-year periods, respectively. The Fund has not been in operation for a full 10-year period. The Board was satisfied with such performance. FRANKLIN SMALL-MID CAP GROWTH FUND - The performance universe for this Fund consisted of all retail and institutional mid-cap growth funds as selected by Lipper. The Lipper report comparison for the Fund showed its total return during the one-year period was in the lowest quintile of such performance universe, and on an annualized basis was in the second-lowest quintile of such universe during each of the previous three- and five-year periods, and the middle quintile of such universe during the previous 10-year period. In discussing the Fund's underperformance, management noted that it arose from the Fund's overweighting and poor stock selection within the financial, telecom and industrial sectors, as well as certain stock specific investments outside such sectors. The independent Trustees met separately with the Fund's lead portfolio manager and other management representatives to discuss the steps being taken to improve such performance. While intending to continuously monitor this Fund, the Board was satisfied with management's response and the efforts being made to improve its performance. The Board also noted that the Fund's total return for the previous three- and five-year periods were 6.95% and 13.41%, respectively, on an annualized basis as shown in the Lipper report. FRANKLIN SMALL CAP GROWTH FUND - The performance universe for this Fund consisted of the Fund and all retail and institutional small cap growth funds as selected by Lipper. The Lipper report comparison for the Fund showed its total return to be in the lowest quintile of such performance universe during the one-year period and to be in the second-lowest quintile of such universe for the previous three- and five-year periods on an annualized basis. The Fund has not been in operation for a full 10-year period. In discussing such relatively poor performance, management pointed out that it was largely attributable to the Fund's overweighting and poor stock selection within the financial sector, as well as stock selection within the health care sector. The independent Trustees met separately with the Fund's lead portfolio manager and other management representatives to discuss such performance and steps being taken to improve it. While intending to continuously monitor this Fund, the Board was satisfied with management's response and the efforts being made to improve performance. The Board also noted that the Fund's annualized total return during the previous five-year period was 11.89% as shown in the Lipper report. 110 | Annual Report Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) COMPARATIVE EXPENSES. Consideration was given to the management fee and total expense ratios of each Fund compared with those of a group of other funds selected by Lipper as its appropriate Lipper expense group. Prior to making such comparison, the Board relied upon a survey showing that the scope of services covered under the Fund's investment management agreement was similar to those provided by fund managers to other mutual fund groups. In reviewing comparative costs, emphasis was given to each Fund's contractual investment management fee in comparison with the investment management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual investment management fee analysis includes administrative charges as being part of the investment management fee, and actual total expenses, for comparative consistency, are shown by Lipper for Fund Class A shares for those Funds with multiple share classes. The results of such expense comparisons showed the contractual investment management fee rates and actual total expenses for each of Franklin Flex Cap Growth Fund and Franklin Small-Mid Cap Growth Fund were in the least expensive quintile of their respective Lipper expense groups. The contractual investment management fee rate for Franklin Small Cap Growth Fund was below the median of its Lipper expense group and its actual total expenses were in the least expensive quintile of such expense group. The contractual management fee rate for Franklin Growth Opportunities Fund was in the least expensive quintile of its Lipper expense group and its actual total expenses were in the second least expensive quintile of such group. The Board was satisfied with the contractual management fees and total expenses of each Fund in comparison to its expense group as shown in the Lipper reports. MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services to each Fund. Specific attention was given to the methodology followed in allocating costs to each Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that, while being continuously refined and reflecting changes in the Manager's own cost accounting, the allocation methodology was consistent with that followed in profitability report presentations for the Funds made in prior years and that the Funds' independent registered public accounting firm had been engaged by the Manager to perform certain procedures on a biennial basis, specified and approved by the Manager and the Funds' Board solely for their purposes and use in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for the type of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to each Fund in determining its profitability, as well as the Annual Report | 111 Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management's expenditures in improving shareholder services provided the Funds, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC and other regulatory requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager's parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including its interest in a joint venture entity that financed up-front commissions paid to brokers/dealers who sold fund Class B shares prior to February 2005, when the offering of such shares was discontinued, as well as potential benefits resulting from allocation of fund brokerage and the use of "soft" commission dollars to pay for research. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to each Fund was not excessive in view of the nature, quality and extent of services provided. ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Manager as the Funds grow larger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as some funds get larger, at some point economies of scale do result in the Manager realizing a larger profit margin on management services provided such a fund. The Board noted that economies of scale were shared with each Fund and its shareholders through management fee breakpoints so that as a Fund grows in size, its effective management fee rate declines. The fee structure under the investment management agreements for all of the Funds contains breakpoints that continued to asset levels that exceeded their asset size at December 31, 2007. It was noted that new or reduced breakpoints in the fee structure for Franklin Flex Cap Growth Fund and Franklin Small Mid-Cap Growth Fund at the $7.5 billion and $10 billion asset levels had been authorized by the Trustees at a meeting held December 3, 2007, and had become effective January 1, 2008. In view of such structure and the favorable fee and expense comparisons of these Funds within their respective expense groups, the Board believed that to the extent economies of scale may be realized by the manager of these Funds and its affiliates, that there was a sharing of benefits with each of these Funds and their shareholders. 112 | Annual Report Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) PROXY VOTING POLICIES AND PROCEDURES The Trust has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. Annual Report | 113 (FRANKLIN TEMPLETON INVESTMENTS LOGO) FRANKLIN TEMPLETON INVESTMENTS One Franklin Parkway 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. ANNUAL 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. (GRAPHIC) APRIL 30, 2008 A series of Franklin Strategic Series ANNUAL REPORT AND SHAREHOLDER LETTER BLEND FRANKLIN FOCUSED CORE EQUITY FUND WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. (FRANKLIN TEMPLETON INVESTMENTS LOGO) FRANKLIN TEMPLETON INVESTMENTS FRANKLIN - Templeton - Mutual Series Annual Report Franklin Focused Core Equity Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Focused Core Equity Fund seeks capital appreciation by investing at least 80% of its net assets in equity securities. The Fund will invest primarily in equity securities of large capitalization companies, which are similar in size to those in the Standard & Poor's 500 Index (S&P 500).(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 inaugural annual report for Franklin Focused Core Equity Fund covers the period from inception on December 13, 2007, through April 30, 2008. PERFORMANCE OVERVIEW Franklin Focused Core Equity Fund - Class A had a -13.10% cumulative total return from inception on December 13, 2007, through April 30, 2008. The Fund underperformed its benchmark, the S&P 500, which had a -5.42% total return for the same period.(2) You can find more of the Fund's performance data in the Performance Summary beginning on page 8. ECONOMIC AND MARKET OVERVIEW During the five months ended April 30, 2008, the U.S. economy slowed. The housing downturn negatively affected the overall economy by fourth quarter 2007 as credit conditions worsened and the pace of consumer spending declined. Gross domestic product (GDP) growth decelerated sharply from 4.9% in the third quarter of 2007 and registered annualized rates of 0.6% in the fourth quarter of 2007 and an estimated 0.9% in the first quarter of 2008. A weaker U.S. dollar compared with many foreign currencies contributed to increased exports, which along with inventory buildup, helped the fragile economy in the first quarter. (1.) 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. (2.) Source: Standard & Poor's Micropal. See footnote 1 for a description of the S&P 500. 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 17. Annual Report | 3 PORTFOLIO BREAKDOWN Based on Total Net Assets as of 4/30/08 (BAR CHART) Consumer Discretionary 18.5% Health Care 16.9% Financials 12.0% Information Technology 12.0% Telecommunication Services 7.4% Energy 6.7% Industrials 5.0% Consumer Staples 4.5% Materials 0.9% Short-Term Investments & Other Net Assets 16.1%
The unemployment rate was 5.0% in April 2008.(3) Continued deterioration in consumer confidence, home prices and the job market, as well as rising mortgage and fuel costs, plagued the economy. Volatile oil prices reached a historical high in April, topping $119 per barrel, before retreating to $113 by period-end. For the 12 months ended April 30, 2008, the core Consumer Price Index (CPI), which excludes food and energy costs, rose 2.3%, which was higher than its 10-year average rate.(3) Faced with a deepening housing contraction and stressed financial markets, the Federal Reserve Board made several cuts to the federal funds target rate during the period, including 225 basis points (100 basis points equal one percentage point) so far in 2008. As investors fled riskier, poorer-performing assets, U.S. Treasuries rallied, and the 10-year Treasury note yield fell from 4.18% at the beginning of the period to 3.77% on April 30, 2008. Stock markets were volatile during the reporting period partly due to investor concerns about slowing economic growth. Overall, the blue chip stocks of the Dow Jones Industrial Average had a total return of -3.01%, while the broader S&P 500 had a -5.42% return, and the technology-heavy NASDAQ Composite Index had a - -8.96% return.(4) The energy and materials sectors performed relatively well. INVESTMENT STRATEGY We are research-driven, fundamental investors pursuing a growth strategy. As bottom-up investors focusing primarily on individual securities, we seek to invest in financially strong companies with favorable growth potential and sustainable competitive advantages and that present, in our opinion, the most compelling trade-off between growth potential, valuation and risk. We rely on a team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies. We will generally seek to maintain a portfolio of securities representing approximately 30-40 companies, and we will apply a long-term perspective through market and business cycles. (3.) Source: Bureau of Labor Statistics. (4.) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. 4 | Annual Report MANAGER'S DISCUSSION During the period under review, the Fund had some significant contributors to absolute performance including Visa in the information technology sector and Comcast and Lowe's in the consumer discretionary sector. Visa operates the world's largest consumer payment system, Comcast is the largest cable television provider in the U.S., and Lowe's is a nationwide chain of home improvement superstores. From a sector perspective, telecommunication services contributed to absolute results due to mobile carrier NII Holdings, our only position in the sector. The Fund had several disappointments during the reporting period. Major detractors included directory publisher R.H. Donnelley and high-end stereo and audio equipment maker Harman International Industries in the consumer discretionary sector, and pharmaceutical company Schering-Plough in the health care sector. By sector, our holdings in consumer discretionary, health care and financials weighed on the Fund's absolute performance. Motorcycle manufacturer Harley-Davidson and specialty coffee retailer Starbucks in the consumer discretionary sector declined in value. In the health care sector, biotechnology developer PDL BioPharma and pharmaceutical and diagnostic manufacturer Roche Holding detracted from Fund performance. Other major detractors included wealth and mutual fund manager Legg Mason and real estate investment trust iStar Financial in the financials sector. It should be noted that the Fund's holdings in the consumer discretionary sector were a mix of stocks that both significantly contributed to and detracted from return. We consider such results a reflection of our bottom-up strategy, which focuses primarily on individual securities regardless of sector. TOP 10 EQUITY HOLDINGS 4/30/08
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- NII Holdings Inc. 7.4% TELECOMMUNICATION SERVICES Schering-Plough Corp. 5.1% HEALTH CARE Comcast Corp. 4.2% CONSUMER DISCRETIONARY Harley-Davidson Inc. 3.9% CONSUMER DISCRETIONARY Maxim Integrated Products Inc. 3.7% INFORMATION TECHNOLOGY Avery Dennison Corp. 3.5% INDUSTRIALS Legg Mason Inc. 3.2% FINANCIALS Lam Research Corp. 3.1% INFORMATION TECHNOLOGY Roche Holding AG 3.1% HEALTH CARE Hansen Natural Corp. 3.1% CONSUMER STAPLES
Annual Report | 5 Thank you for your participation in Franklin Focused Core Equity Fund. We look forward to serving your future investment needs. (PHOTO OF STEVEN KORNFELD) /s/ Steven Kornfeld Steven Kornfeld, CFA (PHOTO OF EDWARD PERKS) /s/ Edward Perks Edward Perks, CFA Portfolio Management Team Franklin Focused Core Equity Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF APRIL 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 6 | Annual Report STEVEN KORNFELD specializes in research analysis of the pharmaceutical industry. Mr. Kornfeld is a member of the Franklin core equity management team and manages several portfolios. Prior to joining Franklin Templeton Investments in January 2001, Mr. Kornfeld previously worked as a sell-side research analyst where he specialized in covering emerging growth companies. Mr. Kornfeld holds an M.B.A. from Northwestern University's Kellogg Graduate School of Management and a bachelor's degree from the Wharton School of Business at the University of Pennsylvania. He is a Charted Financial Analyst (CFA) Charterholder. EDWARD PERKS manages several portfolios for retail, institutional and off-shore accounts. Prior industry research responsibilities include computer hardware, specialty finance, major integrated oils, oil and gas exploration and production, oil field services and equipment, chemicals and the food and beverage industries. Mr. Perks joined Franklin Templeton Investments in 1992. Mr. Perks earned his B.A. in economics and political science from Yale University. A CFA Charterholder, Mr. Perks is a member of the CFA Institute and the Security Analysts of San Francisco (SASF). Annual Report | 7 Performance Summary as of 4/30/08 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: N/A) CHANGE 4/30/08 12/13/07 Net Asset Value (NAV) -$1.31 $8.69 $10.00 CLASS C (SYMBOL: N/A) CHANGE 4/30/08 12/13/07 Net Asset Value (NAV) -$1.33 $8.67 $10.00 CLASS R (SYMBOL: N/A) CHANGE 4/30/08 12/13/07 Net Asset Value (NAV) -$1.32 $8.68 $10.00 ADVISOR CLASS (SYMBOL: N/A) CHANGE 4/30/08 12/13/07 Net Asset Value (NAV) -$1.30 $8.70 $10.00
8 | Annual Report Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AGGREGATE TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. UNTIL AUGUST 31, 2008, THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
CLASS A INCEPTION (12/13/07) - ------- -------------------- Cumulative Total Return(2) -13.10% Aggregate Total Return(3) -18.19% Value of $10,000 Investment(4) $ 8,181 Aggregate Total Return (3/31/08)(5) -23.47% Total Annual Operating Expenses(6) Without Waiver 1.54% With Waiver 1.24%
CLASS C INCEPTION (12/13/07) - ------- -------------------- Cumulative Total Return(2) -13.30% Aggregate Total Return(3) -14.17% Value of $10,000 Investment(4) $ 8,583 Aggregate Total Return (3/31/08)(5) -19.81% Total Annual Operating Expenses(6) Without Waiver 2.19% With Waiver 1.89%
CLASS R INCEPTION (12/13/07) - ------- -------------------- Cumulative Total Return(2) -13.20% Aggregate Total Return(3) -13.20% Value of $10,000 Investment(4) $ 8,680 Aggregate Total Return (3/31/08)(5) -18.80% Total Annual Operating Expenses(6) Without Waiver 1.69% With Waiver 1.39%
ADVISOR CLASS INCEPTION (12/13/07) - ------------- -------------------- Cumulative Total Return(2) -13.00% Aggregate Total Return(3) -13.00% Value of $10,000 Investment(4) $ 8,700 Aggregate Total Return (3/31/08)(5) -18.70% Total Annual Operating Expenses(6) Without Waiver 1.19% With Waiver 0.89%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. THE MANAGER AND ADMINISTRATOR HAVE CONTRACTUALLY AGREED TO LIMIT FUND EXPENSES SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES DO NOT EXCEED THE AMOUNT SHOWN WITH WAIVER (OTHER THAN CERTAIN NON-ROUTINE EXPENSES) FOR EACH SHARE CLASS UNTIL 8/31/09. Annual Report | 9 Performance Summary (CONTINUED) ENDNOTES WHILE STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORT TERM. THERE ARE SPECIAL RISKS INVOLVED WITH SIGNIFICANT EXPOSURE TO A PARTICULAR SECTOR, INCLUDING INCREASED SUSCEPTIBILITY RELATED TO ECONOMIC, BUSINESS, OR OTHER DEVELOPMENTS AFFECTING THAT SECTOR, WHICH MAY RESULT IN INCREASED VOLATILITY. THE FUND ALSO HAS THE POTENTIAL TO INVEST IN FOREIGN COMPANY STOCKS, WHICH INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL UNCERTAINTY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS C: These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. If the manager and administrator had not waived fees, the Fund's total return would have been lower. 2. Cumulative total return represents the change in value of an investment over the period indicated. 3. Aggregate total return represents the change in value of an investment over the period indicated. Because the Fund has existed for less than one year, average annual total returns are not available. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the period indicated. 5. In accordance with SEC rules, we provide standardized total return information through the latest calendar quarter. 6. Figures are as stated in the Fund's prospectus current as of the date of this report. 10 | Annual Report Your Fund's Expenses As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 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 VALUE EXPENSES PAID DURING PERIOD* ACTUAL 12/13/07 ENDING ACCOUNT ACTUAL 12/13/07-4/30/08 CLASS A HYPOTHETICAL 11/1/07 VALUE 4/30/08 HYPOTHETICAL 11/1/07-4/30/08 - ------- ----------------------- -------------- ---------------------------- Actual $1,000 $ 868.00 $4.33 Hypothetical (5% return before expenses) $1,000 $1,018.80 $6.12 CLASS C Actual $1,000 $ 867.00 $6.56 Hypothetical (5% return before expenses) $1,000 $1,015.66 $9.27 CLASS R Actual $1,000 $ 868.00 $4.93 Hypothetical (5% return before expenses) $1,000 $1,017.95 $6.97 ADVISOR CLASS Actual $1,000 $ 870.00 $3.16 Hypothetical (5% return before expenses) $1,000 $1,020.44 $4.47
* Expenses are calculated using the expense ratio, net of expense waivers, annualized for each class (A: 1.22%; C: 1.85%; R: 1.39% and Advisor: 0.89%), multiplied by the average account value over the period, multiplied by 182/366 (Hypothetical) to reflect the one-half year period. For actual expenses, the multiplier is 139/366 to reflect the number of days since inception. 12 | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN FOCUSED CORE EQUITY FUND
PERIOD ENDED APRIL 30, CLASS A 2008(e) - ------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................. $ 10.00 ------- Income from investment operations(a): Net investment income(b) ......................... 0.03 Net realized and unrealized gains (losses) ....... (1.34) ------- Total from investment operations .................... (1.31) ------- Net asset value, end of year ........................ $ 8.69 ======= Total return(c) ..................................... (13.10)% RATIOS TO AVERAGE NET ASSETS(d) Expenses before waiver and payments by affiliates ... 5.48% Expenses net of waiver and payments by affiliates ... 1.22% Net investment income ............................... 0.91% SUPPLEMENTAL DATA Net assets, end of year (000's) ..................... $ 4,652 Portfolio turnover rate ............................. 35.64%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) For the period December 13, 2007 (commencement of operations) to April 30, 2008. Annual Report | The accompanying notes are an integral part of these financial statements. | 13 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FOCUSED CORE EQUITY FUND
PERIOD ENDED APRIL 30, CLASS C 2008(e) - ------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................. $10.00 ------ Income from investment operations(a): Net investment income(b) ......................... 0.01 Net realized and unrealized gains (losses) ....... (1.34) ------ Total from investment operations .................... (1.33) ------ Net asset value, end of year ........................ $ 8.67 ====== Total return(c) ..................................... (13.30)% RATIOS TO AVERAGE NET ASSETS(d) Expenses before waiver and payments by affiliates ... 6.11% Expenses net of waiver and payments by affiliates ... 1.85% Net investment income ............................... 0.28% SUPPLEMENTAL DATA Net assets, end of year (000's) ..................... $ 41 Portfolio turnover rate ............................. 35.64%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) For the period December 13, 2007 (commencement of operations) to April 30, 2008. 14 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FOCUSED CORE EQUITY FUND
PERIOD ENDED APRIL 30, CLASS R 2008(e) - ------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................. $10.00 ------ Income from investment operations(a): Net investment income(b) ......................... 0.03 Net realized and unrealized gains (losses) ....... (1.35) ------ Total from investment operations .................... (1.32) ------ Net asset value, end of year ........................ $ 8.68 ====== Total return(c) ..................................... (13.20)% RATIOS TO AVERAGE NET ASSETS(d) Expenses before waiver and payments by affiliates ... 5.65% Expenses net of waiver and payments by affiliates ... 1.39% Net investment income ............................... 0.74% SUPPLEMENTAL DATA Net assets, end of year (000's) ..................... $ 9 Portfolio turn over rate ............................ 35.64%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) For the period December 13, 2007 (commencement of operations) to April 30, 2008. Annual Report | The accompanying notes are an integral part of these financial statements. | 15 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FOCUSED CORE EQUITY FUND
PERIOD ENDED APRIL 30, ADVISOR CLASS 2008(e) - ------------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................. $ 10.00 ------- Income from investment operations(a): Net investment income(b) ......................... 0.04 Net realized and unrealized gains (losses) ....... (1.34) ------- Total from investment operations .................... (1.30) ------- Net asset value, end of year ........................ $ 8.70 ======= Total return(c) ..................................... (13.00)% RATIOS TO AVERAGE NET ASSETS(d) Expenses before waiver and payments by affiliates ... 5.15% Expenses net of waiver and payments by affiliates ... 0.89% Net investment income ............................... 1.24% SUPPLEMENTAL DATA Net assets, end of year (000's) ..................... $ 171 Portfolio turnover rate ............................. 35.64%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) For the period December 13, 2007 (commencement of operations) to April 30, 2008. 16 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008
