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 811-537 ------- FRANKLIN CUSTODIAN FUNDS, INC. ------------------------------ (Exact name of registrant as specified in charter) ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 (Address of principal executive offices) (Zip code) MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ----------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (650) 312-2000 -------------- Date of fiscal year end: 9/30 ---- Date of reporting period: 9/30/03 ------- ITEM 1. REPORTS TO STOCKHOLDERS. SEPTEMBER 30, 2003 Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund [PHOTO OMITTED] ANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN CUSTODIAN FUNDS, INC. WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. [LOGO OMITTED] FRANKLIN(R) TEMPLETON(R) INVESTMENTS FRANKLIN o TEMPLETON o MUTUAL SERIES Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups--Franklin, Templeton and Mutual Series. Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a leader in tax-free investing and a driving force in fixed income investing around the globe. They also bring expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with research offices in over 25 countries, they offer investors the broadest global reach in the industry. MUTUAL SERIES. Established in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among undervalued stocks, arbitrage situations and distressed companies. Because our management groups work independently and adhere to distinctly different investment approaches, Franklin, Templeton and Mutual Series funds typically have a low overlap of securities. That's why our funds can be used to build truly diversified portfolios covering every major asset class. At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable account services that have helped us become one of the most trusted names in financial services. SPECIALIZED EXPERTISE TRUE DIVERSIFICATION RELIABILITY YOU CAN TRUST MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS [photo omitted] Not part of the annual report Contents SHAREHOLDER LETTER ....................... 1 ANNUAL REPORT Franklin DynaTech Fund ................... 3 Franklin Growth Fund ..................... 9 Franklin Income Fund ..................... 17 Franklin U.S. Government Securities Fund .......................... 29 Franklin Utilities Fund .................. 39 Financial Highlights and Statements of Investments ................ 48 Financial Statements ..................... 97 Notes to Financial Statements ..................... 106 Independent Auditors' Report ......................... 121 Tax Designation .......................... 122 Board Members and Officers ............................. 123 Proxy Voting Policies and Procedures ........................... 127 - -------------------------------------------------------------------------------- Annual Report Franklin DynaTech Fund YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: Franklin DynaTech Fund seeks capital appreciation by investing most of its assets in companies emphasizing scientific and technological development. We are pleased to bring you Franklin DynaTech Fund's annual report for the fiscal year ended September 30, 2003. PERFORMANCE OVERVIEW Franklin DynaTech Fund-Class A posted a +31.23% cumulative total return for the 12 months under review, as shown in the Performance Summary beginning on page 6. Although the Fund performed well during the year under review, it underperformed its narrow benchmark, the Nasdaq 100 Index, which had a price-only return of 56.60%, while it outperformed the broad Standard & Poor's 500 (S&P 500) Composite Index's total return of 24.38%.1 ECONOMIC AND MARKET OVERVIEW During the fiscal year ended September 30, 2003, the U.S. economy expanded within a relatively muted inflation environment, despite rising energy and health care costs. Gross domestic product (GDP) grew at annualized rates of 1.4% in fourth quarter 2002 and first quarter 2003, 3.3% in the second quarter, and an estimated 7.2% in the third quarter. Much of the momentum resulted from surging government defense spending and the stalwart consumer, whose steady participation in retail, vehicle and home sales was supported by tax cuts, cash raised through aggressive mortgage borrowing, and increasingly attractive price discounting and financing. Indeed, consumers' contribution to economic output, which historically accounts for about two-thirds of GDP, rose to a record 70% in 2003's second 1. Source: Standard & Poor's Micropal. The Nasdaq 100 Index includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization. The index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies including investment companies. Index returns are price-return only and do not include reinvested dividends. 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 and includes reinvested dividends. The indexes are unmanaged. 