FRANKLIN FOCUSED CORE EQUITY FUND COUNTRY SHARES VALUE - --------------------------------- ------------- ------- ---------- COMMON STOCKS 83.9% CONSUMER DISCRETIONARY 18.5% Comcast Corp .......................................................... United States 9,980 $205,089 Harley-Davidson Inc. .................................................. United States 4,960 189,720 Harman International Industries Inc. .................................. United States 3,130 127,923 Lowe's Cos. Inc. ...................................................... United States 4,870 122,675 (a) R.H. Donnelley Corp. .................................................. United States 13,440 64,378 (a) Starbucks Corp ........................................................ United States 4,960 80,501 Target Corp. .......................................................... United States 2,080 110,510 ---------- 900,796 ---------- CONSUMER STAPLES 4.5% (a) Hansen Natural Corp. .................................................. United States 4,270 151,115 Walgreen Co ........................................................... United States 2,010 70,049 ---------- 221,164 ---------- ENERGY 6.7% Chesapeake Energy Corp. ............................................... United States 480 24,816 Marathon Oil Corp. .................................................... United States 2,230 101,621 (a) Petroplus Holdings AG ................................................. Switzerland 2,240 140,189 (a) SEACOR Holdings Inc ................................................... United States 700 59,577 ---------- 326,203 ---------- FINANCIALS 12.0% American Express Co. .................................................. United States 2,560 122,931 CapitalSource Inc. .................................................... United States 7,700 108,185 Discover Financial Services ........................................... United States 5,930 107,985 iStar Financial Inc. .................................................. United States 4,600 88,550 Legg Mason Inc. ....................................................... United States 2,620 157,934 ---------- 585,585 ---------- HEALTH CARE 16.9% (a) Advanced Medical Optics Inc ........................................... United States 4,010 84,210 (a) Genentech Inc. ........................................................ United States 1,000 68,200 Merck & Co. Inc. ...................................................... United States 2,770 105,371 (a) PDL BioPharma Inc. .................................................... United States 3,670 48,664 Roche Holding AG ...................................................... Switzerland 910 151,754 Schering-Plough Corp. ................................................. United States 13,470 247,983 Wyeth ................................................................. United States 2,600 115,622 ---------- 821,804 ---------- INDUSTRIALS 5.0% Avery Dennison Corp ................................................... United States 3,520 169,629 Precision Castparts Corp. ............................................. United States 640 75,238 ---------- 244,867 ---------- INFORMATION TECHNOLOGY 12.0% (a) Autodesk Inc. ......................................................... United States 3,620 137,560 (a) Lam Research Corp. .................................................... United States 3,720 151,925 Maxim Integrated Products Inc. ........................................ United States 8,500 178,755
Annual Report | 17 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND COUNTRY SHARES VALUE - --------------------------------- ------------- ------- ---------- COMMON STOCKS (CONTINUED) INFORMATION TECHNOLOGY (CONTINUED) (a) VeriFone Holdings Inc. ................................................ United States 7,280 $ 81,463 (a) Visa Inc., A .......................................................... United States 400 33,380 ---------- 583,083 ---------- MATERIALS 0.9% Alcoa Inc. ............................................................ United States 1,180 41,041 (a) Intrepid Potash Inc. .................................................. United States 90 4,274 ---------- 45,315 ---------- TELECOMMUNICATION SERVICES 7.4% (a) NII Holdings Inc. ..................................................... United States 7,840 358,602 ---------- TOTAL COMMON STOCKS (COST $4,799,065) ................................. 4,087,419 ---------- SHORT TERM INVESTMENT (COST $316,894) 6.5% MONEY MARKET FUND 6.5% (b) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.29% .. United States 316,894 316,894 ---------- TOTAL INVESTMENTS (COST $5,115,959) 90.4% ............................. 4,404,313 OTHER ASSETS, LESS LIABILITIES 9.6% ................................... 467,989 ---------- NET ASSETS 100.0% ..................................................... $4,872,302 ----------
(a) Non-income producing for the twelve months ended April 30, 2008. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. 18 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES April 30, 2008
FRANKLIN FOCUSED CORE EQUITY FUND ------------ Assets: Investments in securities: Cost - Unaffiliated issuers................ $4,799,065 Cost - Sweep Money Fund (Note 7)........... 316,894 ---------- Total cost of investments.................. $5,115,959 ========== Value - Unaffiliated issuers............... $4,087,419 Value - Sweep Money Fund (Note 7).......... 316,894 ---------- Total value of investments................. 4,404,313 Receivables: Investment securities sold................. 453,502 Capital shares sold........................ 200 Dividends.................................. 3,691 Affiliates................................. 58,499 Offering costs................................ 43,664 ---------- Total assets............................ 4,963,869 ---------- Liabilities: Payables: Investment securities purchased............ 80,607 Reports to shareholders.................... 8,626 Accrued expenses and other liabilities........ 2,334 ---------- Total liabilities....................... 91,567 ---------- Net assets, at value................. $4,872,302 ========== Net assets consist of: Paid-in capital............................... $5,544,727 Undistributed net investment income........... 28,566 Net unrealized appreciation (depreciation).... (710,813) Accumulated net realized gain (loss).......... 9,822 ---------- Net assets, at value................. $4,872,302 ==========
Annual Report | The accompanying notes are an integral part of these financial statements. | 19 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) April 30, 2008
FRANKLIN FOCUSED CORE EQUITY FUND ------------ CLASS A: Net assets, at value..................................................... $4,651,834 ---------- Shares outstanding....................................................... 535,588 ---------- Net asset value per share(a)............................................. $ 8.69 ---------- Maximum offering price per share (net asset value per share / 94.25%).... $ 9.22 ---------- CLASS C: Net assets, at value..................................................... $ 40,718 ---------- Shares outstanding....................................................... 4,695 ---------- Net asset value and maximum offering price per share(a).................. $ 8.67 ---------- CLASS R: Net assets, at value..................................................... $ 8,678 ---------- Shares outstanding....................................................... 1,000 ---------- Net asset value and maximum offering price per share(a).................. $ 8.68 ---------- ADVISOR CLASS: Net assets, at value..................................................... $ 171,072 ---------- Shares outstanding....................................................... 19,667 ---------- Net asset value and maximum offering price per share(a).................. $ 8.70 ----------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fee retained by the Fund. 20 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the period December 13, 2007 (commencement of operations) to April 30, 2008
FRANKLIN FOCUSED CORE EQUITY FUND ------------ Investment income: Dividends: Unaffiliated issuers....................................................... $ 34,535 Sweep Money Fund (Note 7).................................................. 2,576 Interest...................................................................... 1,729 --------- Total investment income................................................. 38,840 --------- Expenses: Management fees (Note 3a)..................................................... 13,224 Administrative fees (Note 3b)................................................. 3,640 Distribution fees: (Note 3c) Class A.................................................................... 5,814 Class C.................................................................... 74 Class R.................................................................... 17 Transfer agent fees (Note 3e)................................................. 1,799 Custodian fees (Note 4)....................................................... 313 Reports to shareholders....................................................... 9,571 Registration and filing fees.................................................. 4,014 Professional fees............................................................. 21,006 Trustees' fees and expenses................................................... 3 Amortization of offering costs................................................ 38,891 Other......................................................................... 1,286 --------- Total expenses.......................................................... 99,652 Expenses waived/paid by affiliates (Note 3f)............................ (77,549) --------- Net expenses......................................................... 22,103 --------- Net investment income............................................. 16,737 --------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments................................................................ 9,822 Foreign currency transactions.............................................. (831) --------- Net realized gain (loss).......................................... 8,991 --------- Net change in unrealized appreciation (depreciation) on: Investments................................................................ (711,645) Translation of assets and liabilities denominated in foreign currencies.... 832 --------- Net change in unrealized appreciation (depreciation).............. (710,813) --------- Net realized and unrealized gain (loss).......................................... (701,822) --------- Net increase (decrease) in net assets resulting from operations.................. $(685,085) =========
Annual Report | The accompanying notes are an integral part of these financial statements. | 21 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF CHANGES IN NET ASSETS
FRANKLIN FOCUSED CORE EQUITY FUND ----------------- PERIOD ENDED APRIL 30, 2008(a) ----------------- Increase (decrease) in net assets: Operations: Net investment income.......................................................... $ 16,737 Net realized gain (loss) from investments and foreign currency transactions.... 8,991 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies..... (710,813) ---------- Net increase (decrease) in net assets resulting from operations.......... (685,085) ---------- Capital share transactions: (Note 2) Class A........................................................................ 5,311,800 Class C........................................................................ 41,349 Class R........................................................................ 10,000 Advisor Class.................................................................. 194,238 ---------- Total capital share transactions.................................................. 5,557,387 ---------- Net increase (decrease) in net assets.................................... 4,872,302 Net assets: Beginning of year................................................................. -- ---------- End of year....................................................................... $4,872,302 ========== Undistributed net investment income included in net assets: End of year....................................................................... $ 28,566 ==========
(a) For the period December 13, 2007 (commencement of operations) to April 30, 2008. 22 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS FRANKLIN FOCUSED CORE EQUITY FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNT POLICIES Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of eleven separate funds. The Franklin Focused Core Equity Fund (Fund) included in this report is diversified. The financial statements of the remaining funds in the Trust are presented separately. Effective December 13, 2007, the Fund commenced operations offering four classes of shares: Class A, Class C, Class R, and Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege. The following summarizes the 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. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Trust's Board of Trustees. Annual Report | 23 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN FOCUSED CORE EQUITY FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNT POLICIES (CONTINUED) 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. 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. 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 at a future 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. D. INCOME TAXES No provision has been made for U.S. income taxes because it is the Fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Fund has reviewed the tax position as of April 30, 2008, and has determined that no provision for income tax is required in the Fund's financial statements. 24 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN FOCUSED CORE EQUITY FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNT POLICIES (CONTINUED) E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. F. OFFERING COSTS Offering costs are amortized on a straight line basis over twelve months. G. 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. H. 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. There were no redemption fees for the year. Annual Report | 25 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN FOCUSED CORE EQUITY FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNT POLICIES (CONTINUED) I. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST At April 30, 2008, there were an unlimited number of shares authorized (without par value). Transactions in the Fund's shares were as follows:
PERIOD ENDED APRIL 30, 2008(A) -------------------- SHARES AMOUNT ------- ---------- CLASS A SHARES: Shares sold ............... 539,141 $5,341,810 Shares redeemed ........... (3,553) (30,010) ------- ---------- Net increase (decrease) ... 535,588 $5,311,800 ======= ========== CLASS C SHARES: Shares sold ............... 4,695 $ 41,349 ------- ---------- Net increase (decrease) ... 4,695 $ 41,349 ======= ========== CLASS R SHARES: Shares sold ............... 1,000 $ 10,000 ------- ---------- Net increase (decrease) ... 1,000 $ 10,000 ======= ========== ADVISOR CLASS SHARES: Shares sold ............... 19,731 $ 194,788 Shares redeemed ........... (64) (550) ------- ---------- Net increase (decrease) ... 19,667 $ 194,238 ======= ==========
(a) For the period December 13, 2007 (commencement of operations) to April 30, 2008. 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
26 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN FOCUSED CORE EQUITY 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 0.650% Over $500 million, up to and including $1 billion 0.600% Over $1 billion, up to and including $1.5 billion 0.550% Over $1.5 billion, up to and including $6.5 billion 0.525% Over $6.5 billion, up to and including $11.5 billion 0.500% Over $11.5 billion, up to and including $16.5 billion 0.490% Over $16.5 billion, up to and including $19 billion 0.480% Over $19 billion, up to and including $21.5 billion 0.470% In excess of $ 21.5 billion
B. ADMINISTRATIVE FEES The Fund pays an administrative fee to FT Services of 0.20% per year of the average daily net assets of the Fund. 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 Fund's compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, 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 A ... 0.35% Class C ... 1.00% Class R ... 0.50%
Distributors has agreed to limit the current rate to 0.30% per year for Class A shares for the period of March 1, 2008 through January 1, 2009. 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 retained net of commissions paid to unaffiliated broker/dealers ..................... $1,138
Annual Report | 27 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN FOCUSED CORE EQUITY FUND 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) E. TRANSFER AGENT FEES For the period ended April 30, 2008, the Fund paid transfer agent fees of $1,799, of which $418 was retained by Investor Services. F. WAIVER AND EXPENSE REIMBURSEMENTS FT Services and Advisers have agreed in advance to waive all or a portion of their respective fees and to assume payment of other expenses through August 31, 2009. Total expenses waived or paid are not subject to reimbursement by the Fund subsequent to the Fund's fiscal year end. After August 31, 2009, FT Services and Advisers may discontinue this waiver at any time upon notice to the Fund's Board of Trustees. G. OTHER AFFILIATED TRANSACTIONS At April 30, 2008, Advisers owned 89.13% of the Fund's outstanding shares. 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 April 30, 2008, there were no credits earned. 5. INCOME TAXES At April 30, 2008, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows: Cost of investments .......................... $5,121,620 ---------- Unrealized appreciation ...................... $ 136,174 Unrealized depreciation ...................... (853,481) ---------- Net unrealized appreciation (depreciation) ... $ (717,307) ---------- Undistributed ordinary income ................ $ 44,069 Undistributed long term capital gains ........ 110 ---------- Distributable earnings ....................... $ 44,179 ----------
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions and offering costs. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. 28 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN FOCUSED CORE EQUITY FUND 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the period ended April 30, 2008, aggregated $6,384,015 and $1,594,773, respectively. 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (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. NEW ACCOUNTING PRONOUNCEMENTS In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157, "Fair Value Measurement" (SFAS 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Trust believes the adoption of SFAS 157 will have no material impact on its financial statements. In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Fund is currently evaluating the impact, if any, of applying the various provisions of SFAS 161. Annual Report | 29 Franklin Strategic Series REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FRANKLIN FOCUSED CORE EQUITY FUND TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN FOCUSED CORE EQUITY FUND In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Focused Core Equity Fund (a separate portfolio of Franklin Strategic Series, hereafter referred to as the "Fund") at April 30, 2008, and the results of its operations, the changes in its net assets and its financial highlights for the period from December 13, 2007 (commencement of operations) through April 30, 2008, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at April 30, 2008 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California June 18, 2008 30 | Annual Report Franklin Strategic Series TAX DESIGNATION (UNAUDITED) FRANKLIN FOCUSED CORE EQUITY FUND Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund designates the maximum amount allowable but no less than $110 as a long term capital gain dividend for the fiscal year ended April 30, 2008. Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount allowable but no less than $17,123 as a short term capital gain dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended April 30, 2008. Under Section 854(b)(2) of the Code, the Fund designates the maximum amount allowable but no less than $24,528 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended April 30, 2008. Distributions, including qualified dividend income, paid during calendar year 2008 will be reported to shareholders on Form 1099-DIV in January 2009. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Annual Report | 31 Franklin Strategic Series BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member serves until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------ -------------- ------------------ ----------------------- ----------------------------------- HARRIS J. ASHTON (1932) Trustee Since 1991 143 Bar-S Foods (meat packing One Franklin Parkway company). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ROBERT F. CARLSON (1928) Trustee Since 2007 122 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Retired; and FORMERLY, Vice President, senior member and past President, Board of Administration, California Public Employees Retirement Systems (CALPERS) (1971-January 2008); member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield of California; and Chief Counsel, California Department of Transportation. SAM GINN (1937) Trustee Since 2007 122 Chevron Corporation (global One Franklin Parkway energy company) and ICO Global San Mateo, CA 94403-1906 Communications (Holdings) Limited (satellite company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding company) (1988-1994). EDITH E. HOLIDAY (1952) Trustee Since 1998 143 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas), H.J. San Mateo, CA 94403-1906 Heinz Company (processed foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
32 | Annual Report
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------ -------------- ------------------ ----------------------- ----------------------------------- FRANK W.T. LAHAYE (1929) Trustee Since 1991 122 Center for Creative Land Recycling One Franklin Parkway (brownfield redevelopment). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital). FRANK A. OLSON (1932) Trustee Since 2007 143 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas) and San Mateo, CA 94403-1906 Sentient Jet (private jet service). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). LARRY D. THOMPSON (1945) Trustee Since 2007 143 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). JOHN B. WILSON (1959) Lead Trustee since 122 None One Franklin Parkway Independent 2006 and Lead San Mateo, CA 94403-1906 Trustee Independent Trustee since January 2008 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Executive Vice President - - Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm) (1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------ -------------- ------------------ ----------------------- ----------------------------------- **CHARLES B. JOHNSON (1933) Trustee and Trustee since 143 None One Franklin Parkway Chairman of 1991 and San Mateo, CA 94403-1906 the Board Chairman of the Board since 1993 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments.
Annual Report | 33
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------ -------------- ------------------ ----------------------- ----------------------------------- **RUPERT H. JOHNSON, JR. (1940) Trustee, Trustee since 56 None One Franklin Parkway President and 1991 and San Mateo, CA 94403-1906 Chief President and Executive Chief Executive Officer - Officer - Investment Investment Management Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable One Franklin Parkway Compliance Officer since 2004 San Mateo, CA 94403-1906 Officer and and Vice Vice President President - AML - AML Compliance since Compliance 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). LAURA F. FERGERSON (1962) Treasurer, Treasurer since Not Applicable Not Applicable One Franklin Parkway Chief 2004, Chief San Mateo, CA 94403-1906 Financial Financial Officer Officer and and Chief Chief Accounting Officer Accounting since February Officer 2008 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003). JIMMY D. GAMBILL (1947) Vice President Since February Not Applicable Not Applicable 500 East Broward Blvd. 2008 Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
34 | Annual Report
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------ -------------- ------------------ ----------------------- ----------------------------------- DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments. EDWARD B. JAMIESON (1948) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of four of the investment companies in Franklin Templeton Investments. CHRISTOPHER J. MOLUMPHY (1962) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director and Executive Vice President, Franklin Advisers, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments. KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable One Franklin Parkway and Secretary San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin Templeton Investments. CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
Annual Report | 35
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------ -------------- ------------------ ----------------------- ----------------------------------- GALEN G. VETTER (1951) Senior Vice Since February Not Applicable Not Applicable 500 East Broward Blvd. President and 2008 Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Executive Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004).