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 COMPLETE LEGAL TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 51. Annual Report | 3 [SIDEBAR] PORTFOLIO BREAKDOWN Franklin DynaTech Fund 9/30/03 - ------------------------------------- % OF TOTAL SECTOR/INDUSTRY NET ASSETS - ------------------------------------------- Semiconductors 11.4% - ------------------------------------------- Packaged Software 8.9% - ------------------------------------------- Biotechnology 7.9% - ------------------------------------------- Medical Specialties 6.3% - ------------------------------------------- Major Pharmaceuticals 5.1% - ------------------------------------------- Electronic Production Equipment 4.7% - ------------------------------------------- Data Processing Services 4.4% - ------------------------------------------- Other Consumer Services 4.0% - ------------------------------------------- Telecommunications Equipment 3.7% - ------------------------------------------- Electronic Equipment & Instruments 3.1% - ------------------------------------------- Information Technology Services 2.8% - ------------------------------------------- Managed Health Care 2.7% - ------------------------------------------- Casinos & Gaming 2.7% - ------------------------------------------- Computer Processing Hardware 2.4% - ------------------------------------------- Recreational Products 2.3% - ------------------------------------------- Computer Communications 2.2% - ------------------------------------------- Air Freight & Couriers 2.0% - ------------------------------------------- Broadcasting 1.6% - ------------------------------------------- Internet Software & Services 1.4% - ------------------------------------------- Financial Conglomerates 1.4% - ------------------------------------------- Other Pharmaceuticals 1.3% - ------------------------------------------- Media Conglomerates 1.3% - ------------------------------------------- Cable & Satellite TV 1.3% - ------------------------------------------- Medical Distributors 1.2% - ------------------------------------------- Chemicals: Specialty 1.0% - ------------------------------------------- Computer Peripherals 0.8% - ------------------------------------------- Electronics & Appliance Stores 0.7% - ------------------------------------------- Insurance Brokers & Services 0.6% - ------------------------------------------- Internet Retail 0.6% - ------------------------------------------- Household & Personal Care 0.5% - ------------------------------------------- Electronic Components 0.4% - ------------------------------------------- Oilfield Services & Equipment 0.4% - ------------------------------------------- Short-Term Investments & Other Net Assets 8.9% - ------------------------------------------- quarter. Business spending began to pick up in 2003 as businesses sought to upgrade or replace aging computer hardware and software. Slowly improving activity, profitability and cash flow accompanied by substantial new tax depreciation benefits also enticed businesses to spend more. An accommodative Federal Reserve Board, in an attempt to bolster the sluggish economy, continued to cut interest rates during the year under review. The federal funds target rate fell from 1.75% at the beginning of the reporting period to 1.00% by period-end. Additionally, the U.S. government injected fiscal stimulus into the economy, approving another round of tax cuts and rebates that included dividend tax reductions. However, with unemployment hovering above 6% and with little new job creation, continued economic recovery was not assured. On a brighter note, U.S. equity markets, which often serve as a leading indicator of economic recovery, rallied from 2003's second quarter into September. Overall, during the Fund's fiscal year stock markets sank and rose seemingly in response to war news, improving corporate earnings and profit margins, and mixed unemployment and production data. For the 12-month reporting period, broad equity indexes posted double-digit gains, with technology stocks rallying especially strongly to return 53.32% as measured by the Nasdaq Composite Index. 2 INVESTMENT STRATEGY Normally, we seek to invest in companies and established industry leaders we believe have a competitive advantage due to their state-of-the-art products and technologies. We use a conservative, bottom-up research process to find what we consider undervalued companies. MANAGER'S DISCUSSION During the Fund's fiscal year, we continued to position the portfolio -- consistent with our investment strategy -- toward market-leading companies with compelling valuations, potential for market leadership, and unique products or services. Our largest holding during most of the 12-month reporting period was Intel, a leading provider of semiconductors. From an individual holding perspective, Intel contributed the most to the Fund's performance as the result of being up 98% for the year under review. Genentech, a leading biotechnology company, had favorable news around its drug Avastin. Shares rose more than 145% for the period. The third largest contribution to the Fund came from eBay, the leading provider of Internet auctions; it appreciated more than 103% over the 12-month period. 2. Source: Standard & Poor's Micropal. The Nasdaq Composite Index measures all domestic and international common stocks listed on The Nasdaq Stock Market. The index is market value-weighted and includes over 4,000 companies. 4 | Annual Report On a less positive note, Sony, a front-runner in consumer electronics, declined more than 16% for the period and dragged down Fund performance; we sold it. Similarly, American International Group, an insurance provider, hurt the Fund's performance. Motorola--a leading provider of semiconductors and telecommunications equipment--also negatively affected the Fund. We look forward to serving your future investment needs. Thank you for your support and interest in Franklin DynaTech Fund. [PHOTO OF RUPERT H. JOHNSON, JR.] /S/Rupert H. Johnson, Jr. Rupert H. Johnson, Jr. [PHOTO OF ROBERT R. DEAN] /S/Robert R. Dean Robert R. Dean, CFA Portfolio Management Team Franklin DynaTech Fund [SIDEBAR] TOP 10 HOLDINGS Franklin DynaTech Fund 9/30/03 - -------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------- Intel Corp. 5.0% SEMICONDUCTORS - -------------------------------------- Microsoft Corp. 4.2% PACKAGED SOFTWARE - -------------------------------------- Genentech Inc. 3.7% BIOTECHNOLOGY - -------------------------------------- eBay Inc. 3.5% OTHER CONSUMER SERVICES - -------------------------------------- Amgen Inc. 3.0% BIOTECHNOLOGY - -------------------------------------- International Business Machines Corp. 2.8% INFORMATION TECHNOLOGY SERVICES - -------------------------------------- UnitedHealth Group Inc. 2.7% MANAGED HEALTH CARE - -------------------------------------- International Game Technology 2.7% CASINOS & GAMING - -------------------------------------- Electronic Arts Inc. 2.3% RECREATIONAL PRODUCTS - -------------------------------------- Linear Technology Corp. 2.3% SEMICONDUCTORS - -------------------------------------- THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE FUND'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON 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 ADVISOR 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 | 5 Performance Summary as of 9/30/03 FRANKLIN DYNATECH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects the Fund's dividend income, capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION - ----------------------------------------------------------------------------------------------------- CLASS A CHANGE 9/30/03 9/30/02 - ----------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.80 $20.17 $15.37 - ----------------------------------------------------------------------------------------------------- CLASS B CHANGE 9/30/03 9/30/02 - ----------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.61 $19.80 $15.19 - ----------------------------------------------------------------------------------------------------- CLASS C CHANGE 9/30/03 9/30/02 - ----------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.56 $19.59 $15.03 PERFORMANCE - ----------------------------------------------------------------------------------------------------- CLASS A 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +31.23% +20.68% +158.86% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +23.67% +2.61% +9.33% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $12,367 $11,373 $24,393 - ----------------------------------------------------------------------------------------------------- CLASS B 1-YEAR 3-YEAR INCEPTION (2/1/00) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +30.35% -28.36% -27.32% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +26.35% -11.40% -9.07% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $12,635 $6,955 $7,057 - ----------------------------------------------------------------------------------------------------- CLASS C 1-YEAR 5-YEAR INCEPTION (9/16/96) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +30.34% +16.33% +63.63% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +28.06% +2.86% +7.09% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $12,806 $11,515 $16,197 ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SINCE MARKETS CAN GO DOWN AS WELL AS UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. FOR MORE CURRENT PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 6 | Past performance does not guarantee future results. | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes the current, applicable, maximum sales charge(s), Fund expenses, account fees and reinvested distributions. The indexes are unmanaged. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. CLASS A (10/1/93-9/30/03) [LINE CHART OMITTED] Franklin S&P Nasdaq 100 DynaTech Fund 500 4 Index 4 10/93 $9,423 $10,000 $10,000 $9,460 $10,207 $10,216 $9,322 $10,109 $10,106 $9,444 $10,232 $10,407 $9,681 $10,579 $10,818 $9,651 $10,292 $10,770 $9,385 $9,844 $10,007 $9,237 $9,971 $9,753 $9,365 $10,134 $9,899 $9,021 $9,886 $9,414 $9,306 $10,210 $9,672 $9,868 $10,628 $10,397 $9,700 $10,368 $10,291 $10,104 $10,601 $10,793 $9,917 $10,215 $10,578 $9,936 $10,366 $10,563 $10,027 $10,635 $10,591 $10,297 $11,049 $11,301 $10,528 $11,374 $11,684 $10,959 $11,709 $12,269 $11,280 $12,176 $12,754 $12,162 $12,459 $14,058 $12,714 $12,872 $14,865 $12,573 $12,904 $15,071 $12,814 $13,448 $15,288 $13,065 $13,400 $15,646 $12,884 $13,988 $15,514 $12,532 $14,257 $15,057 $12,543 $14,742 $15,464 $12,986 $14,879 $16,274 3/96 $12,728 $15,022 $15,931 $13,769 $15,243 $17,421 $14,264 $15,636 $18,092 $13,810 $15,696 $17,697 $12,986 $15,002 $16,619 $13,460 $15,319 $17,339 $14,460 $16,181 $19,272 $14,728 $16,627 $19,649 $16,140 $17,883 $21,792 $16,141 $17,528 $21,462 $17,340 $18,623 $24,080 $16,364 $18,769 $22,222 $15,950 $17,999 $20,827 $16,661 $19,073 $22,856 $17,595 $20,233 $25,054 $17,754 $21,139 $25,014 $19,484 $22,820 $28,926 $19,134 $21,543 $28,067 $19,611 $22,722 $28,668 $18,646 $21,964 $26,642 $18,847 $22,980 $27,449 $18,501 $23,374 $25,889 $19,136 $23,633 $27,988 $19,986 $25,336 $31,202 $20,076 $26,632 $31,895 $20,461 $26,900 $32,613 $19,736 $26,439 $31,148 $20,699 $27,512 $34,944 $20,801 $27,219 $35,987 $18,898 $23,288 $29,796 9/98 $20,212 $24,780 $35,157 $20,767 $26,794 $36,595 $22,048 $28,417 $40,709 $23,560 $30,054 $47,974 $25,395 $31,310 $55,582 $24,225 $30,337 $50,307 $25,017 $31,550 $55,039 $25,085 $32,772 $55,823 $24,672 $31,999 $54,603 $25,934 $33,774 $60,013 $25,911 $32,721 $59,338 $26,634 $32,559 $62,629 $26,508 $31,667 $62,917 $27,586 $33,670 $68,915 $29,215 $34,355 $77,518 $32,321 $36,377 $96,883 $32,647 $34,550 $93,283 $35,522 $33,896 $111,493 $35,882 $37,210 $114,913 $33,939 $36,091 $98,591 $32,309 $35,352 $86,856 $34,299 $36,224 $98,346 $33,694 $35,658 $94,310 $36,138 $37,872 $106,545 $33,287 $35,873 $93,298 $32,437 $35,721 $85,765 $28,981 $32,907 $65,495 $28,366 $33,068 $61,187 $29,795 $34,241 $67,753 $26,198 $31,121 $49,863 3/01 $24,661 $29,150 $41,108 $26,269 $31,414 $48,474 $25,864 $31,624 $47,030 $25,673 $30,855 $47,889 $24,863 $30,551 $43,992 $23,851 $28,640 $38,402 $22,350 $26,328 $30,529 $23,374 $26,830 $35,661 $24,828 $28,888 $41,704 $24,647 $29,141 $41,207 $24,453 $28,716 $40,505 $23,304 $28,162 $35,516 $24,018 $29,221 $37,961 $22,724 $27,450 $33,369 $22,433 $27,249 $31,573 $21,043 $25,309 $27,473 $19,954 $23,336 $25,139 $19,870 $23,489 $24,624 $18,588 $20,939 $21,753 $20,160 $22,780 $25,856 $21,405 $24,119 $29,163 $19,749 $22,703 $25,721 $19,531 $22,109 $25,687 $19,724 $21,777 $26,384 $19,894 $21,987 $26,617 $21,212 $23,798 $28,901 $22,784 $25,051 $31,300 $23,171 $25,371 $31,399 $24,006 $25,819 $33,366 $24,888 $26,321 $35,045 9/03 $24,393 $26,042 $34,065 CLASS B (2/1/00-9/30/03) [LINE CHART OMITTED] Franklin S&P Nasdaq DynaTech Fund 500 4 100 Index 4 2/00 $10,000 $10,000 $10,000 $10,870 $9,811 $11,952 $10,973 $10,770 $12,319 $10,374 $10,446 $10,569 $9,868 $10,232 $9,311 $10,471 $10,485 $10,543 $10,278 $10,321 $10,110 $11,020 $10,962 $11,422 $10,146 $10,383 $10,002 $9,879 $10,339 $9,194 $8,824 $9,524 $7,021 12/00 $8,624 $9,571 $6,559 $9,053 $9,911 $7,263 $7,958 $9,008 $5,345 $7,488 $8,437 $4,407 $7,968 $9,092 $5,196 $7,841 $9,153 $5,042 $7,779 $8,931 $5,134 $7,528 $8,843 $4,716 $7,219 $8,290 $4,117 $6,760 $7,620 $3,273 $7,062 $7,766 $3,823 11/01 $7,499 $8,361 $4,471 $7,437 $8,435 $4,417 $7,378 $8,312 $4,342 $7,026 $8,151 $3,807 $7,239 $8,458 $4,069 $6,842 $7,945 $3,577 $6,751 $7,887 $3,385 $6,329 $7,325 $2,945 $5,995 $6,754 $2,695 $5,969 $6,799 $2,640 $5,576 $6,060 $2,332 10/02 $6,046 $6,593 $2,772 $6,413 $6,981 $3,126 $5,917 $6,571 $2,757 $5,848 $6,399 $2,754 $5,903 $6,303 $2,828 $5,947 $6,364 $2,853 $6,340 $6,888 $3,098 $6,806 $7,251 $3,355 $6,916 $7,343 $3,366 $7,158 $7,473 $3,577 $7,419 $7,618 $3,757 9/03 $7,057 $7,538 $3,652 Annual Report | Past performance does not guarantee future results. | 7 Performance Summary (CONTINUED) [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - -------------------------------------- CLASS C 9/30/03 - -------------------------------------- 1-Year +28.06% - -------------------------------------- 5-Year +2.86% - -------------------------------------- Since Inception (9/16/96) +7.09% CLASS C (9/16/96-9/30/03) [LINE CHART OMITTED] Franklin S&P Nasdaq DynaTech Fund 500 4 100 Index 4 9/96 $9,899 $10,000 $10,000 $10,159 $10,262 $10,520 $10,333 $10,545 $10,726 $11,318 $11,342 $11,896 $11,312 $11,117 $11,716 $12,155 $11,811 $13,145 $11,461 $11,904 $12,131 $11,163 $11,416 $11,369 $11,648 $12,097 $12,477 $12,289 $12,833 $13,677 $12,386 $13,407 $13,655 $13,587 $14,473 $15,790 $13,326 $13,663 $15,322 $13,646 $14,411 $15,650 $12,968 $13,930 $14,543 $13,095 $14,575 $14,984 $12,843 $14,825 $14,132 $13,256 $14,989 $15,278 $13,836 $16,069 $17,033 $13,892 $16,891 $17,411 $14,154 $17,061 $17,803 $13,638 $16,768 $17,003 6/98 $14,297 $17,449 $19,075 $14,352 $17,263 $19,645 $13,034 $14,770 $16,265 $13,923 $15,716 $19,191 $14,297 $16,994 $19,976 $15,170 $18,023 $22,222 $16,198 $19,061 $26,188 $17,447 $19,858 $30,341 $16,638 $19,241 $27,461 $17,167 $20,010 $30,045 $17,207 $20,785 $30,473 $16,919 $20,295 $29,807 $17,767 $21,420 $32,760 $17,743 $20,753 $32,392 $18,224 $20,650 $34,188 $18,128 $20,084 $34,345 $18,848 $21,355 $37,619 $19,953 $21,789 $42,316 $22,062 $23,071 $52,887 $22,272 $21,912 $50,922 $24,221 $21,498 $60,862 $24,447 $23,600 $62,729 4/00 $23,113 $22,890 $53,819 $21,981 $22,422 $47,413 $23,331 $22,974 $53,685 $22,903 $22,616 $51,482 $24,544 $24,020 $58,161 $22,596 $22,752 $50,930 $22,006 $22,655 $46,817 $19,653 $20,871 $35,752 $19,213 $20,973 $33,401 $20,174 $21,717 $36,985 $17,727 $19,738 $27,220 $16,684 $18,488 $22,440 $17,760 $19,924 $26,461 $17,473 $20,057 $25,673 $17,333 $19,569 $26,142 $16,775 $19,376 $24,014 $16,077 $18,165 $20,963 $15,059 $16,698 $16,665 $15,740 $17,017 $19,467 $16,709 $18,322 $22,765 $16,569 $18,482 $22,494 $16,437 $18,213 $22,111 2/02 $15,660 $17,861 $19,387 $16,123 $18,533 $20,722 $15,246 $17,410 $18,216 $15,040 $17,282 $17,235 $14,097 $16,051 $14,997 $13,361 $14,801 $13,723 $13,295 $14,898 $13,442 $12,427 $13,280 $11,875 $13,477 $14,448 $14,114 $14,296 $15,297 $15,920 $13,188 $14,399 $14,041 $13,031 $14,023 $14,022 $13,155 $13,812 $14,403 $13,254 $13,945 $14,530 $14,130 $15,094 $15,776 $15,164 $15,888 $17,086 $15,412 $16,091 $17,140 $15,958 $16,375 $18,214 $16,536 $16,694 $19,130 9/03 $16,197 $16,517 $18,595 END NOTES INVESTING IN A NON-DIVERSIFIED FUND CONCENTRATING IN THE SCIENTIFIC AND TECHNOLOGICAL SECTOR INVOLVES SPECIAL RISKS, INCLUDING THOSE RELATED TO FLUCTUATIONS IN THE PRICE OF TECHNOLOGY STOCKS AND INCREASED SUSCEPTIBILITY TO ADVERSE ECONOMIC AND REGULATORY DEVELOPMENTS AFFECTING THE SECTOR. THE TECHNOLOGY SECTOR HAS BEEN AMONG THE MARKET'S MOST VOLATILE. THE FUND MAY ALSO INVEST IN SMALL-CAPITALIZATION COMPANIES, WHICH INVOLVE SPECIAL RISKS SUCH AS RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND MODEST MARKET SHARE. THE PRICE OF THESE SECURITIES CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM AND INVESTORS SHOULD EXPECT FLUCTUATION IN THE VALUE OF THEIR INVESTMENT. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Subject to the current, maximum 5.75% initial sales charge. Prior to 8/3/98, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: Subject to no initial sales charge, but subject to a contingent deferred sales charge (CDSC) declining from 4% to 0% over six years. These shares have higher annual fees and expenses than Class A shares. CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge(s). 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge(s). 4. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 includes reinvested dividends and is one of the most widely used benchmarks of U.S. equity performance. The Nasdaq 100 Index includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization. The index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies including investment companies. The Nasdaq 100 Index is calculated under a modified capitalization-weighted methodology. Index returns are price-return only and do not include reinvested dividends. 8 | Past performance does not guarantee future results. | Annual Report Franklin Growth Fund YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: Franklin Growth Fund seeks capital appreciation by investing most of its assets in common stocks or convertible securities believed to offer favorable possibilities for capital appreciation. [SIDEBAR] PORTFOLIO BREAKDOWN Franklin Growth Fund 9/30/03 - --------------------------------------- % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------------------------------- Health Technology 23.0% - --------------------------------------- Producer Manufacturing 18.5% - --------------------------------------- Electronic Technology 17.2% - --------------------------------------- Technology Services 10.6% - --------------------------------------- Transportation 5.3% - --------------------------------------- Consumer Services 4.9% - --------------------------------------- Consumer Non-Durables 3.0% - --------------------------------------- Distribution Services 2.8% - --------------------------------------- Commercial Services 2.7% - --------------------------------------- Retail Trade 2.2% - --------------------------------------- Consumer Durables 2.2% - --------------------------------------- Energy Minerals 2.0% - --------------------------------------- Process Industries 1.8% - --------------------------------------- Industrial Services 1.7% - --------------------------------------- Health Services 0.7% - --------------------------------------- Finance 0.3% Short-Term Investments & - --------------------------------------- Other Net Assets 1.1% - --------------------------------------- We are pleased to bring you Franklin Growth Fund's annual report for the fiscal year ended September 30, 2003. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Growth Fund - Class A delivered a +22.27% cumulative total return, as shown in the Performance Summary beginning on page 12. The Fund underperformed its benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which returned 24.38% for the same period. 1 ECONOMIC AND MARKET OVERVIEW During the fiscal year ended September 30, 2003, the U.S. economy expanded within a relatively muted inflation environment, despite rising energy and health care costs. Gross domestic product (GDP) grew at annualized rates of 1.4% in fourth quarter 2002 and first quarter 2003, 3.3% in the second quarter, and an estimated 7.2% in the third quarter. Much of the momentum resulted from surging government defense spending and the stalwart consumer, whose steady participation in retail, vehicle and home sales was supported by tax cuts, cash raised through aggressive mortgage borrowing, and increasingly attractive price discounting and financing. Indeed, consumers' contribution to economic output, which historically accounts for about two-thirds of GDP, rose to a record 70% in 2003's second quarter. Business spending began to pick up in 2003 as businesses