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested persons of the Trust under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc., which is the parent company of the Trust's investment manager and distributor. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI. 36 | Annual Report Franklin Strategic Series SHAREHOLDER INFORMATION FRANKLIN FOCUSED CORE EQUITY FUND PROXY VOTING POLICIES AND PROCEDURES The Trust has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. Annual Report | 37 (FRANKLIN TEMPLETON INVESTMENTS LOGO) One Franklin Parkway 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. ANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN FOCUSED CORE EQUITY 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. (GRAPHIC) APRIL 30, 2008 A series of Franklin Strategic Series ANNUAL REPORT AND SHAREHOLDER LETTER INCOME FRANKLIN STRATEGIC INCOME FUND WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. (FRANKLIN TEMPLETON INVESTMENTS LOGO) FRANKLIN TEMPLETON INVESTMENTS FRANKLIN - Templeton - Mutual Series Annual 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 U.S. and foreign debt securities, including those in emerging markets, which include all varieties of fixed and floating rate income securities, including bonds, mortgage securities and other asset-backed securities, and convertible securities. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This annual report for Franklin Strategic Income Fund covers the fiscal year ended April 30, 2008. PERFORMANCE OVERVIEW Franklin Strategic Income Fund - Class A posted a +4.80% cumulative total return for the 12 months under review. The Fund underperformed its benchmark, the Lehman Brothers (LB) U.S. Aggregate Index, which had a +6.87% total return for the same period.(1) During the same period, the Fund outperformed its peers as measured by the Lipper Multi-Sector Income Funds Classification Average's +2.02% 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 LB U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The 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 12-month period ended 4/30/08, there were 134 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. Fund performance relative to the average may have differed if these or other factors had been considered. The Lipper average includes reinvestment of any income or distributions. Past performance does not guarantee future results. 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 23. Annual Report | 3 ECONOMIC AND MARKET OVERVIEW During the 12 months ended April 30, 2008, the U.S. economy slowed as gross domestic product (GDP) growth decelerated sharply to an annualized 0.6% in the fourth quarter of 2007 from a fairly robust growth rate of 4.9% in the preceding quarter. As the financial, labor and housing markets continued to deteriorate, investor and consumer confidence waned, which led to a pullback in consumer spending. These factors as well as upward inflationary pressures from a weakening U.S. dollar and increasing food, energy and commodity prices weighed on the overall economy. The retrenchment continued in the first quarter of 2008 as the economy grew at a 0.9% estimated annualized rate, which was largely credited to external demand and an inventory buildup. Volatile oil prices reached a historical high in April, topping $119 per barrel, before retreating to $113 by period-end. Despite inflation risks from higher food and energy costs, core inflation, which excludes such costs, remained relatively subdued at an annual 2.3% rate in April 2008.(3) This level was above the Federal Reserve Board's (Fed's) informal target range of 1%-2%. The core personal consumption expenditures price index reported a 12-month increase of 2.1%.(4) The Fed acted aggressively to restore liquidity and confidence to unsettled financial markets and cut interest rates seven times over the 12-month period, bringing the federal funds target rate to 2.00% by period-end. The Fed also implemented a series of unconventional measures aimed at easing strained credit conditions. It created a $200 billion loan program intended to provide liquidity to a wider range of financial institutions that could also use riskier assets for collateral, such as illiquid mortgage-backed securities. After a run on Bear Stearns nearly resulted in the investment bank's collapse, the Fed orchestrated its acquisition by JPMorgan Chase. In addition, federal regulators eased capital requirements on government-sponsored Fannie Mae and Freddie Mac. Despite the Fed's actions, U.S. Treasuries rallied and financial stocks continued to sell off for most of the reporting period. Fixed income spreads generally widened relative to Treasury yields over the period due to heightened market turbulence. Investors continued to seek the relative safety of short- and intermediate-term U.S. Treasury securities as Treasury yields declined and the yield curve steepened. Short-term, two- and five-year yields declined significantly, (3.) Source: Bureau of Labor Statistics. (4.) Source: Bureau of Economic Analysis. 4 | Annual Report with the two-year bill yielding 2.29% at the end of April, down from 4.60% 12 months prior. The 10-year U.S. Treasury note ended April yielding 3.77%, compared with 4.63% at the beginning of the period. However, by period-end, it appeared that the Fed's aggressive campaigns were beginning to take effect as non-Treasury investment grade sectors showed signs of improvement. Outside the U.S., eurozone fourth quarter 2007 GDP growth registered 2.2% year-over-year; however, business and consumer confidence indicators showed signs of a slowing economy.(5) Economic growth in non-euro European countries largely continued to outpace the eurozone's. For example, strong investment and consumer spending supported robust economic growth in Poland, Norway and Sweden. The European Central Bank increased interest rates from 3.75% to 4.00% early in the period, and remained focused on preventing high food and energy costs from filtering into underlying prices. In Asia, economic growth remained resilient but moderated due to slower external demand. China was an important contributor to regional growth as its GDP registered 10.6% year-over-year growth in first quarter 2008, somewhat lower than last year's peak growth.(6) Economic growth also remained reasonably strong in other Asian countries such as Malaysia and Singapore. Chinese monetary authorities continued to tighten credit conditions; however, inflation pressures increased, primarily reflecting higher global commodity prices. Asian countries continued to generate large current account surpluses and accumulate foreign exchange reserves. In addition to Asia, other commodity producing countries accumulated surpluses as oil prices rose. With increased risk aversion and volatile equity performance, Asian sovereign wealth funds helped provide stability to U.S. and European financial systems through bank recapitalization. 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. (5.) Source: Eurostat. (6.) Source: National Bureau of Statistics, China. Annual Report | 5 DIVIDEND DISTRIBUTIONS* 5/1/07-4/30/08
DIVIDEND PER SHARE ------------------------------------------------------------------- ADVISOR MONTH CLASS A CLASS B CLASS C CLASS R CLASS - ---------- ----------- ----------- ----------- ----------- ----------- May 5.00 cents 4.64 cents 4.66 cents 4.79 cents 5.21 cents June 5.00 cents 4.64 cents 4.66 cents 4.80 cents 5.21 cents July 5.00 cents 4.64 cents 4.66 cents 4.80 cents 5.21 cents August 5.00 cents 4.64 cents 4.66 cents 4.80 cents 5.21 cents September 5.00 cents 4.66 cents 4.67 cents 4.78 cents 5.21 cents October 5.00 cents 4.66 cents 4.67 cents 4.78 cents 5.21 cents November 5.00 cents 4.66 cents 4.67 cents 4.78 cents 5.21 cents December** 14.00 cents 13.64 cents 13.65 cents 13.79 cents 14.21 cents January 5.00 cents 4.64 cents 4.65 cents 4.79 cents 5.21 cents February 5.00 cents 4.64 cents 4.65 cents 4.79 cents 5.21 cents March 5.00 cents 4.66 cents 4.68 cents 4.79 cents 5.21 cents April 5.00 cents 4.66 cents 4.68 cents 4.79 cents 5.21 cents ----------- ----------- ----------- ----------- ----------- TOTAL 69.00 CENTS 64.78 CENTS 64.96 CENTS 66.48 CENTS 71.52 CENTS
* All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. ** Includes an additional 9 cent distribution to meet excise tax requirements. MANAGER'S DISCUSSION For the fiscal year under review, Franklin Strategic Income Fund underperformed the LB U.S. Aggregate Index and outperformed the Lipper Multi-Sector Income Funds Classification Average. The Fund's lower exposure to more interest-rate sensitive fixed income sectors (i.e., Treasury securities, agency bonds and mortgage-backed securities) constrained performance compared with the index given the decline in interest rates during the period. The Fund's positioning in non-U.S. dollar government bonds helped performance relative to the Fund's peers largely due to broad weakness in the U.S. dollar over the past year. During the period, the declining U.S housing market and related deterioration in securities and structured financial vehicles tied to the subprime mortgage market took center stage. Rising delinquencies in this sector contributed to severe price declines, which then flowed through global financial markets in the form of considerable asset write-downs for many global financial institutions. At the same time, increasing investor risk aversion began to affect financial markets, which made many banks and brokerage firms unwilling to lend. By the end of 2007, the prospect for a significant U.S. economic slowdown emerged, adding concerns about consumer and corporate domestic spending. 6 | Annual Report PORTFOLIO BREAKDOWN Based on Total Net Assets
4/30/08 4/30/07 ------- ------- High Yield Corporate Bonds & Preferred Stocks 22.8% 28.8% Mortgages & Other Asset-Backed Bonds 16.7% 13.5% Floating Rate Bank Loans 16.1% 13.3% Other International Bonds (non-$US) 11.8% 14.6% International Developed Country Bonds (non-$US) 9.6% 9.8% Investment Grade Corporate Bonds 9.4% 2.7% U.S. Government & Agency Bonds* 4.9% 9.3% Convertible Securities 2.7% 3.0% Municipal Bonds 1.9% 0.0% Emerging Market Bonds ($US) 1.5% 2.7% Common Stocks & Warrants 0.0%** 0.0%** Short-Term Investments & Other Net Assets 2.6% 2.3%
* Includes 0.2% denominated in non-U.S. dollars and 0.6% Treasury Inflation Protected Securities. Also includes agency preferred stock. ** Rounds to less than 0.1% of net assets. In this environment, one of the strongest performing asset categories was U.S. Treasury securities, largely due to a flight to quality in financial markets and expectations that slowing domestic growth could temper inflationary pressures. Non-U.S. dollar denominated securities also performed well, given low relative short-term U.S. interest rates. Although the economic environment remained challenging, we sought to take advantage of dislocations across fixed income markets, which pushed valuations for many sectors toward, and in some cases past, their historically cheapest valuation levels. We invested in securities that we considered had attractive yields and total return potential in light of our longer-term assessment of fundamental risks. In addition to lower short-term interest rates due to the Fed's action during the Fund's fiscal year, intermediate- and long-term interest rates also fell, leading U.S. Treasury securities to record some of the strongest gains in the fixed income market during the period. Given our view that the decline in interest rates was at least partly due to risk aversion rather than longer-term inflation expectations, we reduced the Fund's exposure to Treasury securities and agency debentures as we found what we considered were more attractive investment opportunities in other sectors. We did, however, increase exposure to the mortgage- and other asset-backed securities sector. Yield spreads for many asset-backed securities (ABS) increased significantly during the fiscal year as concerns about structured securities in general negatively affected the ABS market. Although fundamentals Annual Report | 7 had just begun to weaken for certain ABS issuers, such as commercial mortgage-backed securities and credit card-related ABS, we believed valuations more than compensated for these softening fundamental trends. Within the investment grade portion of the corporate bond market, financial issuers came under pressure due to write-offs to cover price declines for sub-prime mortgage-backed securities. Toward the period's latter half, non-financial issuers also experienced widening yield spreads as concerns regarding the economy and future corporate earnings emerged. Although corporate earnings may experience some weakness, from a fundamental credit perspective, our analysis led us to believe major banks and brokerage firms should survive this cycle, particularly considering the amount of equity and preferred stock issued over the past year. Therefore, we increased exposure to the investment grade corporate bond sector, particularly among financial companies. As would be expected in such a market environment, the high yield corporate bond sector also faced pressure from the flight to quality amid domestic economic concerns. Although many analysts expected default rates to rise given the amount of lower quality issues over the past few years, the weaker economy and difficult credit environment for refinancing, actual defaults remained historically low. Similarly, the leveraged bank loan sector came under significant pressure and had a negative return over the past year as measured by the CS Leveraged Loan Index's -3.34% return.(7) For bank loans, the largest buyer of these instruments, collateralized loan obligations (CLOs), were largely unable to launch new products given the market's structured nature. In addition, a large loan supply calendar to finance pending leveraged buyouts weighed on bank loan prices as underwriters attempted to clear these loans from their books at discounts to par value. However, in our view the lower valuations were overdone due to these technical supply and demand factors; therefore, we added to our leveraged bank loan exposure and reduced our high yield corporate bond exposure during the Fund's fiscal year. The weak U.S. dollar, largely due to declining short-term interest rates and continued structural imbalances caused by the U.S. current account deficit, contributed to strong returns for the foreign fixed income sovereign bond sector. Throughout the Fund's fiscal year, we held a significant weighting in non-U.S. dollar bonds, based on the prospect that the U.S. dollar could weaken further given current trends. The Fund benefited from positive results from bond holdings in Norway, Switzerland, Poland, Brazil, Singapore and Japan. However, (7.) Source: Credit Suisse. The CS Leveraged Loan Index is designed to mirror the investible universe of the $US-denominated leveraged loan market. 8 | Annual Report we believed the euro had exceeded its fundamental longer-term value relative to the U.S. dollar; therefore, using forward currency contracts we began to hedge the Fund's effective euro exposure from some of our holdings with currencies correlated with the euro. In the U.S. dollar-denominated emerging market bond sector, yield spreads widened during the period; however, the market experienced less volatility compared with historical trends largely due to the higher quality of many developing market issuers relative to the late 1990s' currency crisis. Based on what we considered full valuations, we held a relatively small weighting in this sector throughout the reporting period. We added some convertible securities to the Fund's portfolio, with a focus on financial sector issuers. However, overall exposure to this asset class remained relatively low compared with other asset classes, at less than 3% of total net assets at period-end. Thank you for your continued participation in Franklin Strategic Income Fund. We look forward to serving your future investment needs. (PHOTO OF CHRISTOPHER J. MOLUMPHY) /s/ Christopher J. Molumphy Christopher J. Molumphy, CFA (PHOTO OF ERIC G. TAKAHA) /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 APRIL 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 9 Performance Summary as of 4/30/08 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FRSTX) CHANGE 4/30/08 4/30/07 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) -$0.20 $10.28 $10.48 DISTRIBUTIONS (5/1/07-4/30/08) Dividend Income $0.6900
CLASS B (SYMBOL: FKSBX) CHANGE 4/30/08 4/30/07 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) -$0.20 $10.32 $10.52 DISTRIBUTIONS (5/1/07-4/30/08) Dividend Income $0.6478
CLASS C (SYMBOL: FSGCX) CHANGE 4/30/08 4/30/07 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) -$0.21 $10.27 $10.48 DISTRIBUTIONS (5/1/07-4/30/08) Dividend Income $0.6496
CLASS R (SYMBOL: FKSRX) CHANGE 4/30/08 4/30/07 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) -$0.21 $10.25 $10.46 DISTRIBUTIONS (5/1/07- 4/30/08) Dividend Income $0.6648
ADVISOR CLASS (SYMBOL: FKSAX) CHANGE 4/30/08 4/30/07 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) -$0.21 $10.28 $10.49 DISTRIBUTIONS (5/1/07- 4/30/08) Dividend Income $0.7152
10 | Annual Report Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. UNTIL AUGUST 31, 2008, THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
CLASS A 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------ ------ --------- Cumulative Total Return(2) +4.80% +45.89% +86.57% Average Annual Total Return(3) +0.30% +6.91% +5.97% Avg. Ann. Total Return (3/31/08)(4) -0.07% +7.41% +5.82% Distribution Rate(5) 5.59% 30-Day Standardized Yield(6) 5.44% Total Annual Operating Expenses(7) 0.93%
INCEPTION CLASS B 1-YEAR 5-YEAR (1/1/99) - ------------------------------------- ------ ------ --------- Cumulative Total Return(2) +4.35% +43.10% +79.47% Average Annual Total Return(3) +0.43% +7.13% +6.47% Avg. Ann. Total Return (3/31/08)(4) 0.00% +7.61% +6.31% Distribution Rate(5) 5.42% 30-Day Standardized Yield(6) 5.31% Total Annual Operating Expenses(7) 1.33%
CLASS C 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------ ------ --------- Cumulative Total Return(2) +4.28% +43.03% +78.77% Average Annual Total Return(3) +3.30% +7.42% +5.98% Avg. Ann. Total Return (3/31/08)(4) +2.86% +7.89% +5.84% Distribution Rate(5) 5.47% 30-Day Standardized Yield(6) 5.28% Total Annual Operating Expenses(7) 1.33%
INCEPTION CLASS R 1-YEAR 5-YEAR (1/1/02) - ------------------------------------- ------ ------ --------- Cumulative Total Return(2) +4.55% +44.09% +63.77% Average Annual Total Return(3) +4.55% +7.58% +8.11% Avg. Ann. Total Return (3/31/08)(4) +4.00% +8.05% +7.90% Distribution Rate(5) 5.61% 30-Day Standardized Yield(6) 5.43% Total Annual Operating Expenses(7) 1.18%
ADVISOR CLASS(8) 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------ ------ --------- Cumulative Total Return(2) +5.05% +47.67% +90.58% Average Annual Total Return(3) +5.05% +8.11% +6.66% Avg. Ann. Total Return (3/31/08)(4) +4.50% +8.61% +6.50% Distribution Rate(5) 6.08% 30-Day Standardized Yield(6) 5.96% Total Annual Operating Expenses(7) 0.68%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Annual Report | 11 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT(1) Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/08 - ------- ------- 1-Year +0.30% 5-Year +6.91% 10-Year +5.97%
CLASS A (5/1/98-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN STRATEGIC INCOME LEHMAN BROTHERS U.S. LIPPER MULTI-SECTOR INCOME DATE FUND - CLASS A AGGREGATE INDEX CLASSIFICATION AVERAGE - ---------- ------------------------- -------------------- -------------------------- 5/1/1998 $ 9,574 $10,000 $10,000 5/31/1998 $ 9,518 $10,095 $ 9,981 6/30/1998 $ 9,488 $10,180 $ 9,959 7/31/1998 $ 9,556 $10,202 $10,005 8/31/1998 $ 8,663 $10,368 $ 9,392 9/30/1998 $ 9,092 $10,611 $ 9,563 10/31/1998 $ 9,276 $10,555 $ 9,532 11/30/1998 $ 9,648 $10,615 $ 9,864 12/31/1998 $ 9,656 $10,647 $ 9,852 1/31/1999 $ 9,698 $10,723 $ 9,916 2/28/1999 $ 9,569 $10,535 $ 9,817 3/31/1999 $ 9,714 $10,594 $ 9,972 4/30/1999 $ 9,979 $10,627 $10,186 5/31/1999 $ 9,745 $10,534 $ 9,982 6/30/1999 $ 9,762 $10,501 $ 9,994 7/31/1999 $ 9,695 $10,456 $ 9,966 8/31/1999 $ 9,608 $10,451 $ 9,898 9/30/1999 $ 9,616 $10,572 $ 9,944 10/31/1999 $ 9,662 $10,611 $ 9,974 11/30/1999 $ 9,746 $10,610 $10,072 12/31/1999 $ 9,880 $10,559 $10,178 1/31/2000 $ 9,719 $10,525 $10,094 2/29/2000 $ 9,841 $10,652 $10,257 3/31/2000 $ 9,864 $10,792 $10,267 4/30/2000 $ 9,799 $10,761 $10,151 5/31/2000 $ 9,672 $10,756 $10,025 6/30/2000 $ 9,958 $10,980 $10,282 7/31/2000 $10,023 $11,080 $10,321 8/31/2000 $10,180 $11,240 $10,407 9/30/2000 $10,114 $11,311 $10,302 10/31/2000 $ 9,913 $11,386 $10,102 11/30/2000 $ 9,711 $11,572 $ 9,954 12/31/2000 $10,137 $11,787 $10,239 1/31/2001 $10,545 $11,979 $10,613 2/28/2001 $10,509 $12,084 $10,626 3/31/2001 $10,344 $12,145 $10,428 4/30/2001 $10,350 $12,094 $10,350 5/31/2001 $10,411 $12,167 $10,426 6/30/2001 $10,330 $12,213 $10,339 7/31/2001 $10,458 $12,486 $10,422 8/31/2001 $10,586 $12,629 $10,564 9/30/2001 $10,157 $12,776 $10,231 10/31/2001 $10,468 $13,044 $10,479 11/30/2001 $10,736 $12,864 $10,608 12/31/2001 $10,685 $12,782 $10,575 1/31/2002 $10,703 $12,886 $10,634 2/28/2002 $10,726 $13,010 $10,660 3/31/2002 $10,831 $12,794 $10,684 4/30/2002 $10,971 $13,042 $10,849 5/31/2002 $10,924 $13,153 $10,877 6/30/2002 $10,461 $13,267 $10,656 7/31/2002 $10,234 $13,427 $10,487 8/31/2002 $10,499 $13,653 $10,706 9/30/2002 $10,474 $13,874 $10,684 10/31/2002 $10,535 $13,811 $10,729 11/30/2002 $10,978 $13,808 $11,016 12/31/2002 $11,188 $14,093 $11,233 1/31/2003 $11,387 $14,105 $11,395 2/28/2003 $11,588 $14,300 $11,574 3/31/2003 $11,744 $14,289 $11,694 4/30/2003 $12,244 $14,407 $12,093 5/31/2003 $12,606 $14,676 $12,387 6/30/2003 $12,765 $14,646 $12,501 7/31/2003 $12,422 $14,154 $12,232 8/31/2003 $12,544 $14,248 $12,358 9/30/2003 $13,006 $14,625 $12,708 10/31/2003 $13,090 $14,489 $12,801 11/30/2003 $13,280 $14,523 $12,945 12/31/2003 $13,658 $14,671 $13,244 1/31/2004 $13,837 $14,789 $13,373 2/29/2004 $13,909 $14,949 $13,406 3/31/2004 $14,009 $15,061 $13,511 4/30/2004 $13,675 $14,669 $13,218 5/31/2004 $13,558 $14,611 $13,097 6/30/2004 $13,674 $14,693 $13,218 7/31/2004 $13,830 $14,839 $13,343 8/31/2004 $14,140 $15,122 $13,605 9/30/2004 $14,313 $15,163 $13,774 10/31/2004 $14,599 $15,290 $14,011 11/30/2004 $14,787 $15,168 $14,191 12/31/2004 $15,005 $15,308 $14,398 1/31/2005 $14,968 $15,404 $14,388 2/28/2005 $15,160 $15,313 $14,485 3/31/2005 $14,807 $15,234 $14,244 4/30/2005 $14,783 $15,440 $14,274 5/31/2005 $14,905 $15,608 $14,408 6/30/2005 $15,022 $15,693 $14,555 7/31/2005 $15,095 $15,550 $14,606 8/31/2005 $15,198 $15,749 $14,744 9/30/2005 $15,094 $15,587 $14,692 10/31/2005 $14,990 $15,464 $14,541 11/30/2005 $15,095 $15,532 $14,621 12/31/2005 $15,230 $15,680 $14,760 1/31/2006 $15,456 $15,680 $14,903 2/28/2006 $15,547 $15,733 $15,006 3/31/2006 $15,486 $15,578 $14,920 4/30/2006 $15,624 $15,550 $15,004 5/31/2006 $15,593 $15,533 $14,935 6/30/2006 $15,516 $15,566 $14,894 7/31/2006 $15,687 $15,777 $15,076 8/31/2006 $15,874 $16,018 $15,281 9/30/2006 $16,000 $16,159 $15,379 10/31/2006 $16,205 $16,266 $15,546 11/30/2006 $16,427 $16,455 $15,749 12/31/2006 $16,479 $16,359 $15,786 1/31/2007 $16,511 $16,352 $15,853 2/28/2007 $16,704 $16,604 $16,054 3/31/2007 $16,801 $16,605 $16,107 4/30/2007 $17,045 $16,695 $16,281 5/31/2007 $17,110 $16,568 $16,296 6/30/2007 $16,979 $16,519 $16,162 7/31/2007 $16,830 $16,657 $16,004 8/31/2007 $16,897 $16,861 $16,077 9/30/2007 $17,346 $16,989 $16,384 10/31/2007 $17,547 $17,141 $16,538 11/30/2007 $17,396 $17,450 $16,480 12/31/2007 $17,446 $17,499 $16,513 1/31/2008 $17,515 $17,793 $16,545 2/29/2008 $17,515 $17,817 $16,477 3/31/2008 $17,532 $17,878 $16,396 4/30/2008 $17,862 $17,841 $16,621
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/08 - ------------------------ ------- 1-Year +0.43% 5-Year +7.13% Since Inception (1/1/99) +6.47%
CLASS B (1/1/99-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN STRATEGIC INCOME LEHMAN BROTHERS U.S. LIPPER MULTI-SECTOR INCOME DATE FUND - CLASS B AGGREGATE INDEX CLASSIFICATION AVERAGE - ---------- ------------------------- -------------------- -------------------------- 1/1/1999 $10,000 $10,000 $10,000 1/31/1999 $10,054 $10,071 $10,065 2/28/1999 $ 9,914 $ 9,896 $ 9,964 3/31/1999 $10,069 $ 9,950 $10,122 4/30/1999 $10,340 $ 9,982 $10,339 5/31/1999 $10,104 $ 9,894 $10,133 6/30/1999 $10,119 $ 9,863 $10,145 7/31/1999 $10,036 $ 9,821 $10,116 8/31/1999 $ 9,943 $ 9,816 $10,047 9/30/1999 $ 9,958 $ 9,930 $10,094 10/31/1999 $ 9,993 $ 9,967 $10,124 11/30/1999 $10,077 $ 9,966 $10,223 12/31/1999 $10,213 $ 9,918 $10,332 1/31/2000 $10,053 $ 9,885 $10,246 2/29/2000 $10,165 $10,005 $10,411 3/31/2000 $10,186 $10,137 $10,421 4/30/2000 $10,115 $10,108 $10,304 5/31/2000 $ 9,981 $10,103 $10,176 6/30/2000 $10,271 $10,313 $10,436 7/31/2000 $10,334 $10,407 $10,476 8/31/2000 $10,493 $10,558 $10,564 9/30/2000 $10,432 $10,624 $10,457 10/31/2000 $10,222 $10,694 $10,254 11/30/2000 $10,010 $10,869 $10,104 12/31/2000 $10,445 $11,071 $10,394 1/31/2001 $10,850 $11,252 $10,773 2/28/2001 $10,820 $11,350 $10,786 3/31/2001 $10,647 $11,407 $10,585 4/30/2001 $10,639 $11,360 $10,506 5/31/2001 $10,708 $11,428 $10,583 6/30/2001 $10,611 $11,471 $10,495 7/31/2001 $10,738 $11,728 $10,579 8/31/2001 $10,866 $11,862 $10,723 9/30/2001 $10,424 $12,000 $10,385 10/31/2001 $10,738 $12,251 $10,637 11/30/2001 $11,008 $12,082 $10,768 12/31/2001 $10,965 $12,006 $10,735 1/31/2002 $10,968 $12,103 $10,794 2/28/2002 $10,999 $12,220 $10,821 3/31/2002 $11,103 $12,017 $10,844 4/30/2002 $11,231 $12,250 $11,013 5/31/2002 $11,192 $12,354 $11,041 6/30/2002 $10,703 $12,461 $10,816 7/31/2002 $10,468 $12,611 $10,645 8/31/2002 $10,734 $12,824 $10,867 9/30/2002 $10,718 $13,032 $10,845 10/31/2002 $10,764 $12,972 $10,890 11/30/2002 $11,224 $12,969 $11,182 12/31/2002 $11,423 $13,237 $11,402 1/31/2003 $11,622 $13,248 $11,567 2/28/2003 $11,823 $13,431 $11,748 3/31/2003 $11,990 $13,421 $11,870 4/30/2003 $12,482 $13,532 $12,275 5/31/2003 $12,859 $13,784 $12,573 6/30/2003 $13,017 $13,757 $12,689 7/31/2003 $12,651 $13,294 $12,416 8/31/2003 $12,784 $13,383 $12,544 9/30/2003 $13,249 $13,737 $12,899 10/31/2003 $13,329 $13,609 $12,993 11/30/2003 $13,504 $13,641 $13,140 12/31/2003 $13,897 $13,780 $13,444 1/31/2004 $14,074 $13,891 $13,574 2/29/2004 $14,143 $14,041 $13,608 3/31/2004 $14,239 $14,147 $13,714 4/30/2004 $13,897 $13,778 $13,417 5/31/2004 $13,773 $13,723 $13,294 6/30/2004 $13,885 $13,801 $13,417 7/31/2004 $14,039 $13,938 $13,544 8/31/2004 $14,349 $14,203 $13,810 9/30/2004 $14,518 $14,242 $13,981 10/31/2004 $14,802 $14,361 $14,221 11/30/2004 $15,002 $14,247 $14,405 12/31/2004 $15,217 $14,378 $14,615 1/31/2005 $15,176 $14,468 $14,605 2/28/2005 $15,350 $14,383 $14,703 3/31/2005 $14,988 $14,309 $14,459 4/30/2005 $14,959 $14,503 $14,489 5/31/2005 $15,092 $14,660 $14,625 6/30/2005 $15,204 $14,739 $14,774 7/31/2005 $15,273 $14,605 $14,826 8/31/2005 $15,357 $14,793 $14,966 9/30/2005 $15,262 $14,640 $14,913 10/31/2005 $15,137 $14,524 $14,760 11/30/2005 $15,237 $14,589 $14,841 12/31/2005 $15,383 $14,727 $14,982 1/31/2006 $15,605 $14,728 $15,127 2/28/2006 $15,677 $14,777 $15,231 3/31/2006 $15,610 $14,632 $15,145 4/30/2006 $15,758 $14,605 $15,229 5/31/2006 $15,707 $14,590 $15,159 6/30/2006 $15,639 $14,621 $15,118 7/31/2006 $15,806 $14,818 $15,303 8/31/2006 $15,988 $15,045 $15,511 9/30/2006 $16,109 $15,177 $15,610 10/31/2006 $16,294 $15,278 $15,780 11/30/2006 $16,527 $15,455 $15,986 12/31/2006 $16,558 $15,365 $16,024 1/31/2007 $16,589 $15,359 $16,091 2/28/2007 $16,784 $15,596 $16,296 3/31/2007 $16,881 $15,596 $16,349 4/30/2007 $17,126 $15,681 $16,526 5/31/2007 $17,191 $15,562 $16,541 6/30/2007 $17,058 $15,516 $16,405 7/31/2007 $16,908 $15,645 $16,244 8/31/2007 $16,976 $15,837 $16,319 9/30/2007 $17,427 $15,957 $16,631 10/31/2007 $17,630 $16,100 $16,787 11/30/2007 $17,478 $16,390 $16,728 12/31/2007 $17,529 $16,436 $16,762 1/31/2008 $17,597 $16,712 $16,794 2/29/2008 $17,597 $16,735 $16,725 3/31/2008 $17,615 $16,792 $16,643 4/30/2008 $17,947 $16,757 $16,871