sought to upgrade or replace aging computer hardware and software. Slowly improving activity, profitability and cash flow accompanied by substantial new tax depreciation benefits also enticed businesses to spend more. An accommodative Federal Reserve Board, in an attempt to bolster the sluggish economy, continued to cut interest rates during the year under review. The federal funds target rate fell from 1.75% at the beginning of the reporting period to 1.00% 1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 61. Annual Report | 9 [SIDEBAR] TOP 10 HOLDINGS Franklin Growth Fund 9/30/03 - -------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------- Pfizer Inc. 3.3% HEALTH TECHNOLOGY - -------------------------------------- Amgen Inc. 3.2% HEALTH TECHNOLOGY - -------------------------------------- 3M Co. 3.0% PRODUCER MANUFACTURING - -------------------------------------- International Business Machines Corp. 2.7% TECHNOLOGY SERVICES - -------------------------------------- Johnson & Johnson 2.7% HEALTH TECHNOLOGY - -------------------------------------- Northrop Grumman Corp. 2.3% ELECTRONIC TECHNOLOGY - -------------------------------------- Genentech Inc. 2.2% HEALTH TECHNOLOGY - -------------------------------------- General Dynamics Corp. 2.1% ELECTRONIC TECHNOLOGY - -------------------------------------- Computer Sciences Corp. 2.0% TECHNOLOGY SERVICES - -------------------------------------- Boeing Co. 1.9% ELECTRONIC TECHNOLOGY - -------------------------------------- by period-end. Additionally, the U.S. government injected fiscal stimulus into the economy, approving another round of tax cuts and rebates that included dividend tax reductions. However, with unemployment hovering above 6% and with little new job creation, continued economic recovery was not assured. On a brighter note, U.S. equity markets, which often serve as a leading indicator of economic recovery, rallied from 2003's second quarter into September. Overall, during the Fund's fiscal year stock markets sank and rose seemingly in response to war news, improving corporate earnings and profit margins, and mixed unemployment and production data. For the 12-month reporting period, broad equity indexes posted double-digit gains, with technology stocks rallying especially strongly to return 53.32% as measured by the Nasdaq Composite Index.2 INVESTMENT STRATEGY The Fund looks for positive change opportunities primarily in new and rapidly growing businesses and secondarily in mature businesses selling at depressed prices but offering favorable recovery possibilities. Additionally, we seek to invest in companies that have strong management teams, strong financials and industry leadership. We analyze securities individually and buy stocks of large and small companies in our effort to maintain a solid and diversified portfolio. MANAGER'S DISCUSSION We were nearly fully invested in stocks during the entire reporting period. Of the Fund's 106 companies held for the entire year, 28 of the 53 that exceeded the S&P 500's return more than doubled it. On the other hand, 53 of the 106 did not rise as much as the S&P 500. The Fund holds more aggressive positions than the benchmark. However, we attribute our slight underperformance relative to the S&P 500 to our company weightings. Holdings that produced the highest returns for the Fund were Amgen, Tyco International, Yahoo!, Genentech, Caterpillar, Ingersoll Rand and Computer Sciences. The lowest returns came from Lockheed Martin, Teleflex, R.R. Donnelley, Schering-Plough, Northrop Grumman, General Dynamics and American Greetings. 2. Source: Standard & Poor's Micropal. The Nasdaq Composite Index measures all domestic and international common stocks listed on the Nasdaq Stock Market. The index is market value-weighted and includes over 4,000 companies. 10 | Annual Report For the Fund's stability, growth and diversification, we favor pharmaceutical companies because for the most part they manufacture relatively inexpensive products and may offer investors opportunities to prosper from meaningful new product introductions. During the past year, however, the industry was uncharacteristically dormant and did not contribute significantly to Fund performance. Lackluster action during the period was primarily due to absorption of the 1990s' large gains, depleted new product pipelines, few big drug introductions and negative publicity in the press. [PHOTO] /S/V. Jerry Palmieri V. Jerry Palmieri Portfolio Manager Franklin Growth Fund THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE FUND'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON 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 ADVISOR 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 | 11 Performance Summary as of 9/30/03 FRANKLIN GROWTH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects the Fund's dividend income, capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION - --------------------------------------------------------------------------------------------------- CLASS A CHANGE 9/30/03 9/30/02 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.86 $26.87 $22.01 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - --------------------------------------------------------------------------------------------------- Dividend