12 | Annual Report Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/08 - ------- ------- 1-Year +3.30% 5-Year +7.42% 10-Year +5.98%
CLASS C (5/1/98-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN STRATEGIC INCOME LEHMAN BROTHERS U.S. LIPPER MULTI-SECTOR INCOME DATE FUND - CLASS C AGGREGATE INDEX CLASSIFICATION AVERAGE - ---------- ------------------------- ------------------- -------------------------- 5/1/1998 $10,000 $10,000 $10,000 5/31/1998 $ 9,920 $10,095 $ 9,981 6/30/1998 $ 9,885 $10,180 $ 9,959 7/31/1998 $ 9,952 $10,202 $10,005 8/31/1998 $ 9,028 $10,368 $ 9,392 9/30/1998 $ 9,461 $10,611 $ 9,563 10/31/1998 $ 9,650 $10,555 $ 9,532 11/30/1998 $10,034 $10,615 $ 9,864 12/31/1998 $10,038 $10,647 $ 9,852 1/31/1999 $10,079 $10,723 $ 9,916 2/28/1999 $ 9,941 $10,535 $ 9,817 3/31/1999 $10,087 $10,594 $ 9,972 4/30/1999 $10,359 $10,627 $10,186 5/31/1999 $10,113 $10,534 $ 9,982 6/30/1999 $10,127 $10,501 $ 9,994 7/31/1999 $10,053 $10,456 $ 9,966 8/31/1999 $ 9,950 $10,451 $ 9,898 9/30/1999 $ 9,965 $10,572 $ 9,944 10/31/1999 $10,009 $10,611 $ 9,974 11/30/1999 $10,094 $10,610 $10,072 12/31/1999 $10,229 $10,559 $10,178 1/31/2000 $10,058 $10,525 $10,094 2/29/2000 $10,181 $10,652 $10,257 3/31/2000 $10,202 $10,792 $10,267 4/30/2000 $10,131 $10,761 $10,151 5/31/2000 $ 9,997 $10,756 $10,025 6/30/2000 $10,289 $10,980 $10,282 7/31/2000 $10,352 $11,080 $10,321 8/31/2000 $10,511 $11,240 $10,407 9/30/2000 $10,439 $11,311 $10,302 10/31/2000 $10,229 $11,386 $10,102 11/30/2000 $10,027 $11,572 $ 9,954 12/31/2000 $10,452 $11,787 $10,239 1/31/2001 $10,870 $11,979 $10,613 2/28/2001 $10,840 $12,084 $10,626 3/31/2001 $10,655 $12,145 $10,428 4/30/2001 $10,658 $12,094 $10,350 5/31/2001 $10,717 $12,167 $10,426 6/30/2001 $10,631 $12,213 $10,339 7/31/2001 $10,759 $12,486 $10,422 8/31/2001 $10,888 $12,629 $10,564 9/30/2001 $10,443 $12,776 $10,231 10/31/2001 $10,759 $13,044 $10,479 11/30/2001 $11,029 $12,864 $10,608 12/31/2001 $10,974 $12,782 $10,575 1/31/2002 $10,989 $12,886 $10,634 2/28/2002 $11,009 $13,010 $10,660 3/31/2002 $11,113 $12,794 $10,684 4/30/2002 $11,242 $13,042 $10,849 5/31/2002 $11,202 $13,153 $10,877 6/30/2002 $10,723 $13,267 $10,656 7/31/2002 $10,487 $13,427 $10,487 8/31/2002 $10,754 $13,653 $10,706 9/30/2002 $10,726 $13,874 $10,684 10/31/2002 $10,785 $13,811 $10,729 11/30/2002 $11,235 $13,808 $11,016 12/31/2002 $11,446 $14,093 $11,233 1/31/2003 $11,647 $14,105 $11,395 2/28/2003 $11,848 $14,300 $11,574 3/31/2003 $12,004 $14,289 $11,694 4/30/2003 $12,498 $14,407 $12,093 5/31/2003 $12,877 $14,676 $12,387 6/30/2003 $13,035 $14,646 $12,501 7/31/2003 $12,667 $14,154 $12,232 8/31/2003 $12,800 $14,248 $12,358 9/30/2003 $13,267 $14,625 $12,708 10/31/2003 $13,347 $14,489 $12,801 11/30/2003 $13,536 $14,523 $12,945 12/31/2003 $13,918 $14,671 $13,244 1/31/2004 $14,095 $14,789 $13,373 2/29/2004 $14,165 $14,949 $13,406 3/31/2004 $14,262 $15,061 $13,511 4/30/2004 $13,918 $14,669 $13,218 5/31/2004 $13,794 $14,611 $13,097 6/30/2004 $13,906 $14,693 $13,218 7/31/2004 $14,061 $14,839 $13,343 8/31/2004 $14,358 $15,122 $13,605 9/30/2004 $14,543 $15,163 $13,774 10/31/2004 $14,828 $15,290 $14,011 11/30/2004 $15,015 $15,168 $14,191 12/31/2004 $15,231 $15,308 $14,398 1/31/2005 $15,189 $15,404 $14,388 2/28/2005 $15,378 $15,313 $14,485 3/31/2005 $15,014 $15,234 $14,244 4/30/2005 $14,986 $15,440 $14,274 5/31/2005 $15,104 $15,608 $14,408 6/30/2005 $15,217 $15,693 $14,555 7/31/2005 $15,287 $15,550 $14,606 8/31/2005 $15,371 $15,749 $14,744 9/30/2005 $15,276 $15,587 $14,692 10/31/2005 $15,166 $15,464 $14,541 11/30/2005 $15,251 $15,532 $14,621 12/31/2005 $15,398 $15,680 $14,760 1/31/2006 $15,621 $15,680 $14,903 2/28/2006 $15,708 $15,733 $15,006 3/31/2006 $15,626 $15,578 $14,920 4/30/2006 $15,775 $15,550 $15,004 5/31/2006 $15,739 $15,533 $14,935 6/30/2006 $15,656 $15,566 $14,894 7/31/2006 $15,823 $15,777 $15,076 8/31/2006 $16,007 $16,018 $15,281 9/30/2006 $16,128 $16,159 $15,379 10/31/2006 $16,330 $16,266 $15,546 11/30/2006 $16,548 $16,455 $15,749 12/31/2006 $16,596 $16,359 $15,786 1/31/2007 $16,622 $16,352 $15,853 2/28/2007 $16,811 $16,604 $16,054 3/31/2007 $16,903 $16,605 $16,107 4/30/2007 $17,142 $16,695 $16,281 5/31/2007 $17,202 $16,568 $16,296 6/30/2007 $17,065 $16,519 $16,162 7/31/2007 $16,910 $16,657 $16,004 8/31/2007 $16,971 $16,861 $16,077 9/30/2007 $17,417 $16,989 $16,384 10/31/2007 $17,613 $17,141 $16,538 11/30/2007 $17,456 $17,450 $16,480 12/31/2007 $17,483 $17,499 $16,513 1/31/2008 $17,546 $17,793 $16,545 2/29/2008 $17,557 $17,817 $16,477 3/31/2008 $17,551 $17,878 $16,396 4/30/2008 $17,877 $17,841 $16,621
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/08 - ------------------------ ------- 1-Year +4.55% 5-Year +7.58% Since Inception (1/1/02) +8.11%
CLASS R (1/1/02-4/30/08) (PERFORMANCE GRAPH)
FRANKLIN STRATEGIC LEHMAN BROTHERS U.S. LIPPER MULTI-SECTOR INCOME DATE INCOME FUND - CLASS R AGGREGATE INDEX CLASSIFICATION AVERAGE - ---------- --------------------- -------------------- -------------------------- 1/1/2002 $10,000 $10,000 $10,000 1/31/2002 $ 9,974 $10,081 $10,055 2/28/2002 $ 9,982 $10,179 $10,080 3/31/2002 $10,078 $10,009 $10,102 4/30/2002 $10,207 $10,203 $10,259 5/31/2002 $10,172 $10,290 $10,286 6/30/2002 $ 9,739 $10,379 $10,076 7/31/2002 $ 9,513 $10,504 $ 9,917 8/31/2002 $ 9,758 $10,682 $10,124 9/30/2002 $ 9,745 $10,855 $10,103 10/31/2002 $ 9,788 $10,805 $10,145 11/30/2002 $10,209 $10,802 $10,417 12/31/2002 $10,403 $11,025 $10,622 1/31/2003 $10,575 $11,035 $10,775 2/28/2003 $10,759 $11,188 $10,944 3/31/2003 $10,915 $11,179 $11,058 4/30/2003 $11,366 $11,271 $11,435 5/31/2003 $11,711 $11,481 $11,713 6/30/2003 $11,857 $11,459 $11,821 7/31/2003 $11,524 $11,073 $11,567 8/31/2003 $11,647 $11,147 $11,686 9/30/2003 $12,061 $11,442 $12,016 10/31/2003 $12,149 $11,335 $12,104 11/30/2003 $12,312 $11,362 $12,241 12/31/2003 $12,660 $11,478 $12,524 1/31/2004 $12,836 $11,570 $12,645 2/29/2004 $12,901 $11,696 $12,677 3/31/2004 $12,978 $11,783 $12,776 4/30/2004 $12,666 $11,477 $12,498 5/31/2004 $12,568 $11,431 $12,385 6/30/2004 $12,659 $11,495 $12,499 7/31/2004 $12,803 $11,609 $12,617 8/31/2004 $13,088 $11,831 $12,865 9/30/2004 $13,246 $11,863 $13,024 10/31/2004 $13,508 $11,962 $13,248 11/30/2004 $13,680 $11,867 $13,419 12/31/2004 $13,878 $11,976 $13,615 1/31/2005 $13,842 $12,051 $13,605 2/28/2005 $14,016 $11,980 $13,697 3/31/2005 $13,686 $11,919 $13,469 4/30/2005 $13,662 $12,080 $13,498 5/31/2005 $13,772 $12,211 $13,624 6/30/2005 $13,876 $12,277 $13,763 7/31/2005 $13,942 $12,165 $13,812 8/31/2005 $14,034 $12,321 $13,941 9/30/2005 $13,935 $12,194 $13,893 10/31/2005 $13,837 $12,098 $13,750 11/30/2005 $13,930 $12,151 $13,825 12/31/2005 $14,052 $12,267 $13,956 1/31/2006 $14,258 $12,268 $14,092 2/28/2006 $14,340 $12,308 $14,189 3/31/2006 $14,280 $12,188 $14,108 4/30/2006 $14,405 $12,165 $14,187 5/31/2006 $14,373 $12,152 $14,122 6/30/2006 $14,299 $12,178 $14,084 7/31/2006 $14,454 $12,343 $14,256 8/31/2006 $14,624 $12,532 $14,450 9/30/2006 $14,737 $12,642 $14,542 10/31/2006 $14,923 $12,726 $14,701 11/30/2006 $15,124 $12,873 $14,892 12/31/2006 $15,155 $12,798 $14,927 1/31/2007 $15,196 $12,793 $14,990 2/28/2007 $15,371 $12,990 $15,180 3/31/2007 $15,457 $12,991 $15,231 4/30/2007 $15,664 $13,061 $15,395 5/31/2007 $15,736 $12,962 $15,409 6/30/2007 $15,612 $12,924 $15,283 7/31/2007 $15,457 $13,031 $15,133 8/31/2007 $15,530 $13,191 $15,202 9/30/2007 $15,941 $13,291 $15,493 10/31/2007 $16,122 $13,411 $15,638 11/30/2007 $15,980 $13,652 $15,584 12/31/2007 $16,008 $13,690 $15,615 1/31/2008 $16,066 $13,920 $15,644 2/29/2008 $16,063 $13,939 $15,580 3/31/2008 $16,076 $13,987 $15,504 4/30/2008 $16,377 $13,958 $15,716
Annual Report | 13 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 4/30/08 - ---------------- ------- 1-Year +5.05% 5-Year +8.11% 10-Year +6.66%
ADVISOR CLASS (5/1/98-4/30/08)(8) (PERFORMANCE GRAPH)
FRANKLIN STRATEGIC INCOME LEHMAN BROTHERS U.S. LIPPER MULTI-SECTOR INCOME DATE FUND - ADVISOR CLASS AGGREGATE INDEX CLASSIFICATION AVERAGE - ---------- ------------------------- -------------------- -------------------------- 5/1/1998 $10,000 $10,000 $10,000 5/31/1998 $ 9,942 $10,095 $ 9,981 6/30/1998 $ 9,910 $10,180 $ 9,959 7/31/1998 $ 9,981 $10,202 $10,005 8/31/1998 $ 9,048 $10,368 $ 9,392 9/30/1998 $ 9,496 $10,611 $ 9,563 10/31/1998 $ 9,689 $10,555 $ 9,532 11/30/1998 $10,078 $10,615 $ 9,864 12/31/1998 $10,085 $10,647 $ 9,852 1/31/1999 $10,130 $10,723 $ 9,916 2/28/1999 $ 9,995 $10,535 $ 9,817 3/31/1999 $10,146 $10,594 $ 9,972 4/30/1999 $10,423 $10,627 $10,186 5/31/1999 $10,179 $10,534 $ 9,982 6/30/1999 $10,197 $10,501 $ 9,994 7/31/1999 $10,126 $10,456 $ 9,966 8/31/1999 $10,035 $10,451 $ 9,898 9/30/1999 $10,055 $10,572 $ 9,944 10/31/1999 $10,096 $10,611 $ 9,974 11/30/1999 $10,186 $10,610 $10,072 12/31/1999 $10,328 $10,559 $10,178 1/31/2000 $10,172 $10,525 $10,094 2/29/2000 $10,291 $10,652 $10,257 3/31/2000 $10,318 $10,792 $10,267 4/30/2000 $10,252 $10,761 $10,151 5/31/2000 $10,121 $10,756 $10,025 6/30/2000 $10,423 $10,980 $10,282 7/31/2000 $10,493 $11,080 $10,321 8/31/2000 $10,660 $11,240 $10,407 9/30/2000 $10,604 $11,311 $10,302 10/31/2000 $10,395 $11,386 $10,102 11/30/2000 $10,186 $11,572 $ 9,954 12/31/2000 $10,635 $11,787 $10,239 1/31/2001 $11,053 $11,979 $10,613 2/28/2001 $11,029 $12,084 $10,626 3/31/2001 $10,858 $12,145 $10,428 4/30/2001 $10,856 $12,094 $10,350 5/31/2001 $10,922 $12,167 $10,426 6/30/2001 $10,839 $12,213 $10,339 7/31/2001 $10,975 $12,486 $10,422 8/31/2001 $11,112 $12,629 $10,564 9/30/2001 $10,664 $12,776 $10,231 10/31/2001 $10,993 $13,044 $10,479 11/30/2001 $11,276 $12,864 $10,608 12/31/2001 $11,238 $12,782 $10,575 1/31/2002 $11,247 $12,886 $10,634 2/28/2002 $11,273 $13,010 $10,660 3/31/2002 $11,398 $12,794 $10,684 4/30/2002 $11,536 $13,042 $10,849 5/31/2002 $11,489 $13,153 $10,877 6/30/2002 $11,004 $13,267 $10,656 7/31/2002 $10,768 $13,427 $10,487 8/31/2002 $11,048 $13,653 $10,706 9/30/2002 $11,038 $13,874 $10,684 10/31/2002 $11,091 $13,811 $10,729 11/30/2002 $11,559 $13,808 $11,016 12/31/2002 $11,783 $14,093 $11,233 1/31/2003 $11,996 $14,105 $11,395 2/28/2003 $12,210 $14,300 $11,574 3/31/2003 $12,376 $14,289 $11,694 4/30/2003 $12,906 $14,407 $12,093 5/31/2003 $13,303 $14,676 $12,387 6/30/2003 $13,460 $14,646 $12,501 7/31/2003 $13,101 $14,154 $12,232 8/31/2003 $13,233 $14,248 $12,358 9/30/2003 $13,723 $14,625 $12,708 10/31/2003 $13,814 $14,489 $12,801 11/30/2003 $14,018 $14,523 $12,945 12/31/2003 $14,420 $14,671 $13,244 1/31/2004 $14,611 $14,789 $13,373 2/29/2004 $14,705 $14,949 $13,406 3/31/2004 $14,799 $15,061 $13,511 4/30/2004 $14,450 $14,669 $13,218 5/31/2004 $14,343 $14,611 $13,097 6/30/2004 $14,468 $14,693 $13,218 7/31/2004 $14,623 $14,839 $13,343 8/31/2004 $14,954 $15,122 $13,605 9/30/2004 $15,154 $15,163 $13,774 10/31/2004 $15,444 $15,290 $14,011 11/30/2004 $15,662 $15,168 $14,191 12/31/2004 $15,896 $15,308 $14,398 1/31/2005 $15,860 $15,404 $14,388 2/28/2005 $16,051 $15,313 $14,485 3/31/2005 $15,695 $15,234 $14,244 4/30/2005 $15,659 $15,440 $14,274 5/31/2005 $15,807 $15,608 $14,408 6/30/2005 $15,933 $15,693 $14,555 7/31/2005 $16,014 $15,550 $14,606 8/31/2005 $16,111 $15,749 $14,744 9/30/2005 $16,020 $15,587 $14,692 10/31/2005 $15,898 $15,464 $14,541 11/30/2005 $16,012 $15,532 $14,621 12/31/2005 $16,175 $15,680 $14,760 1/31/2006 $16,418 $15,680 $14,903 2/28/2006 $16,502 $15,733 $15,006 3/31/2006 $16,440 $15,578 $14,920 4/30/2006 $16,606 $15,550 $15,004 5/31/2006 $16,560 $15,533 $14,935 6/30/2006 $16,498 $15,566 $14,894 7/31/2006 $16,683 $15,777 $15,076 8/31/2006 $16,886 $16,018 $15,281 9/30/2006 $17,023 $16,159 $15,379 10/31/2006 $17,228 $16,266 $15,546 11/30/2006 $17,484 $16,455 $15,749 12/31/2006 $17,526 $16,359 $15,786 1/31/2007 $17,581 $16,352 $15,853 2/28/2007 $17,790 $16,604 $16,054 3/31/2007 $17,897 $16,605 $16,107 4/30/2007 $18,142 $16,695 $16,281 5/31/2007 $18,233 $16,568 $16,296 6/30/2007 $18,097 $16,519 $16,162 7/31/2007 $17,925 $16,657 $16,004 8/31/2007 $18,017 $16,861 $16,077 9/30/2007 $18,500 $16,989 $16,384 10/31/2007 $18,717 $17,141 $16,538 11/30/2007 $18,560 $17,450 $16,480 12/31/2007 $18,600 $17,499 $16,513 1/31/2008 $18,676 $17,793 $16,545 2/29/2008 $18,680 $17,817 $16,477 3/31/2008 $18,702 $17,878 $16,396 4/30/2008 $19,058 $17,841 $16,621
14 | Annual Report Performance Summary (CONTINUED) ENDNOTES BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. HIGH YIELDS REFLECT THE HIGHER CREDIT RISKS ASSOCIATED WITH CERTAIN LOWER-RATED SECURITIES HELD IN THE PORTFOLIO. FLOATING-RATE LOANS AND HIGH YIELD CORPORATE BONDS ARE RATED BELOW INVESTMENT GRADE AND ARE SUBJECT TO GREATER RISK OF DEFAULT, WHICH COULD RESULT IN LOSS OF PRINCIPAL -- A RISK THAT MAY BE HEIGHTENED IN A SLOWING ECONOMY. THE RISKS OF FOREIGN SECURITIES INCLUDE CURRENCY FLUCTUATIONS AND POLITICAL 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 increased the Fund's total returns. Without these reductions, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (4.) 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 April dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 4/30/08. (6.) Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 4/30/08. (7.) Figures are as stated in the Fund's prospectus current as of the date of this report. (8.) 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 +91.04% and +7.71%. (9.) Sources: Lehman Brothers Inc.; Lipper Inc. The LB U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The Lipper 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 12-month period ended 4/30/08, there were 134 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 and other factors had been considered. Annual Report | 15 Your Fund's Expenses As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600/$1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 x $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 16 | Annual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 11/1/07 VALUE 4/30/08 PERIOD* 1/1/07- 4/30/08 - ---------------------------------------- ----------------- -------------- ----------------------- Actual $1,000 $1,018.00 $4.57 Hypothetical (5% return before expenses) $1,000 $1,020.34 $4.57 CLASS B Actual $1,000 $1,015.80 $6.57 Hypothetical (5% return before expenses) $1,000 $1,018.35 $6.57 CLASS C Actual $1,000 $1,015.00 $6.56 Hypothetical (5% return before expenses) $1,000 $1,018.35 $6.57 CLASS R Actual $1,000 $1,015.80 $5.81 Hypothetical (5% return before expenses) $1,000 $1,019.10 $5.82 ADVISOR CLASS Actual $1,000 $1,018.20 $3.26 Hypothetical (5% return before expenses) $1,000 $1,021.63 $3.27
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.91%; B: 1.31%; C: 1.31%; R: 1.16%; and Advisor: 0.65%), multiplied by the average account value over the period, multiplied by 182/366 to reflect the one-half year period. Annual Report | 17 Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30, ---------------------------------------------------------------- CLASS A 2008 2007 2006 2005 2004 - ------------------------------------------------------------- ---------- ---------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year........................... $ 10.48 $ 10.20 $ 10.24 $ 10.09 $ 9.65 ---------- ---------- -------- -------- -------- Income from investment operations(a): Net investment income(b).................................. 0.56 0.53 0.51 0.53 0.56 Net realized and unrealized gains (losses)................ (0.07) 0.35 0.05 0.27 0.54 ---------- ---------- -------- -------- -------- Total from investment operations............................. 0.49 0.88 0.56 0.80 1.10 ---------- ---------- -------- -------- -------- Less distributions from net investment income................ (0.69) (0.60) (0.60) (0.65) (0.66) ---------- ---------- -------- -------- -------- Redemption fees.............................................. --(e) --(e) --(e) --(e) -- ---------- ---------- -------- -------- -------- Net asset value, end of year................................. $ 10.28 $ 10.48 $ 10.20 $ 10.24 $ 10.09 ========== ========== ======== ======== ======== Total return(c).............................................. 4.80% 9.09% 5.69% 8.10% 11.69% RATIOS TO AVERAGE NET ASSETS Expenses before waiver and payments by affiliates............ 0.89% 0.92% 0.91% 0.92% 0.92% Expenses net of waiver and payments by affiliates............ 0.89%(f) 0.92%(f) 0.91%(f) 0.91%(f) 0.92%(f) Net investment income........................................ 5.44% 5.22% 5.05% 5.18% 5.53% SUPPLEMENTAL DATA Net assets, end of year (000's).............................. $2,123,947 $1,521,459 $998,182 $696,198 $446,282 Portfolio turnover rate...................................... 31.71% 42.24% 34.10% 48.57% 66.57% Portfolio turnover rate excluding mortgage dollar rolls(d)... 31.71% 41.50% 33.59% 39.91% 52.35%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) See Note 1(e) regarding mortgage dollar rolls. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. 18 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30, ---------------------------------------------------------------- CLASS B 2008 2007 2006 2005 2004 - ------------------------------------------------------------- ---------- ---------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year........................... $ 10.52 $ 10.24 $ 10.27 $ 10.12 $ 9.67 ---------- ---------- -------- -------- -------- Income from investment operations(a): Net investment income(b).................................. 0.52 0.49 0.47 0.49 0.52 Net realized and unrealized gains (losses)................ (0.07) 0.35 0.06 0.27 0.55 ---------- ---------- -------- -------- -------- Total from investment operations............................. 0.45 0.84 0.53 0.76 1.07 ---------- ---------- -------- -------- -------- Less distributions from net investment income................ (0.65) (0.56) (0.56) (0.61) (0.62) ---------- ---------- -------- -------- -------- Redemption fees.............................................. --(e) --(e) --(e) --(e) -- ---------- ---------- -------- -------- -------- Net asset value, end of year................................. $ 10.32 $ 10.52 $ 10.24 $ 10.27 $ 10.12 ========== ========== ======== ======== ======== Total return(c).............................................. 4.35% 8.62% 5.34% 7.65% 11.33% RATIOS TO AVERAGE NET ASSETS Expenses before waiver and payments by affiliates............ 1.29% 1.32% 1.31% 1.32% 1.32% Expenses net of waiver and payments by affiliates............ 1.29%(f) 1.32%(f) 1.31%(f) 1.31%(f) 1.32%(f) Net investment income........................................ 5.04% 4.82% 4.65% 4.78% 5.13% SUPPLEMENTAL DATA Net assets, end of year (000's).............................. $ 105,620 $ 104,523 $104,477 $110,502 $ 91,974 Portfolio turnover rate...................................... 31.71% 42.24% 34.10% 48.57% 66.57% Portfolio turnover rate excluding mortgage dollar rolls(d)... 31.71% 41.50% 33.59% 39.91% 52.35%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) See Note 1(e) regarding mortgage dollar rolls. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 19 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30, ---------------------------------------------------------------- CLASS C 2008 2007 2006 2005 2004 - ------------------------------------------------------------- ---------- ---------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year........................... $ 10.48 $ 10.20 $ 10.24 $ 10.09 $ 9.64 ---------- ---------- -------- -------- -------- Income from investment operations(a): Net investment income(b).................................. 0.52 0.49 0.47 0.49 0.52 Net realized and unrealized gains (losses)................ (0.08) 0.35 0.05 0.27 0.55 ---------- ---------- -------- -------- -------- Total from investment operations............................. 0.44 0.84 0.52 0.76 1.07 ---------- ---------- -------- -------- -------- Less distributions from net investment income................ (0.65) (0.56) (0.56) 0.61) (0.62) ---------- ---------- -------- -------- -------- Redemption fees.............................................. --(e) --(e) --(e) --(e) -- ---------- ---------- -------- -------- -------- Net asset value, end of year................................. $ 10.27 $ 10.48 $ 10.20 $ 10.24 $ 10.09 ========== ========== ======== ======== ======== Total return(c).............................................. 4.28% 8.67% 5.27% 7.67% 11.36% RATIOS TO AVERAGE NET ASSETS Expenses before waiver and payments by affiliates............ 1.29% 1.32% 1.31% 1.32% 1.32% Expenses net of waiver and payments by affiliates............ 1.29%(f) 1.32%(f) 1.31%(f) 1.31%(f) 1.32%(f) Net investment income........................................ 5.04% 4.82% 4.65% 4.78% 5.13% SUPPLEMENTAL DATA Net assets, end of year (000's).............................. $ 733,071 $ 437,026 $294,412 $213,741 $151,823 Portfolio turnover rate...................................... 31.71% 42.24% 34.10% 48.57% 66.57% Portfolio turnover rate excluding mortgage dollar rolls(d)... 31.71% 41.50% 33.59% 39.91% 52.35%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) See Note 1(e) regarding mortgage dollar rolls. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. 20 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30, ---------------------------------------------------------------- CLASS R 2008 2007 2006 2005 2004 - ------------------------------------------------------------- ---------- ---------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......................... $ 10.46 $ 10.18 $ 10.22 $ 10.07 $ 9.63 ---------- ---------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ................................. 0.53 0.51 0.49 0.51 0.53 Net realized and unrealized gains (losses) ............... (0.08) 0.35 0.05 0.26 0.55 ---------- ---------- -------- -------- -------- Total from investment operations ............................ 0.45 0.86 0.54 0.77 1.08 ---------- ---------- -------- -------- -------- Less distributions from net investment income ............... (0.66) (0.58) (0.58) (0.62) (0.64) ---------- ---------- -------- -------- -------- Redemption fees ............................................. --(e) --(e) --(e) --(e) -- ---------- ---------- -------- -------- -------- Net asset value, end of year ................................ $ 10.25 $ 10.46 $ 10.18 $ 10.22 $ 10.07 ========== ========== ======== ======== ======== Total return(c) ............................................. 4.55% 8.74% 5.44% 7.86% 11.45% RATIOS TO AVERAGE NET ASSETS Expenses before waiver and payments by affiliates ........... 1.14% 1.17% 1.16% 1.17% 1.17% Expenses net of waiver and payments by affiliates ........... 1.14%(f) 1.17%(f) 1.16%(f) 1.16%(f) 1.17%(f) Net investment income ....................................... 5.19% 4.97% 4.80% 4.93% 5.28% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................. $ 108,020 $ 65,527 $ 32,971 $ 17,859 $ 7,324 Portfolio turnover rate ..................................... 31.71% 42.24% 34.10% 48.57% 66.57% Portfolio turnover rate excluding mortgage dollar rolls(d) .. 31.71% 41.50% 33.59% 39.91% 52.35%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (d) See Note 1(e) regarding mortgage dollar rolls. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 21 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30, ---------------------------------------------------------------- ADVISOR CLASS 2008 2007 2006 2005 2004 - ------------------------------------------------------------- ---------- ---------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......................... $ 10.49 $ 10.21 $ 10.24 $ 10.09 $ 9.65 ---------- ---------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ................................. 0.58 0.56 0.54 0.56 0.58 Net realized and unrealized gains (losses) ............... (0.07) 0.35 0.06 0.26 0.54 ---------- ---------- -------- -------- -------- Total from investment operations ............................ 0.51 0.91 0.60 0.82 1.12 ---------- ---------- -------- -------- -------- Less distributions from net investment income ............... (0.72) (0.63) (0.63) (0.67) (0.68) ---------- ---------- -------- -------- -------- Redemption fees ............................................. --(d) --(d) --(d) --(d) -- ---------- ---------- -------- -------- -------- Net asset value, end of year ................................ $ 10.28 $ 10.49 $ 10.21 $ 10.24 $ 10.09 ========== ========== ======== ======== ======== Total return ................................................ 5.05% 9.25% 6.05% 8.37% 11.97% RATIOS TO AVERAGE NET ASSETS Expenses before waiver and payments by affiliates ........... 0.64% 0.67% 0.66% 0.67% 0.67% Expenses net of waiver and payments by affiliates ........... 0.64%(e) 0.67%(e) 0.66%(e) 0.66%(e) 0.67%(e) Net investment income ....................................... 5.69% 5.47% 5.30% 5.43% 5.78% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................. $ 111,346 $ 66,745 $ 57,367 $ 60,489 $ 39,784 Portfolio turnover rate ..................................... 31.71% 42.24% 34.10% 48.57% 66.57% Portfolio turnover rate excluding mortgage dollar rolls(c) .. 31.71% 41.50% 33.59% 39.91% 52.35%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) See Note 1(e) regarding mortgage dollar rolls. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. 22 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION SHARES VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS 95.8% COMMON STOCKS 0.0%(a) AUTOMOBILES & COMPONENTS 0.0%(a) (b,c,d) Cambridge Industries Liquidating Trust Interest ................. United States 516,372 $ 3,873 -------------- COMMERCIAL SERVICES & SUPPLIES 0.0% (b,c,d) VS Holdings Inc ................................................. United States 64,666 -- -------------- TOTAL COMMON STOCKS (COST $64,666) .............................. 3,873 -------------- CONVERTIBLE PREFERRED STOCKS 1.6% BANKS 0.4% Wachovia Corp., 7.50%, cvt. pfd., L ............................. United States 5,800 6,780,490 Washington Mutual Inc., 7.75%, cvt. pfd., R ..................... United States 7,500 6,450,825 -------------- 13,231,315 -------------- DIVERSIFIED FINANCIALS 0.7% Affiliated Managers Group Inc., 5.10%, cvt. pfd. ................ United States 161,000 7,013,563 CIT Group Inc., 7.75%, cvt. pfd., Z ............................. United States 380,000 4,446,000 E*TRADE Financial Corp., 6.125%, cvt. pfd. ...................... United States 400,000 2,300,000 Lehman Brothers Holdings Inc., 7.25%, cvt. pfd., P .............. United States 6,370 7,796,880 -------------- 21,556,443 -------------- MATERIALS 0.3% Freeport-McMoRan Copper & Gold Inc., 6.75%, cvt. pfd. ........... United States 50,000 8,147,000 -------------- PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.2% Schering-Plough Corp., 6.00%, cvt. pfd. ......................... United States 39,000 7,024,430 -------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $60,053,670)............ 49,959,188 -------------- PREFERRED STOCKS0.3% FINANCIALS 0.3% FHLMC, 8.375%, pfd. ............................................. United States 276,000 7,065,600 JPMorgan Chase & Co., pfd., junior sub. note, 1, 7.90%........... United States 3,900,000 3,985,773 -------------- TOTAL PREFERRED STOCKS (COST $10,806,500) ....................... 11,051,373 -------------- PRINCIPAL AMOUNT(e) --------------------- (f,g) SENIOR FLOATING RATE INTERESTS 16.1% AUTOMOBILES & COMPONENTS 0.3% Allison Transmission, Term Loan B, 5.48% - 5.74%, 8/07/14 ....... United States 6,467,500 6,078,874 Key Safety Systems Inc., Term Loan B, 4.92% - 5.15%, 3/10/14 .... United States 579,150 477,799 TRW Automotive Inc., Tranche B-1 Term Loan, 4.25% - 4.688%, 2/09/14 .............................................. United States 4,418,869 4,289,984 -------------- 10,846,657 -------------- CAPITAL GOODS 0.7% Amsted Industries Inc., Delayed Draw, 5.085% - 6.84%, 4/05/13 ........................ United States 2,116,243 2,084,499 Term Loan B, 4.67% - 5.014%, 4/05/13 ......................... United States 628,365 618,940 Bucyrus International Inc., Tranche B Dollar Term Loan, 4.195% - 6.413%, 5/04/14 ..................................... United States 580,613 571,903 EnerSys Capital Inc., New 2007 Term Loans, 4.349% - 4.878%, 3/17/11 ...................................................... United States 3,707,215 3,480,148
Annual Report | 23 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) (f,g) SENIOR FLOATING RATE INTERESTS (CONTINUED) CAPITAL GOODS (CONTINUED) Hawker Beechcraft Inc., Synthetic L/C, 4.696%, 3/26/14 ............................... United States 241,060 $ 230,439 Term Loan B, 4.696%, 3/26/14 ................................. United States 4,136,592 3,954,326 Oshkosh Truck Corp., Term Loan B, 4.76%, 12/06/13 ............... United States 9,940,481 9,545,625 RBS Global Inc. (Rexnord Corp.), Term Loan, 5.099% - 5.318%, 7/22/13 ...................................................... United States 2,700,000 2,531,250 -------------- 23,017,130 -------------- COMMERCIAL SERVICES & SUPPLIES 1.3% Affinion Group Inc., Term Loan B, 5.395% - 5.57%, 10/17/12 ...... United States 4,538,544 4,288,924 (h) Allied Waste North America Inc., Credit Link, 4.50%, 3/28/14 .................................. United States 2,378,341 2,301,584 Term Loan B, 4.08% - 4.59%, 3/28/14 .......................... United States 3,955,776 3,828,112 (h) ARAMARK Corp., Synthetic L/C, 5.198%, 1/26/14 ............................... United States 574,664 551,893 Term Loan B, 4.571%, 1/26/14 ................................. United States 8,910,330 8,557,258 Nielsen Finance LLC (VNU Inc.), Dollar Term Loan, 5.346%, 8/09/13 ...................................................... United States 14,268,666 13,531,446 West Corp., Term Loan B-2, 5.238% - 5.465%, 10/24/13 ............ United States 9,596,725 8,796,330 -------------- 41,855,547 -------------- CONSUMER DURABLES & APPAREL 0.5% Jarden Corp., Term Loan B1, 4.446%, 1/24/12 ................................ United States 2,883,110 2,748,766 Term Loan B2, 4.446%, 1/24/12 ................................ United States 5,294,695 5,047,978 Jostens IH Corp. (Visant Holding Corp.), Term Loan C, 6.717%, 12/21/11 ..................................................... United States 3,158,727 3,042,906 The William Carter Co., Term Loan B, 4.384% - 4.399%, 7/14/12 ...................................................... United States 6,317,184 6,032,911 -------------- 16,872,561 -------------- CONSUMER SERVICES 1.6% Avis Budget Car Rental LLC, Term Loan, 4.15%, 4/19/12 ........... United States 5,611,921 5,134,908 Education Management LLC, Term Loan C, 4.50%, 6/01/13 ........... United States 7,068,749 6,322,113 Green Valley Ranch Gaming LLC, Term Loan B, 4.671% - 5.085%, 2/16/14 ...................................................... United States 615,095 495,152 Hertz Corp., Credit Link, 2.599%, 12/21/12 ................................ United States 484,444 465,342 Term Loan B, 4.22% - 4.23%, 12/21/12 ......................... United States 2,679,147 2,573,503 Laureate Education Inc., Closing Date Term Loan, 5.966%, 8/17/14 ...................................................... United States 3,772,335 3,493,182 OSI Restaurant Partners LLC (Outback), Pre-Funded Revolving Credit, 2.67%, 6/14/13 .................. United States 714,727 623,897 Term Loan B, 5.00%, 6/14/14 .................................. United States 8,982,150 7,840,671 Penn National Gaming Inc., Term Loan B, 4.61% - 6.60%, 10/03/12 ..................................................... United States 7,129,539 6,911,689
24 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) (f,g) SENIOR FLOATING RATE INTERESTS (CONTINUED) CONSUMER SERVICES (CONTINUED) (h) VML U.S. Finance LLC (Venetian Macau), Delayed Draw, 4.95%, 5/25/12 ................................. Macau 6,137,883 $ 5,865,901 New Project Term Loans, 4.95%, 5/25/13 ....................... Macau 2,537,661 2,425,212 Term Loan B, 4.95%, 5/24/13 .................................. Macau 10,559,456 10,091,545 -------------- 52,243,115 -------------- DIVERSIFIED FINANCIALS 0.6% Nuveen Investments Inc., Term Loan B, 5.863% - 5.886%, 11/13/14 ..................................................... United States 12,977,264 12,395,311 TD Ameritrade Holding Corp., Term Loan B, 4.37%, 12/31/12 ....... United States 6,831,733 6,685,951 -------------- 19,081,262 -------------- ENERGY 0.6% Citgo Petroleum Corp., Term Loan B, 4.114%, 11/15/12 ............ United States 6,494,110 6,104,463 Dresser Inc., Term Loan B, 5.113% - 5.315%, 5/04/14 ............. United States 7,896,208 7,633,003 Niska Gas Storage Canada ULC (C/R Gas), Asset Sale Term Loan, 4.55%, 5/13/11 ......................... Canada 203,418 195,281 Canadian Term Loan, 4.534%, 5/12/13 .......................... Canada 2,781,516 2,674,892 Niska Gas Storage U.S. LLC (C/R Gas), Delayed Draw, 4.60%, 5/12/13 ................................. United States 304,825 292,632 U.S. Term Loan, 4.589%, 5/12/13 .............................. United States 450,000 432,750 -------------- 17,333,021 -------------- FOOD, BEVERAGE & TOBACCO 0.7% CBRL Group (Cracker Barrel), Term Loan B1, 4.62%, 4/27/13 ................................. United States 6,012,416 5,696,764 Term Loan B2 (Delayed Draw), 4.62%, 4/27/13 .................. United States 199,287 188,824 Constellation Brands Inc., Term Loan B, 4.188% - 6.438%, 6/05/13 ...................................................... United States 6,775,200 6,623,971 Dean Foods Co., Term Loan B, 4.45% - 4.62%, 4/02/14 ............. United States 8,520,451 8,145,313 -------------- 20,654,872 -------------- HEALTH CARE EQUIPMENT & SERVICES 1.6% Bausch and Lomb Inc., (i) Delayed Draw Term Loan, 5.946%, 4/28/15 .................. United States 230,000 227,472 Parent Term Loan B, 5.946%, 4/28/15 ...................... United States 1,835,400 1,815,229 (h) Community Health Systems Inc., Term Loan, 5.335%, 7/25/14 ....... United States 14,963,394 14,356,225 (h) DaVita Inc., Term Loan B-1, 4.20% - 4.60%, 10/05/12 ............. United States 6,325,000 6,068,407 DJO Finance LLC, Term Loan B, 5.696%, 5/20/14 ................... United States 4,568,550 4,460,047 Fresenius Medical Care Holdings Inc., Term Loan B, 3.954% - 6.205%, 3/31/13 ..................................... United States 6,978,232 6,761,251 HCA Inc., (h) Term Loan A-1, 4.196%, 11/16/12 .......................... United States 5,568,543 5,268,075 Term Loan B-1, 4.946%, 11/18/13 .......................... United States 8,437,791 8,026,853 LifePoint Hospitals Inc., Term Loan B, 4.71%, 4/15/12 ........... United States 2,812,042 2,706,590 -------------- 49,690,149 --------------
Annual Report | 25 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) (f,g) SENIOR FLOATING RATE INTERESTS (CONTINUED) MATERIALS 1.5% Celanese U.S. Holdings LLC, Dollar Term Loan, 4.188%, 4/02/14 ... United States 7,301,250 $ 7,068,523 Domtar Corp., Term Loan, 4.175%, 3/07/14 ........................ United States 6,917,289 6,657,275 Georgia-Pacific Corp., Additional Term Loan, 4.446% - 4.74%, 12/20/12 ........... United States 2,036,455 1,956,587 (h) Term Loan B, 4.446% - 4.835%, 12/20/12 ................... United States 9,724,690 9,343,298 Hexion Specialty Chemicals BV, Term Loan C-2, 5.00%, 5/03/13 .... Netherlands 1,203,417 1,137,605 Hexion Specialty Chemicals Inc., Term Loan C-1, 4.938%, 5/03/13 ...................................................... United States 5,539,867 5,236,908 Ineos U.S. Finance LLC, Term Loan B2, 4.885%, 12/16/13 ............................... United States 1,939,616 1,814,148 Term Loan C2, 5.385%, 12/23/14 ............................... United States 1,939,616 1,814,148 Nalco Co., Term Loan B, 4.477% - 6.48%, 11/04/10 ................ United States 4,318,089 4,262,766 (h) Rockwood Specialties Group Inc., Term Loan E, 4.399%, 7/30/12 ... United States 7,567,284 7,219,401 -------------- 46,510,659 -------------- MEDIA 2.6% Citadel Broadcasting Corp., Term Loan B, 4.305% - 4.495%, 6/12/14 ...................................................... United States 6,191,032 5,339,765 CSC Holdings Inc. (Cablevision), Incremental Term Loan, 4.477%, 3/29/13 .............................................. United States 8,254,846 7,971,085 Dex Media West LLC, Term Loan B2, 4.20% - 4.59%, 3/09/10 ........ United States 3,360,536 3,283,244 DIRECTV Holdings LLC, Term Loan B, 4.381%, 4/13/13 .............. United States 4,165,144 4,109,610 Idearc Inc., Term Loan A, 4.20% - 4.36%, 11/17/13 ......................... United States 2,100,000 1,816,876 Term Loan B, 4.70% - 4.86%, 11/17/14 ......................... United States 6,118,580 5,063,125 Insight Midwest Holdings, Term Loan B, 4.69%, 4/02/14 ........... United States 4,549,500 4,337,461 MCC Iowa, Term Loan D-1, 4.46% - 4.65%, 1/31/15 ........................ United States 3,548,123 3,237,662 Term Loan D-2 (Delayed Draw), 4.46% - 4.65%, 1/31/15 ......... United States 1,731,334 1,579,843 Mediacom LLC, Term Loan C, 4.46% - 4.65%, 1/31/15 ............... United States 3,052,624 2,785,519 National CineMedia LLC, Term Loan, 4.62%, 2/13/15 ............... United States 2,939,453 2,739,991 R.H. Donnelley Inc., Term Loan D-2, 4.10% - 4.60%, 6/30/11 ...... United States 4,924,305 4,678,858 (h) Regal Cinemas Corp., Term Loan, 4.196%, 10/27/13 ................ United States 10,264,998 9,770,995 Tribune Co., Term Loan B, 5.542%, 5/16/14 ....................... United States 8,585,125 6,385,187 Univision Communications Inc., Initial Term Loan B, 5.113% - 5.149%, 9/29/14 ..................................... United States 13,100,000 11,065,413 UPC Financing Partnership, Term Loan N, 4.459%, 12/31/14 ........ Netherlands 9,230,000 8,702,164 -------------- 82,866,798 -------------- REAL ESTATE 0.4% (h) Capital Automotive, Term Loan B, 4.46%, 12/15/10 ................ United States 8,215,918 7,968,159 Macerich Co., Term Loan B, 4.25%, 4/25/10 ....................... United States 3,363,000 3,087,739 -------------- 11,055,898 --------------
26 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) (f,g) SENIOR FLOATING RATE INTERESTS (CONTINUED) SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.1% Fairchild Semiconductor Corp., Initial Term Loan, 4.196%, 6/26/13 ....................................................... United States 2,969,195 $ 2,813,312 -------------- SOFTWARE & SERVICES 1.2% Affiliated Computer Services Inc., Additional Term Loan, 4.727% - 4.863%, 3/20/13 ............... United States 6,439,543 6,223,715 Term Loan B, 4.886%, 3/20/13 ................................. United States 598,230 578,180 Dealer Computer Services Inc. (Reynolds & Reynolds), First Lien Term Loan, 4.886%, 10/26/12 .................................. United States 6,687,281 6,403,072 (h) First Data Corp., Term Loan B-2, 5.349% - 5.446%, 9/24/14 ....... United States 18,081,328 17,036,517 (h) SunGard Data Systems Inc., New U.S. Term Loan, 4.878%, 2/28/14 .. United States 9,126,729 8,667,280 -------------- 38,908,764 -------------- TECHNOLOGY HARDWARE & EQUIPMENT 0.2% Flextronics International USA Inc., Term Loan A, 4.934% - 4.963%, 10/01/14 ....................... United States 5,961,810 5,549,450 Term Loan A-1, 4.963%, 10/01/14 .............................. United States 1,713,164 1,594,669 -------------- 7,144,119 -------------- TELECOMMUNICATION SERVICES 1.3% (h) Alltel Communications Inc., Term Loan B-1, 6.75%, 6/30/15 ................................ United States 350,000 321,271 Term Loan B-3, 5.466%, 5/18/15 ............................... United States 20,239,561 18,638,673 (h) Intelsat Subsidiary Holding Co. Ltd., Unfunded Bridge Loan, 5.00%, 1/15/13 ............................................... Bermuda 8,000,000 7,372,000 (h) Wind Telecomunicazioni SpA, Term Loan B-2, 6.875%, 9/30/13 ............................... Italy 2,750,000 2,682,188 Term Loan C-2, 7.375%, 9/30/14 ............................... Italy 2,750,000 2,704,927 Windstream Corp., Tranche B-1, 4.22% - 5.50%, 7/17/13 ........... United States 10,726,877 10,491,272 -------------- 42,210,331 -------------- UTILITIES 0.9% Dynegy Holdings Inc., Term L/C Facility, 4.363%, 4/02/13 ........................... United States 5,816,489 5,491,737 Term Loan B, 4.363%, 4/02/13 ................................. United States 207,468 195,885 (h) NRG Energy Inc., Credit Link, 2.596%, 2/01/13 ................................. United States 2,110,136 2,029,160 Term Loan, 4.196%, 2/01/13 ................................... United States 4,320,550 4,154,749 Texas Competitive Electric Holdings Co. LLC, Term Loan B-2, 6.478% - 6.596%, 10/10/14 ..................... United States 9,950,000 9,545,781 Term Loan B-3, 6.478% - 6.596%, 10/10/14 ..................... United States 7,780,451 7,459,025 -------------- 28,876,337 -------------- TOTAL SENIOR FLOATING RATE INTERESTS (COST $528,497,385) 511,980,532 --------------
Annual Report | 27 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS 32.1% AUTOMOBILES & COMPONENTS 0.8% (j) Allison Transmission Inc., senior note, 144A, 11.00%, 11/01/15 .. United States 3,800,000 $ 3,752,500 Ford Motor Credit Co. LLC, senior note, 5.80%, 1/12/09 ............................................... United States 6,000,000 5,867,808 9.875%, 8/10/11 .............................................. United States 9,500,000 9,196,390 (j) TRW Automotive Inc., senior note, 144A, 7.25%, 3/15/17 .......... United States 7,500,000 7,340,625 -------------- 26,157,323 -------------- BANKS 1.4% (k) Bank of America Corp., pfd., sub. bond, M, 8.125%, Perpetual .... United States 14,000,000 14,325,220 (f) Citigroup Capital XXI, pfd., junior sub. bond, FRN, 8.30%, 12/21/77 ..................................................... United States 12,000,000 12,293,592 (j) ICICI Bank Ltd., 144A, 6.625%, 10/03/12 ......................... India 7,000,000 6,977,838 UBS AG Stamford, senior note, 5.875%, 12/20/17 .................. United States 10,000,000 10,222,470 -------------- 43,819,120 -------------- CAPITAL GOODS 1.9% Commercial Vehicle Group Inc., senior note, 8.00%, 7/01/13 ...... United States 2,600,000 2,242,500 DRS Technologies Inc., senior sub. note, 6.875%, 11/01/13 ............................................. United States 2,500,000 2,493,750 7.625%, 2/01/18 .............................................. United States 5,000,000 5,125,000 Greenbrier Cos. Inc., senior note, 8.375%, 5/15/15 .............. United States 6,000,000 5,760,000 L-3 Communications Corp., senior sub. note, 5.875%, 1/15/15 .............................................. United States 4,500,000 4,387,500 6.375%, 10/15/15 ............................................. United States 2,000,000 1,987,500 Nortek Inc., senior sub. note, 8.50%, 9/01/14 ................... United States 7,100,000 5,236,250 RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 ......... United States 8,000,000 8,040,000 RSC Equipment Rental Inc., senior note, 9.50%, 12/01/14 ......... United States 7,600,000 6,840,000 Terex Corp., senior sub. note, 8.00%, 11/15/17 .................. United States 7,500,000 7,706,250 TransDigm Inc., senior sub. note, 7.75%, 7/15/14 ................ United States 7,000,000 7,192,500 United Rentals North America Inc., senior sub. note, 7.75%, 11/15/13 ..................................................... United States 2,800,000 2,415,000 -------------- 59,426,250 -------------- COMMERCIAL SERVICES & SUPPLIES 0.9% Allied Waste North America Inc., senior secured note, 6.875%, 6/01/17 ...................................................... United States 6,500,000 6,532,500 ARAMARK Corp., senior note, 8.50%, 2/01/15 ...................... United States 7,500,000 7,856,250 (j) Ceva Group PLC, senior note, 144A, 10.00%, 9/01/14 .............. United Kingdom 7,000,000 7,245,000 JohnsonDiversey Holdings Inc., senior disc. note, 10.67%, 5/15/13 ...................................................... United States 2,000,000 2,000,000 JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 ...... United States 4,000,000 4,060,000 -------------- 27,693,750 -------------- CONSUMER DURABLES & APPAREL 0.9% D.R. Horton Inc., senior note, 6.50%, 4/15/16 ................... United States 7,500,000 6,900,000 Jarden Corp., senior sub. note, 7.50%, 5/01/17 .................. United States 8,000,000 7,400,000 Jostens IH Corp., senior sub. note, 7.625%, 10/01/12 ............ United States 7,500,000 7,500,000
28 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) CONSUMER DURABLES & APPAREL (CONTINUED) KB Home, senior note, 6.25%, 6/15/15 ............................................... United States 3,900,000 $ 3,529,500 7.25%, 6/15/18 ............................................... United States 3,100,000 2,883,000 -------------- 28,212,500 -------------- CONSUMER SERVICES 1.2% (j) Fontainebleau Las Vegas, 144A, 10.25%, 6/15/15 .................. United States 6,500,000 4,696,250 Harrah's Operating Co. Inc., senior note, 6.50%, 6/01/16 ........ United States 3,300,000 1,930,500 MGM MIRAGE, senior note, 6.625%, 7/15/15 .............................................. United States 10,000,000 8,775,000 7.50%, 6/01/16 ............................................... United States 1,000,000 910,000 (j) Outback Steakhouse Inc., senior note, 144A, 10.00%, 6/15/15 ..... United States 5,000,000 3,800,000 Pinnacle Entertainment Inc., senior sub. note, 8.25%, 3/15/12 ............................................... United States 600,000 600,000 8.75%, 10/01/13 .............................................. United States 4,200,000 4,284,000 Royal Caribbean Cruises Ltd., senior deb., 7.25%, 3/15/18 ....... United States 8,000,000 7,280,000 Station Casinos Inc., senior note, 6.00%, 4/01/12 .................................. United States 1,200,000 1,018,500 senior sub. note, 6.50%, 2/01/14 ............................. United States 1,000,000 660,000 senior sub. note, 6.875%, 3/01/16 ............................ United States 6,800,000 4,403,000 -------------- 38,357,250 -------------- DIVERSIFIED FINANCIALS 3.7% American Express Co., senior note, 7.00%, 3/19/18 ............... United States 8,000,000 8,627,040 (j) Capmark Financial Group Inc., senior note, 144A, 6.30%, 5/10/17 ...................................................... United States 5,000,000 3,645,860 CIT Group Funding Co. of Canada, senior note, 4.65%, 7/01/10 ...................................................... United States 3,400,000 2,940,194 CIT Group Inc., senior note, 7.625%, 11/30/12 ................... United States 4,500,000 4,203,077 General Electric Capital Corp., senior note, A, 8.50%, 4/06/18 .. United States 170,000,000 MXN 16,062,619 GMAC LLC, 7.25%, 3/02/11 ............................................... United States 4,500,000 3,817,827 6.875%, 9/15/11 .............................................. United States 7,000,000 5,836,579 6.875%, 8/28/12 .............................................. United States 4,000,000 3,177,252 The Goldman Sachs Group Inc., sub. note, 6.75%, 10/01/37 ........ United States 12,500,000 12,302,775 JPMorgan Chase Capital XXII, sub. bond, 6.45%, 2/02/37 .......... United States 14,000,000 12,591,628 Lehman Brothers Holdings Inc., sub. note, 6.50%, 7/19/17 ........ United States 14,000,000 13,785,758 Merrill Lynch & Co. Inc., 5.45%, 2/05/13 ............................................... United States 2,000,000 1,948,692 6.875%, 4/25/18 .............................................. United States 1,000,000 1,010,688 senior note, 6.40%, 8/28/17 .................................. United States 12,000,000 12,016,500 Morgan Stanley, senior note, 6.625%, 4/01/18 ................................. United States 2,000,000 2,078,906 sub. note, 4.75%, 4/01/14 .................................... United States 12,000,000 11,280,552 Residential Capital LLC, senior note, 6.50%, 6/01/12 ............ United States 6,500,000 3,347,500 -------------- 118,673,447 --------------
Annual Report | 29 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) ENERGY 3.0% Canadian Natural Resources Ltd., 5.90%, 2/01/18.................. Canada 7,500,000 $ 7,641,577 Chesapeake Energy Corp., senior note, 7.625%, 7/15/13............................................... United States 1,500,000 1,578,750 6.625%, 1/15/16............................................... United States 3,500,000 3,517,500 6.25%, 1/15/18................................................ United States 6,000,000 5,880,000 Compagnie Generale de Geophysique-Veritas, senior note, 7.50%, 5/15/15................................................ France 5,700,000 5,913,750 7.75%, 5/15/17................................................ France 1,800,000 1,867,500 Copano Energy LLC, senior note, 8.125%, 3/01/16.................. United States 7,000,000 7,315,000 El Paso Corp., senior note, 6.875%, 6/15/14...................... United States 7,500,000 7,817,310 Mariner Energy Inc., senior note, 7.50%, 4/15/13................. United States 7,500,000 7,443,750 Markwest Energy Partners LP, senior note, 6.875%, 11/01/14.......................................... United States 7,000,000 6,790,000 (j) 144A, 8.75%, 4/15/18...................................... United States 800,000 834,000 Peabody Energy Corp., senior note, 7.375%, 11/01/16.............................................. United States 3,500,000 3,692,500 B, 6.875%, 3/15/13............................................ United States 3,600,000 3,690,000 (j) Petroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14........ Switzerland 7,500,000 7,106,250 Tesoro Corp., senior note, 6.25%, 11/01/12............................................... United States 500,000 480,000 6.50%, 6/01/17................................................ United States 8,000,000 7,380,000 Weatherford International Ltd., senior note, 6.00%, 3/15/18...... United States 8,000,000 8,236,512 The Williams Cos. Inc., senior note, 7.625%, 7/15/19............................................... United States 3,000,000 3,255,000 7.875%, 9/01/21............................................... United States 3,400,000 3,731,500 8.75%, 3/15/32................................................ United States 1,300,000 1,543,750 -------------- 95,714,649 -------------- FOOD & STAPLES RETAILING 0.3% The Kroger Co., 6.15%, 1/15/20................................... United States 7,500,000 7,833,360 -------------- FOOD, BEVERAGE & TOBACCO 0.9% (j) Cargill Inc., 144A, 5.20%, 1/22/13................................................ United States 500,000 499,856 6.00%, 11/27/17............................................... United States 7,000,000 6,987,085 Dean Foods Inc., senior note, 7.00%, 6/01/16..................... United States 5,100,000 4,794,000 Dole Food Co. Inc., senior note, 8.625%, 5/01/09............................................... United States 200,000 194,500 7.25%, 6/15/10................................................ United States 200,000 180,000 Reynolds American Inc., senior secured note, 7.625%, 6/01/16..... United States 8,500,000 9,053,665 Smithfield Foods Inc., senior note, 7.75%, 5/15/13....................................................... United States 4,200,000 4,231,500 7/01/17....................................................... United States 3,800,000 3,790,500 -------------- 29,731,106 --------------
30 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) HEALTH CARE EQUIPMENT & SERVICES 2.4% Coventry Health Care Inc., senior note, 6.30%, 8/15/14 ............................................... United States 4,700,000 $ 4,595,533 5.95%, 3/15/17 ............................................... United States 2,800,000 2,569,033 DaVita Inc., senior sub. note, 7.25%, 3/15/15 United States 8,000,000 8,060,000 FMC Finance III SA, senior note, 6.875%, 7/15/17 ................ Germany 7,500,000 7,593,750 HCA Inc., senior note, 6.50%, 2/15/16 .................................. United States 3,000,000 2,700,000 senior secured note, 9.125%, 11/15/14 ........................ United States 10,000,000 10,625,000 Medco Health Solutions Inc., 7.125%, 3/15/18 .................... United States 6,000,000 6,311,664 Quest Diagnostics Inc., 6.40%, 7/01/17 .......................... United States 6,900,000 7,006,626 Tenet Healthcare Corp., senior note, 6.375%, 12/01/11 ............................................. United States 5,000,000 4,725,000 9.875%, 7/01/14 .............................................. United States 2,500,000 2,568,750 (f,l) U.S. Oncology Holdings Inc., senior note, FRN, PIK, 7.949%, 3/15/12 ...................................................... United States 7,902,000 6,400,620 (l) United Surgical Partners International Inc., senior sub. note, PIK, 9.25%, 5/01/17 .................................... United States 6,650,000 6,467,125 Vanguard Health Holding Co. II LLC, senior sub. note, 9.00%, 10/01/14 ..................................................... United States 7,000,000 7,157,500 -------------- 76,780,601 -------------- INSURANCE 0.3% (f,j) MetLife Capital Trust X, secured bond, 144A, FRN, 9.25%, 4/08/68 ...................................................... United States 1,900,000 2,149,195 (f) MetLife Inc., junior sub. note, FRN, 6.40%, 12/15/66 ............ United States 8,000,000 7,227,800 -------------- 9,376,995 -------------- MATERIALS 2.5% Crown Americas Inc., senior note, 7.75%, 11/15/15 ............... United States 7,500,000 7,950,000 Freeport-McMoRan Copper & Gold Inc., senior note, 8.375%, 4/01/17 ...................................................... United States 7,500,000 8,306,250 Huntsman International LLC, senior sub. note, 7.875%, 11/15/14 .. United States 6,000,000 6,360,000 (j) Ineos Group Holdings PLC, 144A, 8.50%, 2/15/16 .................. United Kingdom 8,000,000 6,520,000 (j) MacDermid Inc., senior sub. note, 144A, 9.50%, 4/15/17 .......... United States 7,000,000 6,720,000 Nalco Co., senior sub. note, 8.875%, 11/15/13 ................... United States 7,500,000 7,931,250 (j) NewPage Corp., senior secured note, 144A, 10.00%, 5/01/12 ....... United States 7,500,000 8,043,750 Novelis Inc., senior note, 7.25%, 2/15/15 ....................... Canada 8,000,000 7,360,000 Owens-Brockway Glass Container Inc., senior note, 6.75%, 12/01/14 ..................................................... United States 7,000,000 7,140,000 RPM International Inc., 6.50%, 2/15/18 .......................... United States 7,500,000 7,485,757 Smurfit Kappa Funding PLC, senior sub. note, 7.75%, 4/01/15 ..... Ireland 7,500,000 6,843,750 -------------- 80,660,757 --------------
Annual Report | 31 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) MEDIA 3.9% (j) British Sky Broadcasting Group PLC, senior note, 144A, 6.10%, 2/15/18 ...................................................... United Kingdom 8,000,000 $ 8,161,984 Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 ....... United States 400,000 400,000 CanWest Media Inc., senior sub. note, 8.00%, 9/15/12 ............ Canada 7,500,000 7,218,750 CCH I LLC, senior secured note, 11.00%, 10/01/15 ................ United States 4,000,000 3,130,000 CCH II LLC, senior note, 10.25%, 9/15/10 ........................ United States 9,000,000 8,707,500 Comcast Corp., senior note, 6.30%, 11/15/17 ..................... United States 7,500,000 7,813,725 CSC Holdings Inc., senior deb., 7.625%, 7/15/18 ................................. United States 6,500,000 6,353,750 senior note, 6.75%, 4/15/12 .................................. United States 600,000 591,000 Dex Media Finance/West, senior sub. note, 9.875%, 8/15/13 ....... United States 4,000,000 3,780,000 Dish Network Corp., senior note, 6.375%, 10/01/11 ............................................. United States 5,500,000 5,486,250 7.125%, 2/01/16 .............................................. United States 500,000 493,750 Idearc Inc., senior note, 8.00%, 11/15/16 ....................... United States 9,000,000 5,895,000 Lamar Media Corp., senior sub. note, 7.25%, 1/01/13 ............................................... United States 6,500,000 6,467,500 6.625%, 8/15/15 .............................................. United States 1,500,000 1,421,250 Liberty Media Corp., senior note, 5.70%, 5/15/13 ................ United States 8,000,000 7,204,168 LIN Television Corp., senior sub. note, 6.50%, 5/15/13 .......... United States 6,000,000 5,805,000 Quebecor Media Inc., 7.75%, 3/15/16 ............................................... Canada 1,000,000 967,500 senior note, 7.75%, 3/15/16 .................................. Canada 7,000,000 6,772,500 R.H. Donnelley Corp., senior discount note, A-1, 6.875%, 1/15/13 ............... United States 100,000 64,500 senior discount note, A-2, 6.875%, 1/15/13 ............... United States 200,000 129,000 senior note, A-3, 8.875%, 1/15/16 ........................ United States 7,500,000 4,809,375 (j) senior note, 144A, 8.875%, 10/15/17 ...................... United States 200,000 130,000 Radio One Inc., senior sub. note, 6.375%, 2/15/13 ............... United States 6,500,000 4,956,250 (j) Rainbow National Services LLC, senior sub. deb., 144A, 10.375%, 9/01/14 ............................................. United States 3,000,000 3,240,000 Time Warner Inc., 5.875%, 11/15/16 .............................. United States 9,000,000 8,794,359 (j,l) Univision Communications Inc., senior note, 144A, PIK, 9.75%, 3/15/15 ...................................................... United States 8,500,000 6,162,500 Viacom Inc., senior note, 6.875%, 4/30/36 ....................... United States 8,000,000 8,044,536 -------------- 123,000,147 -------------- PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.2% Schering-Plough Corp., senior note, 6.00%, 9/15/17 .............. United States 6,000,000 6,074,862 -------------- REAL ESTATE 0.6% Forest City Enterprises Inc., senior note, 7.625%, 6/01/15 ...... United States 5,000,000 4,675,000 Host Hotels & Resorts LP, senior note, 6.875%, 11/01/14 ......... United States 1,000,000 990,000 Host Marriott LP, senior note, K, 7.125%, 11/01/13 .......................................... United States 6,000,000 6,007,500 M, 7.00%, 8/15/12 ............................................ United States 2,000,000 2,007,500 (i) Star Financial Inc., senior note, 5.65%, 9/15/11 ................ United States 7,500,000 6,529,793 -------------- 20,209,793 --------------
32 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) RETAILING 0.5% Dollar General Corp., senior note, 10.625%, 7/15/15 ............. United States 7,500,000 $ 7,500,000 Michaels Stores Inc., senior note, 10.00%, 11/01/14 ............. United States 8,000,000 7,800,000 -------------- 15,300,000 -------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.2% Freescale Semiconductor Inc., senior note, 8.875%, 12/15/14 ..................................................... United States 7,000,000 6,195,000 SOFTWARE & SERVICES 0.7% Iron Mountain Inc., senior sub. note, 8.75%, 7/15/18 ............ United States 7,300,000 7,811,000 SunGard Data Systems Inc., senior note, 9.125%, 8/15/13 ................................. United States 5,000,000 5,250,000 senior sub. note, 10.25%, 8/15/15 ............................ United States 7,000,000 7,472,500 -------------- 20,533,500 -------------- TECHNOLOGY HARDWARE & EQUIPMENT 0.3% Celestica Inc., senior sub. note, 7.625%, 7/01/13 ............... Canada 1,400,000 1,379,000 Sanmina-SCI Corp., (f,j) senior note, 144A, FRN, 5.55%, 6/15/14 ................. United States 2,000,000 1,855,000 senior sub. note, 6.75%, 3/01/13 ....................... United States 4,300,000 3,913,000 senior sub. note, 8.125%, 3/01/16 ...................... United States 1,700,000 1,572,500 -------------- 8,719,500 -------------- TELECOMMUNICATION SERVICES 2.9% (j) American Tower Corp., senior note, 144A, 7.00%, 10/15/17 ........ United States 7,500,000 7,612,500 (j) Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 .......... Jamaica 8,000,000 6,880,000 Embarq Corp., senior note, 7.082%, 6/01/16 ...................... United States 7,500,000 7,457,700 Inmarsat Finance II PLC, senior note, zero cpn. to 11/15/08, 10.375% thereafter, 11/15/12 ................................. United Kingdom 7,500,000 7,434,375 Intelsat Intermediate, senior note, zero cpn. to 2/01/10, 9.25% thereafter, 2/01/15 .................................... Bermuda 2,000,000 1,720,000 Intelsat Subsidiary Holding Co. Ltd., senior note, 8.25%, 1/15/13 ...................................................... Bermuda 7,000,000 7,096,250 MetroPCS Wireless Inc., senior note, 9.25%, 11/01/14 ............ United States 8,000,000 7,900,000 Millicom International Cellular SA, senior note, 10.00%, 12/01/13 ..................................................... Luxembourg 6,500,000 6,971,250 Qwest Communications International Inc., senior note, 7.50%, 2/15/14 ...................................................... United States 7,500,000 7,406,250 Telecom Italia Capital, senior note, 4.95%, 9/30/14 ............. Italy 8,000,000 7,439,440 Verizon Communications Inc., 6.10%, 4/15/18 ..................... United States 4,000,000 4,205,576 Verizon New York Inc., senior deb., A, 6.875%, 4/01/12 ........................................... United States 5,000,000 5,272,955 B, 7.375%, 4/01/32 ........................................... United States 1,500,000 1,601,052 (j) Wind Acquisition Finance SA, senior note, 144A, 10.75%, 12/01/15 ..................................................... Italy 7,500,000 8,118,750 Windstream Corp., senior note, 8.625%, 8/01/16 .................. United States 6,000,000 6,315,000 -------------- 93,431,098 --------------
Annual Report | 33 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) UTILITIES 2.6% AES Corp., senior note, 8.00%, 10/15/17 ......................... United States 8,000,000 $ 8,380,000 Aquila Inc., senior note, 9.95%, 2/01/11 ........................ United States 7,000,000 7,292,460 CenterPoint Energy Inc., senior note, 6.125%, 11/01/17 .......... United States 7,500,000 7,570,252 Dynegy Holdings Inc., senior note, 8.375%, 5/01/16 .............. United States 7,500,000 7,856,250 (j) E.ON International Finance BV, 144A, 5.80%, 4/30/18 ............. Germany 8,000,000 8,057,880 Edison Mission Energy, senior note, 7.00%, 5/15/17 .............. United States 7,500,000 7,612,500 (j) Intergen NV, senior secured note, 144A, 9.00%, 6/30/17 .......... Netherlands 6,500,000 6,825,000 Mirant North America LLC, senior note, 7.375%, 12/31/13 ......... United States 8,000,000 8,340,000 NRG Energy Inc., senior note, 7.25%, 2/01/14 ............................................... United States 1,500,000 1,545,000 7.375%, 2/01/16 .............................................. United States 6,000,000 6,195,000 7.375%, 1/15/17 .............................................. United States 2,500,000 2,581,250 (j) Texas Competitive Electric Holdings Co. LLC, senior note, 144A, 10.25%, 11/01/15 ............................................. United States 11,000,000 11,522,500 -------------- 83,778,092 -------------- TOTAL CORPORATE BONDS(COST $1,041,937,282) ...................... 1,019,679,100 -------------- CONVERTIBLE BONDS 1.1% DIVERSIFIED FINANCIALS 0.2% Merrill Lynch & Co. Inc., cvt., senior note, zero cpn., 3/13/32.. United States 7,000,000 7,968,940 -------------- PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.3% Amgen Inc., cvt., senior note, 0.375%, 2/01/13 .................. United States 9,500,000 8,100,517 -------------- REAL ESTATE 0.4% CapitalSource Inc., cvt., senior sub. note, 4.00%, 7/15/34 ...... United States 8,000,000 6,908,800 (f) iStar Financial Inc., cvt., senior note, FRN, 3.198%, 10/01/12 ..................................................... United States 7,000,000 5,621,000 -------------- 12,529,800 -------------- RETAILING 0.2% Best Buy Co. Inc., cvt., sub. deb., 2.25%, 1/15/22 .............. United States 6,500,000 7,125,625 -------------- TOTAL CONVERTIBLE BONDS (COST $39,901,382) ...................... 35,724,882 -------------- ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES 5.2% BANKS 1.2% (f) Banc of America Commercial Mortgage Inc., 2005-6, A4, FRN, 5.18%, 9/10/47 ............................................... United States 8,000,000 7,947,786 (f) Citigroup/Deutsche Bank Commercial Mortgage Trust, 2005-CD1, A4, FRN, 5.40%, 7/15/44 ............................ United States 5,440,000 5,420,857 2006-CD3, A5, FRN, 5.617%, 10/15/48 .......................... United States 22,000,000 21,880,982 (f) LB-UBS Commercial Mortgage Trust, 2002-C2, A4, FRN, 5.594%, 6/15/31 .............................................. United States 5,000,000 5,107,678 -------------- 40,357,303 --------------
34 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (CONTINUED) DIVERSIFIED FINANCIALS 4.0% (f) Chase Credit Card Master Trust, 2003-6, A, FRN, 2.826%, 2/15/11 ...................................................... United States 10,000,000 $ 9,980,884 (f) Chase Issuance Trust, 2005-A9, A9, FRN, 2.736%, 11/15/11 ........................... United States 2,000,000 1,979,110 2007-A9, A9, FRN, 2.746%, 6/16/14 ............................ United States 12,000,000 11,448,874 sub. note, 2006-A7, A, FRN, 2.726%, 2/15/13 .................. United States 4,000,000 3,889,409 Countrywide Asset-Backed Certificates, 2004-7, AF4, 4.774%, 8/25/32 ................................. United States 225,276 220,717 2005-11, AF4, 5.21%, 3/25/34 ................................. United States 2,800,000 2,446,550 GE Capital Commercial Mortgage Corp., 2003-C1, A4, 4.819%, 1/10/38 ...................................................... United States 1,827,831 1,823,999 Greenwich Capital Commercial Funding Corp., 2004-GG1, A7, 5.317%, 6/10/36 ............................ United States 10,714,000 10,896,963 2005-GG5, A5, 5.224%, 4/10/37 ............................ United States 9,280,000 9,208,781 (f) 2006-GG7, A4, FRN, 5.913%, 7/10/38 ....................... United States 12,000,000 12,244,870 GS Mortgage Securities Corp. II, 2003-C1, A3, 4.608%, 1/10/40 ............................. United States 3,965,000 3,847,118 (f) 2006-GG6, A4, FRN, 5.553%, 4/10/38 ....................... United States 10,000,000 9,960,901 JPMorgan Chase Commercial Mortgage Securities Corp., (f) 2004-CB9, A4, FRN, 5.373%, 6/12/41 ....................... United States 8,871,306 9,037,088 2004-LN2, A2, 5.115%, 7/15/41 ............................ United States 807,292 802,212 (f) 2005-LDP5, A4, FRN, 5.179%, 12/15/44 ..................... United States 11,700,000 11,647,114 (j) Keystone Owner Trust, 1997-P3, M2, 144A, 7.98%, 12/25/24 ..................................................... United States 29,452 29,235 (f) MBNA Credit Card Master Note Trust, 2005-A4, A4, FRN, 2.756%, 11/15/12 ............................................. United States 6,000,000 5,881,609 (f) MBNA Master Credit Card Trust, 1997-B, A, FRN, 2.876%, 8/15/14 ...................................................... United States 15,000,000 14,425,990 (f) Morgan Stanley Capital I, 2004-IQ7, A4, FRN, 5.431%, 6/15/38 ...................................................... United States 7,000,000 7,070,489 Residential Asset Securities Corp., 2004-KS1, AI4, 4.213%, 4/25/32 ...................................................... United States 340,852 337,894 -------------- 127,179,807 -------------- TOTAL ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (COST $169,489,631) ............... 167,537,110 -------------- MORTGAGE-BACKED SECURITIES 11.4% (f) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 0.0% (a) FHLMC, 6.058%, 1/01/33 .......................................... United States 352,391 354,866 -------------- FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 3.9% FHLMC Gold 15 Year, 4.50%, 10/01/18 - 9/01/19 ................... United States 6,159,742 6,114,538 FHLMC Gold 15 Year, 5.00%, 12/01/17 - 7/01/22 ................... United States 13,657,717 13,773,792 FHLMC Gold 15 Year, 5.50%, 7/01/17 - 2/01/19 .................... United States 1,194,102 1,222,066 FHLMC Gold 15 Year, 6.50%, 4/01/11 .............................. United States 619 641
Annual Report | 35 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) MORTGAGE-BACKED SECURITIES (CONTINUED) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE (CONTINUED) FHLMC Gold 15 Year, 7.00%, 1/01/09 - 9/01/11 .................... United States 862 $ 897 FHLMC Gold 30 Year, 5.00%, 3/01/34 - 6/01/37 .................... United States 20,067,723 19,757,380 FHLMC Gold 30 Year, 5.50%, 6/01/33 - 3/01/38 .................... United States 42,614,427 42,949,016 FHLMC Gold 30 Year, 6.00%, 6/01/33 - 6/01/37 .................... United States 31,134,173 31,901,949 FHLMC Gold 30 Year, 6.50%, 10/01/21 - 11/01/37 .................. United States 8,626,823 8,950,026 FHLMC Gold 30 Year, 7.00%, 9/01/21 - 8/01/32 .................... United States 244,605 260,246 FHLMC Gold 30 Year, 7.50%, 4/01/24 - 1/01/31 .................... United States 43,821 47,314 FHLMC Gold 30 Year, 8.00%, 11/01/25 - 1/01/26 ................... United States 825 894 FHLMC Gold 30 Year, 9.00%, 12/01/24 ............................. United States 458 510 -------------- 124,979,269 -------------- (f) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 0.1% FNMA, 4.515%, 4/01/20 ........................................... United States 349,949 355,686 FNMA, 4.60%, 12/01/34 ........................................... United States 1,735,091 1,744,268 -------------- 2,099,954 -------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 7.0% FNMA 15 Year, 4.50%, 3/01/20 .................................... United States 1,370,625 1,358,444 FNMA 15 Year, 5.00%, 1/01/18 - 6/01/18 .......................... United States 1,826,596 1,847,001 FNMA 15 Year, 5.50%, 3/01/14 - 4/01/21 .......................... United States 6,528,233 6,660,003 FNMA 15 Year, 6.00%, 4/01/13 - 10/01/16 ......................... United States 238,963 246,906 FNMA 15 Year, 6.50%, 2/01/09 - 6/01/13 .......................... United States 23,608 24,552 FNMA 15 Year, 7.50%, 10/01/14 ................................... United States 16,743 17,537 FNMA 30 Year, 5.00%, 4/01/34 - 6/01/37 .......................... United States 34,607,536 34,039,538 (h) FNMA 30 Year, 5.00%, 5/15/37 .................................... United States 5,000,000 4,911,720 FNMA 30 Year, 5.50%, 9/01/33 - 7/01/37 .......................... United States 59,860,396 60,297,181 (h) FNMA 30 Year, 5.50%, 5/15/37 .................................... United States 15,000,000 15,082,035 FNMA 30 Year, 6.00%, 6/01/34 - 7/01/37 .......................... United States 58,042,830 59,443,440 (h) FNMA 30 Year, 6.00%, 5/15/38 .................................... United States 15,000,000 15,335,160 FNMA 30 Year, 6.50%, 1/01/24 - 7/01/37 .......................... United States 12,149,110 12,597,608 (h) FNMA 30 Year, 6.50%, 5/15/37 .................................... United States 11,000,000 11,383,284 FNMA 30 Year, 7.50%, 12/01/28 - 10/01/29 ........................ United States 40,290 43,505 FNMA 30 Year, 8.00%, 1/01/25 - 6/01/26 .......................... United States 19,950 21,710 FNMA 30 Year, 8.50%, 7/01/25 .................................... United States 745 818 -------------- 223,310,442 -------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 0.4% GNMA I SF 15 Year, 7.00%, 7/15/08 ............................... United States 3,088 3,124 GNMA I SF 30 Year, 5.00%, 6/15/34 - 7/15/34 ..................... United States 1,442,644 1,432,592 GNMA I SF 30 Year, 5.50%, 2/15/33 - 6/15/36 ..................... United States 4,577,862 4,650,921 GNMA I SF 30 Year, 6.00%, 8/15/36 ............................... United States 825,395 849,635 GNMA I SF 30 Year, 6.50%, 3/15/24 - 3/15/32 ..................... United States 314,617 328,629 GNMA I SF 30 Year, 7.00%, 11/15/27 - 5/15/28 .................... United States 54,835 58,834 GNMA I SF 30 Year, 7.50%, 9/15/23 - 5/15/27 ..................... United States 21,728 23,408 GNMA I SF 30 Year, 8.00%, 2/15/25 - 9/15/27 ..................... United States 18,101 19,821 GNMA I SF 30 Year, 8.50%, 8/15/24 ............................... United States 139 154 GNMA I SF 30 Year, 9.00%, 1/15/25 ............................... United States 852 938 GNMA I SF 30 Year, 9.50%, 6/15/25 ............................... United States 724 814
36 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) MORTGAGE-BACKED SECURITIES (CONTINUED) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE (CONTINUED) GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33 ................... United States 2,019,793 $ 1,997,825 GNMA II SF 30 Year, 5.50%, 6/20/34 .............................. United States 1,074,838 1,089,869 GNMA II SF 30 Year, 6.00%, 11/20/34 ............................. United States 966,357 994,723 GNMA II SF 30 Year, 6.50%, 7/20/28 - 12/20/31 ................... United States 419,350 437,737 GNMA II SF 30 Year, 7.50%, 8/20/16 - 4/20/32 .................... United States 243,916 260,636 -------------- 12,149,660 -------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $357,004,203) ............ 362,894,191 -------------- U.S. GOVERNMENT AND AGENCY SECURITIES 4.7% FHLMC, 5.125%, 10/18/16 ............................................. United States 9,000,000 9,576,405 6.00%, 6/15/11 ............................................... United States 4,900,000 5,300,188 6.625%, 9/15/09 .............................................. United States 7,000,000 7,354,193 FNMA, 7.125%, 1/15/30 United States 1,300,000 1,678,587 U.S. Treasury Bond, 4.50%, 5/15/17 ............................................... United States 5,000,000 5,300,395 6.25%, 8/15/23 ............................................... United States 6,800,000 8,205,159 6.88%, 8/15/25 ............................................... United States 1,000,000 1,290,000 7.125%, 2/15/23 .............................................. United States 10,200,000 13,249,647 U.S. Treasury Note, 3.375%, 10/15/09 ............................................. United States 500,000 509,102 3.50%, 12/15/09 .............................................. United States 4,500,000 4,593,519 4.00%, 4/15/10 ............................................... United States 1,100,000 1,137,126 4.00%, 11/15/12 .............................................. United States 1,850,000 1,938,887 4.125%, 8/15/10 .............................................. United States 2,900,000 3,018,042 4.25%, 8/15/13 ............................................... United States 1,000,000 1,057,891 4.25%, 11/15/14 .............................................. United States 700,000 741,070 4.375%, 8/15/12 .............................................. United States 2,600,000 2,764,128 4.50%, 9/30/11 ............................................... United States 2,500,000 2,654,690 4.50%, 3/31/12 ............................................... United States 14,000,000 14,873,908 4.625%, 12/31/11 ............................................. United States 8,000,000 8,540,632 4.625%, 11/15/16 ............................................. United States 6,700,000 7,182,092 4.625%, 2/15/17 .............................................. United States 23,000,000 24,618,993 5.00%, 8/15/11 ............................................... United States 2,100,000 2,262,916 5.625%, 5/15/08 .............................................. United States 3,000,000 3,005,391 (m) Index Linked, 1.625%, 1/15/15 ............................... United States 3,325,655 3,431,663 (m) Index Linked, 2.00%, 1/15/14 ................................ United States 10,310,169 10,887,703 (m) Index Linked, 2.50%, 7/15/16 ................................ United States 4,192,540 4,582,975 -------------- TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $142,403,711).. 149,755,302 -------------- FOREIGN GOVERNMENT AND AGENCY SECURITIES 21.4% European Investment Bank, 4.50%, 5/15/13 .............................................. Supranational(n) 38,100,000 NOK 7,259,250 (f) senior note, FRN, 0.751%, 9/21/11 ........................... Supranational(n) 2,700,000,000 JPY 25,961,113 (f,o) Government of Argentina, senior bond, FRN, 3.092%, 8/03/12 ...... Argentina 70,878,000 37,709,154
Annual Report | 37 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED) Government of Canada, 4.25%, 12/01/08 .............................................. Canada 26,980,000 CAD $ 27,050,878 5.25%, 6/01/12 ............................................... Canada 250,000 CAD 268,933 6.00%, 6/01/11 ............................................... Canada 593,000 CAD 641,518 Government of Indonesia, 10.00%, 7/15/17 .............................................. Indonesia 10,200,000,000 IDR 940,621 10.25%, 7/15/27 .............................................. Indonesia 86,000,000,000 IDR 7,507,052 11.00%, 10/15/14 ............................................ Indonesia 4,500,000,000 IDR 452,891 11.75%, 8/15/23 .............................................. Indonesia 29,150,000,000 IDR 2,868,535 12.80%, 6/15/21 .............................................. Indonesia 40,130,000,000 IDR 4,259,085 13.15%, 3/15/10 .............................................. Indonesia 7,125,000,000 IDR 794,312 13.15%, 1/15/12 .............................................. Indonesia 17,300,000,000 IDR 1,935,849 14.25%, 6/15/13 .............................................. Indonesia 63,035,000,000 IDR 7,282,799 14.275%, 12/15/13 ............................................ Indonesia 28,415,000,000 IDR 3,289,769 FR47, 10.00%, 2/15/28 ........................................ Indonesia 28,000,000,000 IDR 2,317,910 (p) Government of Iraq, Reg S, 5.80%, 1/15/28 ....................... Iraq 14,000,000 9,623,040 Government of Malaysia, 3.461%, 7/31/13 .............................................. Malaysia 16,100,000 MYR 5,061,633 3.756%, 4/28/11 .............................................. Malaysia 53,580,000 MYR 17,111,432 3.814%, 2/15/17 .............................................. Malaysia 31,190,000 MYR 9,841,689 3.833%, 9/28/11 .............................................. Malaysia 6,150,000 MYR 1,969,297 4.24%, 2/07/18 ............................................... Malaysia 64,800,000 MYR 21,062,256 4.305%, 2/27/09 .............................................. Malaysia 53,510,000 MYR 17,072,485 6.45%, 7/01/08 ............................................... Malaysia 16,188,000 MYR 5,150,695 7.00%, 3/15/09 ............................................... Malaysia 4,760,000 MYR 1,553,973 Government of Mexico, 8.00%, 12/17/15 .............................................. Mexico 725,000(q) MXN 6,937,743 10.00%, 12/05/24 ............................................. Mexico 3,355,000(q) MXN 38,019,335 Government of New Zealand, 6.50%, 4/15/13 ....................... New Zealand 7,590,000 NZD 5,883,210 Government of Norway, 5.50%, 5/15/09 ............................................... Norway 112,330,000 NOK 22,107,193 6.00%, 5/16/11 ............................................... Norway 105,850,000 NOK 21,524,580 Government of Poland, 5.75%, 9/23/22 ............................................... Poland 38,800,000 PLN 17,222,692 6.00%, 5/24/09 ............................................... Poland 64,850,000 PLN 29,264,749 6.25%, 10/24/15 .............................................. Poland 17,100,000 PLN 7,848,377 Government of Singapore, 2.375%, 10/01/09 ............................................. Singapore 7,470,000 SGD 5,612,740 4.375%, 1/15/09 .............................................. Singapore 19,290,000 SGD 14,561,063 5.625%, 7/01/08 .............................................. Singapore 12,660,000 SGD 9,407,924 Government of Sweden, 5.00%, 1/28/09 ............................................... Sweden 273,650,000 SEK 45,970,110 5.50%, 10/08/12 .............................................. Sweden 24,960,000 SEK 4,416,293 6.50%, 5/05/08 ............................................... Sweden 236,350,000 SEK 39,477,530 (r) Strip, 9/17/08 .............................................. Sweden 21,000,000 SEK 3,455,032 (f) KfW Bankengruppe, FRN, 0.658%, 8/08/11 .......................... Germany 7,875,000,000 JPY 75,672,675
38 | Annual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(E) VALUE - ------------------------------------------------------------------------- -------------------- --------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED) Korea Treasury Bond, 5.25%, 9/10/12 ............................................... South Korea 14,100,000,000 KRW $ 14,230,438 5.25%, 3/10/27 ............................................... South Korea 13,696,000,000 KRW 13,836,236 5.50%, 9/10/17 ............................................... South Korea 14,000,000,000 KRW 14,357,127 Korea Treasury Note, 4.75%, 6/10/09 South Korea 13,200,000,000 KRW 13,130,845 New South Wales Treasury Corp., 6.00%, 5/01/12 .................. Australia 5,820,000 AUD 5,296,253 Nota Do Tesouro Nacional, 9.762%, 1/01/14 .............................................. Brazil 5,200(s) BRL 2,702,168 9.762%, 1/01/17 .............................................. Brazil 60,650(s) BRL 30,234,078 (t) Index Linked, 6.00%, 5/15/15 ................................. Brazil 4,000(s) BRL 3,761,524 (t) Index Linked, 6.00%, 5/15/45 ................................. Brazil 3,570(s) BRL 3,282,879 Queensland Treasury Corp., 6.00%, 7/14/09 ....................... Australia 14,250,000 AUD 13,284,274 -------------- TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $637,728,863) .......................................... 680,483,237 -------------- MUNICIPAL BONDS 1.9% California State GO, Refunding, 5.00%, 4/01/38 .................................... United States 43,000,000 42,799,620 Various Purpose, Refunding, 5.25%, 3/01/38 ................... United States 17,900,000 18,340,519 -------------- TOTAL MUNICIPAL BONDS (COST $60,881,362) ........................ 61,140,139 -------------- TOTAL LONG TERM INVESTMENTS (COST $3,048,768,655) ............... 3,050,208,927 -------------- SHORT TERM INVESTMENTS 4.8% FOREIGN GOVERNMENT AND AGENCY SECURITIES 1.6% (r) Egypt Treasury Bills, 7/01/08 - 3/03/09 ......................... Egypt 169,600,000 EGP 30,534,740 Government of Canada, 6.00%, 6/01/08 ............................ Canada 3,000,000 CAD 2,986,706 Government of Malaysia, 3.562%, 7/15/08 ......................... Malaysia 34,075,000 MYR 10,791,290 (r) Government of Sweden, Strip, 6/18/08 ............................ Sweden 21,000,000 SEK 3,490,477 (r) Norway Treasury Bills, 6/18/08 - 9/17/08 ........................ Norway 6,400,000 NOK 1,235,532 -------------- TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $46,459,454) ........................................... 49,038,745 -------------- TOTAL INVESTMENTS BEFORE MONEY MARKET FUND (COST $3,095,228,109) ........................................ 3,099,247,672 -------------- Shares --------------------- MONEY MARKET FUND (COST $102,810,662) 3.2% (u) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.29% ............................................. United States 102,810,662 102,810,662 -------------- TOTAL INVESTMENTS (COST $3,198,038,771) 100.6% .................. 3,202,058,334 NET UNREALIZED GAIN ON FORWARD EXCHANGE CONTRACTS 0.1% .................................................. 1,179,399 OTHER ASSETS, LESS LIABILITIES (0.7)% ........................... (21,233,086) -------------- NET ASSETS 100.0% ............................................... $3,182,004,647 ==============
Annual Report | 39 Franklin Strategic Series STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED) FRANKLIN STRATEGIC INCOME FUND CURRENCY ABBREVIATIONS AUD - Australian Dollar BRL - Brazilian Real CAD - Canadian Dollar EGP - Egyptian Pound IDR - Indonesian Rupiah JPY - Japanese Yen KRW - South Korean Won MXN - Mexican Peso MYR - Malaysian Ringgit NOK - Norwegian Krone NZD - New Zealand Dollar PLN - Polish Zloty SEK - Swedish Krona SGD - Singapore Dollar SELECTED PORTFOLIO ABBREVIATIONS FHLMC - Federal Home Loan Mortgage Corp. FNMA - Federal National Mortgage Association FRN - Floating Rate Note GNMA - Government National Mortgage Association GO - General Obligation L/C - Letter of Credit PIK - Payment-In-Kind SF - Single Family (a) Rounds to less than 0.1% of net assets. (b) Non-income producing for the twelve months ended April 30, 2008. (c) See Note 10 regarding restricted securities. (d) Security has been deemed illiquid because it may not be able to be sold within seven days. At April 30, 2008, the aggregate value of these securities was $3,873, representing less than 0.01% of net assets. (e) The principal amount is stated in U.S. dollars unless otherwise indicated. (f) The coupon rate shown represents the rate at period end. (g) See Note 1(f) regarding senior floating rate interests. (h) A portion or all of the security purchased on a delayed delivery or TBA basis. See Note 1(c). (i) See Note 11 regarding unfunded loan commitments. (j) 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 April 30, 2008, the aggregate value of these securities was $144,913,558, representing 4.55% of net assets. (k) Perpetual bond with no stated maturity date. (l) Income may be received in additional securities and/or cash. (m) Principal amount of security is adjusted for inflation. See Note 1(h). (n) A supranational organization is an entity formed by two or more central governments through international treaties. (o) The principal amount is stated in original face, and scheduled paydowns are reflected in the market price on ex-date. (p) Security was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. This security has been deemed liquid under guidelines approved by the Trust's Board of Trustees. At April 30, 2008, the value of this security was $9,623,040, representing 0.30% of net assets. (q) Principal amount is stated in 100 Mexican Peso Units. (r) The security is traded on a discount basis with no stated coupon rate. (s) Principal amount is stated in 1000 Brazilian Real Units. (t) Redemption price at maturity is adjusted for inflation. See Note 1(h). (u) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. 40 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES April 30, 2008
FRANKLIN STRATEGIC INCOME FUND -------------- Assets: Investments in securities: Cost - Unaffiliated issuers ............................ $3,095,228,109 Cost - Sweep Money Fund (Note 7) ....................... 102,810,662 -------------- Total cost of investments .............................. $3,198,038,771 ============== Value - Unaffiliated issuers ........................... $3,099,247,672 Value - Sweep Money Fund (Note 7) ...................... 102,810,662 -------------- Total value of investments ............................. 3,202,058,334 Cash 794,266 Receivables: Investment securities sold ............................. 9,176,856 Capital shares sold .................................... 14,558,119 Dividends and interest ................................. 45,002,159 Unrealized gain on forward exchange contracts (Note 8) .... 6,910,115 -------------- Total assets ........................................ 3,278,499,849 -------------- Liabilities: Payables: Investment securities purchased ........................ 81,897,083 Capital shares redeemed ................................ 5,768,346 Affiliates ............................................. 2,280,719 Unrealized loss on forward exchange contracts (Note 8) .... 5,730,716 Unrealized loss on unfunded loan commitments (Note 11) .... 22,955 Accrued expenses and other liabilities .................... 795,383 -------------- Total liabilities ................................... 96,495,202 -------------- Net assets, at value ............................. $3,182,004,647 ============== Net assets consist of: Paid-in capital ........................................... $3,176,876,027 Undistributed net investment income ....................... 11,698,413 Net unrealized appreciation (depreciation) ................ 5,755,684 Accumulated net realized gain (loss) ...................... (12,325,477) -------------- Net assets, at value ............................. $3,182,004,647 ==============
Annual Report | The accompanying notes are an integral part of these financial statements. | 41 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) April 30, 2008
FRANKLIN STRATEGIC INCOME FUND -------------- CLASS A: Net assets, at value ..................................................... $2,123,947,149 -------------- Shares outstanding ....................................................... 206,674,750 -------------- Net asset value per share(a) ............................................. $ 10.28 -------------- Maximum offering price per share (net asset value per share / 95.75%)..... $ 10.74 -------------- CLASS B: Net assets, at value ..................................................... $ 105,620,049 -------------- Shares outstanding ....................................................... 10,235,214 -------------- Net asset value and maximum offering price per share(a) .................. $ 10.32 -------------- CLASS C: Net assets, at value ..................................................... $ 733,071,270 -------------- Shares outstanding ....................................................... 71,350,696 -------------- Net asset value and maximum offering price per share(a) .................. $ 10.27 -------------- CLASS R: Net assets, at value ..................................................... $ 108,019,841 -------------- Shares outstanding ....................................................... 10,535,535 -------------- Net asset value and maximum offering price per share(a) .................. $ 10.25 -------------- ADVISOR CLASS: Net assets, at value ..................................................... $ 111,346,338 -------------- Shares outstanding ....................................................... 10,826,759 -------------- Net asset value and maximum offering price per share(a) .................. $ 10.28 --------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. 42 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended April 30, 2008
FRANKLIN STRATEGIC INCOME FUND ------------ Investment income: Dividends: Unaffiliated issuers .................................................. $ 2,658,077 Sweep Money Fund (Note 7) ............................................. 2,875,192 Interest ................................................................. 163,123,880 ------------ Total investment income ............................................ 168,657,149 ------------ Expenses: Management fees (Note 3a) ................................................ 11,999,532 Distribution fees: (Note 3c) Class A ............................................................... 4,555,448 Class B ............................................................... 668,633 Class C ............................................................... 3,684,331 Class R ............................................................... 435,740 Transfer agent fees (Note 3e) ............................................ 3,770,812 Custodian fees (Note 4) .................................................. 751,136 Reports to shareholders .................................................. 257,286 Registration and filing fees ............................................. 141,787 Professional fees ........................................................ 74,910 Trustees' fees and expenses .............................................. 37,874 Other .................................................................... 72,709 ------------ Total expenses ..................................................... 26,450,198 Expense reductions (Note 4) ........................................ (39,426) ------------ Net expenses .................................................... 26,410,772 ------------ Net investment income ........................................ 142,246,377 ------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ........................................................... 5,958,041 Foreign currency transactions ......................................... 39,941,638 ------------ Net realized gain (loss) ..................................... 45,899,679 ------------ Net change in unrealized appreciation (depreciation) on: Investments .............................................................. (56,175,762) Translation of assets and liabilities denominated in foreign currencies... 148,637 ------------ Net change in unrealized appreciation (depreciation) ......... (56,027,125) ------------ Net realized and unrealized gain (loss) ..................................... (10,127,446) ------------ Net increase (decrease) in net assets resulting from operations ............. $132,118,931 ============
Annual Report | The accompanying notes are an integral part of these financial statements. | 43 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN STRATEGIC INCOME FUND YEAR ENDED APRIL 30, ------------------------------- 2008 2007 -------------- -------------- Increase (decrease) in net assets: Operations: Net investment income ............................................................. $ 142,246,377 $ 89,407,218 Net realized gain (loss) from investments and foreign currency transactions ....... 45,899,679 23,971,751 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies .................... (56,027,125) 41,340,324 -------------- -------------- Net increase (decrease) in net assets resulting from operations ................ 132,118,931 154,719,293 -------------- -------------- Distributions to shareholders from net investment income: Class A ........................................................................... (121,244,242) (69,450,108) Class B ........................................................................... (6,404,920) (5,676,985) Class C ........................................................................... (35,256,134) (18,536,653) Class R ........................................................................... (5,569,720) (2,534,963) Advisor Class ..................................................................... (6,366,080) (3,568,807) -------------- -------------- Total distributions to shareholders .................................................. (174,841,096) (99,767,516) -------------- -------------- Capital share transactions: (Note 2) Class A ........................................................................... 632,530,329 485,094,064 Class B ........................................................................... 3,048,823 (2,806,860) Class C ........................................................................... 304,040,457 131,890,312 Class R ........................................................................... 43,785,438 30,979,468 Advisor Class ..................................................................... 46,009,389 7,746,480 -------------- -------------- Total capital share transactions ..................................................... 1,029,414,436 652,903,464 -------------- -------------- Redemption fees ...................................................................... 32,113 15,988 -------------- -------------- Net increase (decrease) in net assets .......................................... 986,724,384 707,871,229 Net assets: Beginning of year .................................................................... 2,195,280,263 1,487,409,034 -------------- -------------- End of year .......................................................................... $3,182,004,647 $2,195,280,263 ============== ============== Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of year ....................................................................... $ 11,698,413 $ (496,671) ============== ==============
44 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of eleven separate funds. The Franklin Strategic Income Fund (Fund) included in this report is diversified. The financial statements of the remaining funds in the Trust are presented separately. The Fund offers five classes of shares: Class A, Class B, Class C, Class R, and Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege. The following summarizes the 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. 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 Trust 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 Trust'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 Trust 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 Trust'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. Annual Report | 45 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) 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. 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. 46 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (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 at a future date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund may also enter into forward exchange contracts to hedge against fluctuations in foreign exchange rates or to gain exposure to certain foreign currencies. These contracts are valued daily by the Fund and the unrealized gains or losses on the contracts, as measured by the difference between the contractual forward foreign exchange rates and the forward rates at the reporting date, are included in the Statement of Assets and Liabilities. 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 may enter into mortgage dollar rolls, typically on a TBA basis. Mortgage 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 on the initial sale, and the difference between the repurchase price and the sale price is recorded as an unrealized gain or loss to the fund upon entering into the mortgage dollar roll. In addition, the Fund may earn interest on the cash proceeds that are received from the initial sale. During the period between the sale and repurchase, the Fund is not entitled to principal and interest paid on the mortgage backed securities. The risks of mortgage dollar roll transactions include the potential inability of the counterparty to fulfill its obligations. Annual Report | 47 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. G. INCOME TAXES No provision has been made for U.S. income taxes because it is the Fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of April 30, 2008, and has determined that no provision for income tax is required in the Fund's financial statements. 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. Facility fees are recognized as income over the expected term of the loan. 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 accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. 48 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. 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. Differences in per share distributions, by class, are generally due to differences in class specific expenses. Inflation-indexed bonds provide an inflation hedge through periodic increases in the security's interest accruals and principal redemption value, by amounts corresponding to the current rate of inflation. Any such adjustments, including adjustments to principal redemption value, are recorded as interest income. 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, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. Annual Report | 49 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 2. SHARES OF BENEFICIAL INTEREST At April 30, 2008, there were an unlimited number of shares authorized (without par value). Transactions in the Fund's shares were as follows:
YEAR ENDED APRIL 30, --------------------------------------------------------- 2008 2007 --------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ----------- ------------- CLASS A SHARES: Shares sold ................. 91,217,409 $ 936,036,841 64,577,523 $ 661,797,699 Shares issued in reinvestment of distributions ......... 8,915,352 91,352,929 4,904,231 50,058,427 Shares redeemed ............. (38,572,698) (394,859,441) (22,187,101) (226,762,062) ----------- ------------- ----------- ------------- Net increase (decrease) ..... 61,560,063 $ 632,530,329 47,294,653 $ 485,094,064 =========== ============= =========== ============= CLASS B SHARES: Shares sold ................. 2,874,628 $ 29,428,423 1,326,154 $ 13,607,104 Shares issued in reinvestment of distributions ......... 408,776 4,208,385 356,823 3,651,957 Shares redeemed ............. (2,980,058) (30,587,985) (1,953,852) (20,065,921) ----------- ------------- ----------- ------------- Net increase (decrease) ..... 303,346 $ 3,048,823 (270,875) $ (2,806,860) =========== ============= =========== ============= CLASS C SHARES: Shares sold ................. 37,244,007 $ 381,547,354 18,208,945 $ 186,898,178 Shares issued in reinvestment of distributions ......... 2,345,925 24,029,491 1,165,184 11,894,052 Shares redeemed ............. (9,929,608) (101,536,388) (6,539,064) (66,901,918) ----------- ------------- ----------- ------------- Net increase (decrease) ..... 29,660,324 $ 304,040,457 12,835,065 $ 131,890,312 =========== ============= =========== ============= CLASS R SHARES: Shares sold ................. 6,278,677 $ 64,256,553 3,989,540 $ 40,838,506 Shares issued in reinvestment of distributions ......... 505,060 5,161,628 237,409 2,419,134 Shares redeemed ............. (2,511,917) (25,632,743) (1,200,894) (12,278,172) ----------- ------------- ----------- ------------- Net increase (decrease) ..... 4,271,820 $ 43,785,438 3,026,055 $ 30,979,468 =========== ============= =========== ============= ADVISOR CLASS SHARES: Shares sold ................. 5,446,481 $ 56,078,457 2,180,173 $ 22,375,180 Shares issued in reinvestment of distributions ......... 515,703 5,286,545 299,259 3,050,388 Shares redeemed ............. (1,497,484) (15,355,613) (1,736,283) (17,679,088) ----------- ------------- ----------- ------------- Net increase (decrease) ..... 4,464,700 $ 46,009,389 743,149 $ 7,746,480 =========== ============= =========== =============
50 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME 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
A. MANAGEMENT FEES Effective January 1, 2008, 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% Over $250 million, up to and including $7.5 billion 0.440% Over $7.5 billion, up to and including $10 billion 0.430% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20 billion 0.360% Over $20 billion, up to and including $35 billion 0.355% Over $35 billion, up to and including $50 billion 0.350% In excess of $50 billion
Prior to January 1, 2008, the Fund paid fees 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% Over $250 million, up to and including $10 billion 0.440% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20 billion 0.360% Over $20 billion, up to and including $35 billion 0.355% Over $35 billion, up to and including $50 billion 0.350% In excess of $50 billion
Annual Report | 51 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) 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 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 Fund's Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund's shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Fund's Class B, C, and R compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund's shares up to the maximum annual plan rate for each class. The maximum annual plan rates, based on the average daily net assets, for each class, are as follows: Class A ........................................ 0.25% Class B ........................................ 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: Sales charges retained net of commissions paid to unaffiliated broker/dealers ............................................ $1,870,711 Contingent deferred sales charges retained ................... $ 258,880
E. TRANSFER AGENT FEES For the year ended April 30, 2008, the Fund paid transfer agent fees of $3,770,812, of which $2,204,612 was retained by Investor Services. 52 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME 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 year ended April 30, 2008, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At April 30, 2008, the Fund had tax basis capital losses of $10,888,827 expiring in 2011. During the year ended April 30, 2008, the Fund utilized $2,491,680 of capital loss carryforwards. For tax purposes, realized capital 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, 2008, the Fund deferred realized capital losses of $1,404,408. The tax character of distributions paid during the years ended April 30, 2008 and 2007, was as follows:
2008 2007 ------------ ----------- Distributions paid from ordinary income... $174,841,096 $99,767,516
At April 30, 2008, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows: Cost of investments...................................... $3,206,739,550 ============== Unrealized appreciation.................................. $ 94,570,541 Unrealized depreciation.................................. (99,251,757) -------------- Net unrealized appreciation (depreciation)............... $ (4,681,216) -------------- Distributable earnings - undistributed ordinary income... $ 22,154,124 ==============
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, payments-in-kind, bond discounts and premiums and inflation related adjustments on foreign securities. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, mortgage dollar roll, paydown losses, bond discounts and premiums and inflation related adjustments on foreign securities. Annual Report | 53 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended April 30, 2008, aggregated $1,882,874,013 and $790,755,142, respectively. 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (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. FORWARD EXCHANGE CONTRACTS At April 30, 2008, the Fund had the following forward exchange contracts outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED AMOUNT(a) DATE GAIN LOSS ----------------- ---------- ---------- ----------- CONTRACTS TO BUY 23,099,600 Swiss Franc ....... 20,000,000 10/24/08 $2,308,821 $ -- 7,625,100 Swiss Franc ....... 7,000,000 1/22/09 362,429 -- 226,500,000 Indian Rupee ...... 7,340,454 NZD 2/27/09 57,055 -- CONTRACTS TO SELL 22,688,628 Mexican Peso ...... 86,103,344 INR 5/15/08 -- (33,094) 95,141,931 Mexican Peso ...... 4,364,636,082 CLP 6/12/08 396,411 -- 85,260,441 Mexican Peso ...... 931,119,898 KZT 6/30/08 -- (382,131) 35,638,464 Mexican Peso ...... 1,620,480,980 CLP 9/15/08 138,449 -- 55,719,530 Mexican Peso ...... 199,888,242 INR 10/20/08 -- (293,173) 44,379,630 Mexican Peso ...... 499,350,721 KZT 1/16/09 -- (60,767) 73,468,367 Mexican Peso ...... 255,905,014 INR 1/27/09 -- (509,996) 27,622,500,000 South Korean Won... 31,831,225 CHF 2/13/09 3,190,501 -- 63,268,687 Mexican Peso ...... 5,622,884 2/27/09 -- (173,943) 59,280,000 Euro .............. 88,755,794 3/04/09 -- (2,505,048) 9,880,000 Euro .............. 1,503,587,800 JPY 3/05/09 -- (517,283) 9,880,000 Euro .............. 1,519,524,240 JPY 3/09/09 -- (356,138) 29,200,000 Euro .............. 44,548,980 3/16/09 -- (385,490) 9,600,000 Euro .............. 1,485,984,000 JPY 4/06/09 -- (215,918)
54 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 8. FORWARD EXCHANGE CONTRACTS (CONTINUED)
CONTRACT SETTLEMENT UNREALIZED UNREALIZED AMOUNT(a) DATE GAIN LOSS ----------------- ---------- ---------- ----------- CONTRACTS TO SELL (CONTINUED) 169,061,600 Mexican Peso........ 15,313,551 4/07/09 $ -- $ (97,646) 2,848,160 US Dollar........... 358,198,842 KZT 4/17/09 14,084 -- 4,400,000 Euro................ 696,850,000 JPY 4/23/09 65,917 -- 13,820,000 Euro................ 21,615,586 4/23/09 376,448 -- 9,915,000,000 South Korean Won.... 10,036,146 CHF 4/24/09 -- (200,089) ---------- ----------- Unrealized gain (loss) on forward exchange contracts.................... 6,910,115 (5,730,716) ---------- ----------- Net unrealized gain (loss) on forward exchange contracts............. $1,179,399 ==========
(a) In U.S. dollars unless otherwise indicated. CURRENCY ABBREVIATIONS CHF - Swiss Franc CLP - Chilean Peso INR - Indian Rupee JPY - Japanese Yen KZT - Kazakhstan Tenge NZD - New Zealand Dollar 9. CREDIT RISK The Fund has 43.3% of its portfolio invested in high yield, senior secured floating rate notes, or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities. 10. RESTRICTED SECURITIES The Fund may invest in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Fund may have registration rights for restricted securities. The issuer generally incurs all registration costs. Annual Report | 55 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 10. RESTRICTED SECURITIES (CONTINUED) At April 30, 2008, the Fund held investments in restricted securities, excluding 144A securities deemed to be liquid, 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 - ------- --------------------------------------------------- ----------- ------- ------ 516,372 Cambridge Industries Liquidating Trust Interest ... 1/09/02 $ -- $3,873 64,666 VS Holdings Inc. .................................. 12/06/01 64,666 -- ------ TOTAL RESTRICTED SECURITIES (0.00%(a) of Net Assets) ...................... $3,873 ======
(a) Rounds to less than 0.01% of net assets. 11. 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. Funded portions of credit agreements are presented on the Statement of Investments. At April 30, 2008, unfunded commitments were as follows:
UNFUNDED BORROWER COMMITMENTS - ---------------------------------------------------------- ----------- Bausch & Lomb Inc., Delayed Draw Term Loan ............... $ 230,000 Community Health Systems, Inc., Delayed Draw Term Loan ... 765,449 Laureate Education, Inc., Delayed Draw Term Loan ......... 561,673 ---------- $1,557,122 ==========
Unfunded loan commitments and funded portions of credit agreements are marked to market daily and any unrealized gain or loss is included in the Statement of Assets and Liabilities and Statement of Operations. 12. NEW ACCOUNTING PRONOUNCEMENTS In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157, "Fair Value Measurement" (SFAS 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Trust believes the adoption of SFAS 157 will have no material impact on its financial statements. 56 | Annual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 12. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED) In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Fund is currently evaluating the impact, if any, of applying the various provisions of SFAS 161. Annual Report | 57 Franklin Strategic Series REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FRANKLIN STRATEGIC INCOME FUND TO THE BOARD OF TRUSTEES OF FRANKLIN STRATEGIC SERIES AND SHAREHOLDERS OF FRANKLIN STRATEGIC INCOME FUND In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Strategic Income Fund (one of the funds constituting Franklin Strategic Series, hereafter referred to as the "Fund") at April 30, 2008, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at April 30, 2008 by correspondence with the custodian, brokers and agent banks provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California June 18, 2008 58 | Annual Report Franklin Strategic Series BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member serves until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------- --------------- ---------------- ----------------------- ----------------------------------- HARRIS J. ASHTON (1932) Trustee Since 1991 143 Bar-S Foods (meat packing company). One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ROBERT F. CARLSON (1928) Trustee Since 2007 122 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Retired; and FORMERLY, Vice President, senior member and past President, Board of Administration, California Public Employees Retirement Systems (CALPERS) (1971-January 2008); member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield of California; and Chief Counsel, California Department of Transportation. SAM GINN (1937) Trustee Since 2007 122 Chevron Corporation (global One Franklin Parkway energy company) and ICO Global San Mateo, CA 94403-1906 Communications (Holdings) Limited (satellite company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding company) (1988-1994). EDITH E. HOLIDAY (1952) Trustee Since 1998 143 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas), H.J. San Mateo, CA 94403-1906 Heinz Company (processed foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
Annual Report | 59
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------- --------------- ---------------- ----------------------- ----------------------------------- FRANK W.T. LAHAYE (1929) Trustee Since 1991 122 Center for Creative Land Recycling One Franklin Parkway (brownfield redevelopment). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital). FRANK A. OLSON (1932) Trustee Since 2007 143 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas) and San Mateo, CA 94403-1906 Sentient Jet (private jet service). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). LARRY D. THOMPSON (1945) Trustee Since 2007 143 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). JOHN B. WILSON (1959) Lead Trustee since 122 None One Franklin Parkway Independent 2006 and Lead San Mateo, CA 94403-1906 Trustee Independent Trustee since January 2008 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Executive Vice President - Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm) (1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------- --------------- ---------------- ----------------------- ----------------------------------- **CHARLES B. JOHNSON (1933) Trustee and Trustee since 143 None One Franklin Parkway Chairman of 1991 and San Mateo, CA 94403-1906 the Board Chairman of the Board since 1993 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments.
60 | Annual Report
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------- --------------- ---------------- ----------------------- ----------------------------------- **RUPERT H. JOHNSON, JR. (1940) Trustee, Trustee since 56 None One Franklin Parkway President and 1991 and San Mateo, CA 94403-1906 Chief President and Executive Chief Executive Officer - Officer - Investment Investment Management Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable One Franklin Parkway Compliance Officer since San Mateo, CA 94403-1906 Officer and 2004 and Vice Vice President President - AML - AML Compliance since Compliance 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). LAURA F. FERGERSON (1962) Treasurer, Treasurer since Not Applicable Not Applicable One Franklin Parkway Chief Financial 2004, Chief San Mateo, CA 94403-1906 Officer and Financial Chief Officer and Accounting Chief Officer Accounting Officer since February 2008 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003). JIMMY D. GAMBILL (1947) Vice President Since February Not Applicable Not Applicable 500 East Broward Blvd. 2008 Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
Annual Report | 61
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------- --------------- ---------------- ----------------------- ----------------------------------- DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments. EDWARD B. JAMIESON (1948) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of four of the investment companies in Franklin Templeton Investments. CHRISTOPHER J. MOLUMPHY (1962) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director and Executive Vice President, Franklin Advisers, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments. KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable One Franklin Parkway and Secretary San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin Templeton Investments. CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
62 | Annual Report
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------- --------------- ---------------- ----------------------- ----------------------------------- GALEN G. VETTER (1951) Senior Vice Since February Not Applicable Not Applicable 500 East Broward Blvd. President and 2008 Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Executive Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004).
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested persons of the Trust under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc., which is the parent company of the Trust's investment manager and distributor. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI. Annual Report | 63 Franklin Strategic Series SHAREHOLDER INFORMATION FRANKLIN STRATEGIC INCOME FUND BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT At a meeting held April 15, 2008, the Board of Trustees (Board), including a majority of non-interested or independent Trustees, approved renewal of the investment management agreement for Franklin Strategic Income Fund, one of the separate funds within Franklin Strategic Series (Fund(s)). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for each Fund, as well as periodic reports on shareholder services, legal, compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager (Manager) and its affiliates. Information furnished specifically in connection with the renewal process included a report for each Fund prepared by Lipper, Inc. (Lipper), an independent organization, as well as a Fund profitability analysis report prepared by management. The Lipper reports compared each Fund's investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Included with such profitability analysis report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates including management's explanation of differences where relevant and a three-year expense analysis with an explanation for any increase in expense ratios. Additional material accompanying such report was a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Fund by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale and a comparative analysis concerning transfer agent fees charged each Fund. In considering such materials, the independent Trustees received assistance and advice from and met separately with independent counsel. While the investment management agreements for all Funds were considered at the same Board meeting, the Board dealt with each Fund separately. In approving continuance of the investment management agreement for each Fund, the Board, including a majority of independent Trustees, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of each Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board's decision. NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Fund and its shareholders. In addition to investment performance and expenses discussed later, the Board's opinion was based, in part, upon periodic reports furnished them showing that the investment policies and restrictions for the Fund were consistently complied with as well as other reports periodically 64 | Annual Report Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) FRANKLIN STRATEGIC INCOME FUND BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) furnished the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adopted throughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. The Board also noted the extent of benefits provided Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management's continuous efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted that such systems and procedures had functioned smoothly during the Florida hurricanes and blackouts experienced in recent years. Consideration was also given to the experience of the Fund's portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management's determination of a portfolio manager's bonus compensation was the relative investment performance of the funds he or she managed and that a portion of such bonus was required to be invested in a predesignated list of funds within such person's fund management area so as to be aligned with the interests of Fund shareholders. The Board also took into account the quality of transfer agent and shareholder services provided Fund shareholders by an affiliate of the Manager, noting continuing expenditures by management to increase and improve the scope of such services, periodic favorable reports on such service conducted by third parties, the high industry ranking given to the Franklin Templeton website, and the firsthand experience of individual Board members who deal with the shareholder services department in their capacities as shareholders in one or more of the various Franklin Templeton funds. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of the Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings throughout the year, particular attention in assessing performance was given to the Lipper reports furnished for the agreement renewals. The Lipper report prepared for the Fund showed investment performance of its Class A shares in comparison to a performance universe selected by Lipper. Comparative performance for the Fund was shown for the one-year period ended January 31, 2008, and previous periods ended that date of up to 10 years. The following summarizes the performance results for the Fund and the Board's view of such performance. The performance universe for the Fund consisted of the Fund and all retail and institutional multisector income funds as selected by Lipper. The Lipper report comparison showed that for the one-year period the Fund's income return was in the highest quintile of such performance universe, Annual Report | 65 Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) FRANKLIN STRATEGIC INCOME FUND BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) and its total return was in the second-highest quintile of such universe. The report further showed that the Fund's income and total return during the previous three-, five- and 10-year periods on an annualized basis were, in each case, in either the highest or second-highest quintile of such performance universe. The Board was satisfied with such performance. COMPARATIVE EXPENSES. Consideration was given to the management fee and total expense ratios of the Fund compared with those of a group of other funds selected by Lipper as its appropriate Lipper expense group. Prior to making such comparison, the Board relied upon a survey showing that the scope of services covered under the Fund's investment management agreement was similar to those provided by fund managers to other mutual fund groups. In reviewing comparative costs, emphasis was given to the Fund's contractual investment management fee in comparison with the investment management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual investment management fee analysis includes administrative charges as being part of the investment management fee, and actual total expenses, for comparative consistency, are shown by Lipper for Fund Class A shares. The results of such expense comparisons showed the contractual investment management fee rates and actual total expenses for Franklin Strategic Income Fund were in the least expensive quintile of its Lipper expense group. The Board was satisfied with the contractual management fees and total expenses of the Fund in comparison to its expense group as shown in the Lipper report. MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of the Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services to the Fund. Specific attention was given to the methodology followed in allocating costs to the Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that, while being continuously refined and reflecting changes in the Manager's own cost accounting, the allocation methodology was consistent with that followed in profitability report presentations for the Fund made in prior years and that the Fund's independent registered public accounting firm had been engaged by the Manager to perform certain procedures on a biennial basis, specified and approved by the Manager and the Fund's Board solely for their purposes and use in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for the type of mutual fund operations conducted by the Manager and its affiliates may 66 | Annual Report Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) FRANKLIN STRATEGIC INCOME FUND BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) not be fully reflected in the expenses allocated to the Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management's expenditures in improving shareholder services provided the Fund, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC and other regulatory requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager's parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including its interest in a joint venture entity that financed up-front commissions paid to brokers/dealers who sold fund Class B shares prior to February 2005, when the offering of such shares was discontinued, as well as potential benefits resulting from allocation of fund brokerage and the use of "soft" commission dollars to pay for research. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to the Fund was not excessive in view of the nature, quality and extent of services provided. ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Manager as the Fund grows larger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as some funds get larger, at some point economies of scale do result in the Manager realizing a larger profit margin on management services provided such a fund. The Board noted that economies of scale were shared with the Fund and its shareholders through management fee breakpoints so that as a Fund grows in size, its effective management fee rate declines. The fee structure under the investment management agreement for the Fund contains breakpoints that continued to asset levels that exceeded its asset size at December 31, 2007. It was noted that new or reduced breakpoints in the fee structure for Franklin Strategic Income Fund at the $7.5 billion and $10 billion asset levels had been authorized by the Trustees at a Board meeting held December 3, 2007, and had become effective January 1, 2008. In view of such structure and the favorable fee and expense comparisons of the Fund within its expense group, the Board believed that to the extent economies of scale may be realized by the manager of the Fund and its affiliates, that there was a sharing of benefits with the Fund and its shareholders. Annual Report | 67 Franklin Strategic Series SHAREHOLDER INFORMATION (CONTINUED) FRANKLIN STRATEGIC INCOME FUND PROXY VOTING POLICIES AND PROCEDURES The Trust has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. 68 | Annual Report This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. (FRANKLIN TEMPLETON INVESTMENTS LOGO) One Franklin Parkway 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. ANNUAL 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 A2008 06/08 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial expert is John B. Wilson and he is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES (a) Audit Fees The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $320,584 for the fiscal year ended April 30, 2008 and $391,902 for the fiscal year ended April 30, 2007. (b) Audit-Related Fees There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4. There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements. (c) Tax Fees There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning. The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning were $0 for the fiscal year ended April 30, 2008 and $46,000 for the fiscal year ended April 30, 2007. The services for which these fees were paid included tax compliance and advice. (d) All Other Fees There were no fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4. There were no fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant other than services reported in paragraphs (a)-(c) of Item 4. (e) (1) The registrant's audit committee is directly responsible for approving the services to be provided by the auditors, including: (i) pre-approval of all audit and audit related services; (ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors; (iii)pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant's investment adviser or to any entity that controls, is controlled by or is under common control with the registrant's investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and (iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules. (e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X. (f) No disclosures are required by this Item 4(f). (g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $0 for the fiscal year ended April 30, 2008 and $46,000 for the fiscal year ended April 30, 2007. (h) The registrant's audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (a)(1) Code of Ethics (a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN STRATEGIC SERIES By /S/GALEN G. VETTER ------------------ Galen G. Vetter Chief Executive Officer - Finance and Administration Date June 26, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /S/GALEN G. VETTER ------------------ Galen G. Vetter Chief Executive Officer - Finance and Administration Date June 26, 2008 By /S/LAURA F. FERGERSON --------------------- Laura F. Fergerson Chief Financial Officer and Chief Accounting Officer Date June 26, 2008 EX-99.CODE ETH 2 ncsrcode308.txt Exhibit 12(a)(1) CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Revised March 06, 2008 - ------------------------------------------------------------------------------- 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; 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. 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. 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 March 2008 FRANKLIN GROUP OF FUNDS Edward B. Jamieson President and Chief Executive Officer - Investment Management Charles B. 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 Galen G. Vetter Senior Vice President and Chief Executive Officer - Finance and Administration Jimmy D. Gambill Vice President Laura Fergerson Chief Financial Officer and Chief Accounting Officer FRANKLIN MUTUAL SERIES FUNDS Peter Langerman Chief Executive Officer-Investment Management Galen G. Vetter Senior Vice President and Chief Executive Officer - Finance and Administration Jimmy D. Gambill Vice President Laura Fergerson Chief Financial Officer and Chief Accounting Officer TEMPLETON GROUP OF FUNDS 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 Galen G. Vetter Senior Vice President and Chief Executive Officer - Finance and Administration Jimmy D. Gambill Vice President Laura Fergerson Chief Financial Officer and Chief Accounting Officer EXHIBIT B ACKNOWLEDGMENT FORM DECEMBER 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 c/o Maria Abbott within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Maria Abbott, Manager, Code of Ethics, Global Compliance SM-920/2 TELEPHONE: (650) 312-5698 Fax: (650) 312-5646 E-MAIL: Abbott, Maria (internal address); mabbott@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 - ----------------------------- 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. 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. 5. See Part X. EX-99.CERT 3 cert302.txt Exhbit (a)(2) CERTIFICATIONS 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. 6/26/2008 /S/GALEN G. VETTER Galen G. Vetter Chief Executive Officer - Finance and Administration I, Laura F. Fergerson, 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. 6/26/2008 /S/LAURA F. FERGERSON Laura F. Fergerson Chief Financial Officer and Chief Accounting Officer EX-99.906CERT 4 cert906.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, Galen G. Vetter, 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 4/30/2008 (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: 6/26/2008 /S/GALEN G. VETTER Galen G. Vetter 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, Laura F. Fergerson, 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 4/30/2008 (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: 6/26/2008 /S/LAURA F. FERGERSON Laura F. Fergerson Chief Financial Officer and Chief Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----