Income $0.0389 - --------------------------------------------------------------------------------------------------- CLASS B CHANGE 9/30/03 9/30/02 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.63 $26.32 $21.69 - --------------------------------------------------------------------------------------------------- CLASS C CHANGE 9/30/03 9/30/02 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.59 $26.10 $21.51 - --------------------------------------------------------------------------------------------------- CLASS R CHANGE 9/30/03 9/30/02 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.76 $26.74 $21.98 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - --------------------------------------------------------------------------------------------------- Dividend Income $0.0545 - --------------------------------------------------------------------------------------------------- ADVISOR CLASS CHANGE 9/30/03 9/30/02 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.86 $26.91 $22.05 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - --------------------------------------------------------------------------------------------------- Dividend Income $0.1098 12 |Past performance does not guarantee future results. | Annual Report Performance Summary (CONTINUED) PERFORMANCE - ----------------------------------------------------------------------------------------------------- CLASS A 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +22.27% +4.79% +131.45% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +15.25% -0.25% +8.11% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,525 $9,877 $21,813 - ----------------------------------------------------------------------------------------------------- CLASS B 1-YEAR 3-YEAR INCEPTION (1/1/99) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +21.35% -23.92% -9.97% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +17.35% -9.58% -2.57% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,735 $7,392 $8,836 - ----------------------------------------------------------------------------------------------------- CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +21.34% +0.92% +77.01% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +19.12% -0.01% +6.89% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,912 $9,993 $17,524 - ----------------------------------------------------------------------------------------------------- CLASS R 1-YEAR INCEPTION (1/1/02) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +21.92% -15.17% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +20.92% -9.01% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $12,092 $8,483 - ----------------------------------------------------------------------------------------------------- ADVISOR CLASS4 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +22.58% +6.08% +137.11% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +22.58% +1.19% +9.02% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $12,258 $10,608 $23,711 ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SINCE MARKETS CAN GO DOWN AS WELL AS UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. FOR MORE CURRENT PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Annual Report | Past performance does not guarantee future results. | 13 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 the current, applicable, maximum sales charge(s), Fund expenses, account fees and reinvested distributions. The unmanaged index includes reinvested dividends. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index. [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - -------------------------------------- CLASS A 9/30/03 - -------------------------------------- 1-Year +15.25% - -------------------------------------- 5-Year -0.25% - -------------------------------------- 10-Year +8.11% CLASS A (10/3/93-9/30/03) [LINE CHART OMITTED] Franklin Growth Fund S&P 500 Index 5 10/93 $9,425 $10,000 $9,716 $10,207 $9,735 $10,109 $10,009 $10,232 $10,152 $10,579 $9,846 $10,292 $9,358 $9,844 $9,554 $9,971 $9,717 $10,134 $9,643 $9,886 $9,914 $10,210 $10,423 $10,628 $10,152 $10,368 $10,362 $10,601 $10,090 $10,215 $10,301 $10,366 $10,459 $10,635 $10,885 $11,049 $11,270 $11,374 $11,592 $11,709 $11,846 $12,176 $12,307 $12,459 $12,918 $12,872 $12,897 $12,904 $13,309 $13,448 $13,385 $13,400 3/96 $14,140 $13,988 $14,257 $14,257 $14,669 $14,742 $14,983 $14,879 $15,039 $15,022 $15,346 $15,243 $15,639 $15,636 $15,527 $15,696 $14,725 $15,002 $15,136 $15,319 $15,931 $16,181 $15,973 $16,627 $16,978 $17,883 $16,636 $17,528 $17,055 $18,623 $17,091 $18,769 $16,665 $17,999 $17,261 $19,073 $18,212 $20,233 $18,553 $21,139 $19,292 $22,820 $18,646 $21,543 $19,235 $22,722 $19,072 $21,964 $19,505 $22,980 $19,731 $23,374 $19,935 $23,633 $20,773 $25,336 $21,224 $26,632 $21,508 $26,900 9/98 $21,202 $26,439 $21,603 $27,512 $21,523 $27,219 $19,709 $23,288 $20,816 $24,780 $22,098 $26,794 $22,892 $28,417 $23,386 $30,054 $23,795 $31,310 $23,542 $30,337 $24,181 $31,550 $24,970 $32,772 $24,665 $31,999 $25,698 $33,774 $25,282 $32,721 $25,386 $32,559 $24,695 $31,667 $25,096 $33,670 $25,416 $34,355 $26,236 $36,377 $26,016 $34,550 $25,408 $33,896 $27,619 $37,210 $27,945 $36,091 $28,059 $35,352 $28,454 $36,224 $28,014 $35,658 $29,244 $37,872 $28,036 $35,873 $28,409 $35,721 3/01 $27,672 $32,907 $28,211 $33,068 $28,743 $34,241 $27,301 $31,121 $25,280 $29,150 $27,317 $31,414 $27,736 $31,624 $26,464 $30,855 $26,399 $30,551 $25,199 $28,640 $22,397 $26,328 $23,146 $26,830 $25,344 $28,888 $25,540 $29,141 $25,175 $28,716 $24,997 $28,162 $25,864 $29,221 $24,227 $27,450 $23,749 $27,249 $21,958 $25,309 $19,980 $23,336 $20,020 $23,489 $17,840 $20,939 $19,080 $22,780 $20,385 $24,119 $19,321 $22,703 $18,582 $22,109 $18,160 $21,777 $18,160 $21,987 $19,483 $23,798 9/03 $20,758 $25,051 $21,375 $25,371 $22,008 $25,819 $22,495 $26,321 $21,813 $26,042 [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - -------------------------------------- CLASS B 9/30/03 - -------------------------------------- 1-Year +17.35% - -------------------------------------- 3-Year -9.58% - -------------------------------------- Since Inception (1/1/99) -2.57% CLASS B (1/1/99-9/30/03) [LINE CHART OMITTED] Franklin Growth Fund S&P 500 Index 5 1/99 $10,000 $10,000 $10,172 $10,418 $10,057 $10,094 $10,324 $10,498 $10,655 $10,905 $10,515 $10,647 $10,951 $11,238 $10,766 $10,887 $10,804 $10,834 $10,502 $10,537 $10,668 $11,203 $10,792 $11,431 $11,134 $12,104 $11,031 $11,496 $10,771 $11,279 3/00 $11,698 $12,381 $11,831 $12,009 $11,873 $11,763 $12,031 $12,053 $11,837 $11,865 $12,352 $12,601 $11,834 $11,936 $11,983 $11,886 $11,665 $10,949 $11,883 $11,003 $12,102 $11,393 $11,491 $10,355 $10,630 $9,699 $11,477 $10,453 $11,648 $10,523 6/01 $11,108 $10,267 $11,070 $10,166 $10,565 $9,530 $9,380 $8,760 $9,687 $8,927 $10,609 $9,612 $10,683 $9,696 $10,522 $9,555 $10,444 $9,371 $10,796 $9,723 $10,108 $9,134 $9,903 $9,067 $9,147 $8,421 $8,319 $7,765 $8,333 $7,816 9/02 $7,420 $6,967 $7,929 $7,580 $8,470 $8,025 $8,018 $7,554 $7,710 $7,357 $7,529 $7,246 $7,526 $7,316 $8,070 $7,919 $8,590 $8,335 $8,839 $8,442 $9,096 $8,591 $9,291 $8,758 9/03 $8,836 $8,665 14 | Past performance does not guarantee future results. | Annual Report Performance Summary (CONTINUED) CLASS C (5/1/95-9/30/03) [LINE CHART OMITTED] Franklin Growth Fund S&P 500 Index 5 5/95 $9,900 $10,000 $10,135 $10,399 $10,517 $10,640 $11,040 $10,993 $11,011 $11,020 $11,357 $11,485 $11,410 $11,444 $12,051 $11,946 $12,142 $12,176 $12,482 $12,590 $12,744 $12,707 $12,786 $12,829 $13,037 $13,018 $13,281 $13,354 $13,180 $13,404 $12,488 $12,813 $12,828 $13,083 $13,496 $13,819 $13,526 $14,200 $14,367 $15,272 $14,068 $14,970 $14,407 $15,905 $14,431 $16,029 $14,061 $15,372 $14,558 $16,289 $15,351 $17,280 6/97 $15,624 $18,054 $16,242 $19,489 $15,678 $18,398 $16,169 $19,405 $16,024 $18,758 $16,375 $19,626 $16,554 $19,962 $16,715 $20,183 $17,407 $21,638 $17,771 $22,745 $18,000 $22,974 $17,734 $22,579 $18,055 $23,496 $17,975 $23,246 $16,455 $19,889 $17,363 $21,163 $18,426 $22,883 $19,068 $24,269 $19,473 $25,667 $19,799 $26,740 $19,573 $25,909 $20,087 $26,945 $20,734 $27,988 $20,470 $27,329 $21,317 $28,844 $20,953 $27,945 8/99 $21,028 $27,806 $20,439 $27,045 $20,759 $28,756 $21,010 $29,340 $21,680 $31,067 $21,477 $29,506 $20,967 $28,949 $22,775 $31,779 $23,023 $30,823 $23,106 $30,192 $23,418 $30,937 $23,043 $30,453 $24,042 $32,344 $23,036 $30,637 $23,329 $30,507 $22,705 $28,103 $23,136 $28,241 $23,552 $29,243 $22,365 $26,578 $20,689 $24,895 $22,345 $26,828 $22,673 $27,008 $21,621 $26,351 $21,547 $26,092 $20,562 $24,460 $18,262 $22,485 10/01 $18,859 $22,914 $20,642 $24,671 $20,787 $24,887 $20,478 $24,524 $20,323 $24,051 $21,008 $24,956 $19,672 $23,444 $19,269 $23,271 $17,806 $21,614 $16,188 $19,930 $16,214 $20,060 $14,442 $17,882 $15,436 $19,455 $16,483 $20,599 $15,610 $19,389 $15,006 $18,882 $14,650 $18,598 $14,643 $18,777 $15,704 $20,325 $16,718 $21,394 $17,201 $21,668 $17,705 $22,050 $18,081 $22,479 9/03 $17,524 $22,241 [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - -------------------------------------- CLASS C 9/30/03 - -------------------------------------- 1-Year +19.12% - -------------------------------------- 5-Year -0.01% - -------------------------------------- Since Inception (5/1/95) +6.89% CLASS R (1/1/02-9/30/03) [LINE CHART OMITTED] Franklin Growth Fund S&P 500 Index 5 1/02 $10,000 $10,000 $9,832 $9,854 $9,759 $9,664 $10,098 $10,028 $9,456 $9,420 $9,266 $9,351 6/02 $8,566 $8,685 $7,793 $8,008 $7,806 $8,061 $6,957 $7,185 $7,435 $7,817 $7,945 $8,277 12/02 $7,528 $7,791 $7,239 $7,587 $7,071 $7,473 $7,071 $7,545 $7,585 $8,167 $8,080 $8,596 6/03 $8,318 $8,706 $8,562 $8,860 $8,750 $9,032 9/03 $8,483 $8,937 [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - -------------------------------------- CLASS R 9/30/03 - -------------------------------------- 1-Year +20.92% - -------------------------------------- Since Inception (1/1/02) -9.01% Annual Report | Past performance does not guarantee future results. | 15 Performance Summary (CONTINUED) [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - -------------------------------------- ADVISOR CLASS 4 9/30/03 - -------------------------------------- 1-Year +22.58% - -------------------------------------- 5-Year +1.19% - -------------------------------------- 10-Year +9.02% ADVISOR CLASS (10/1/93-9/30/03) 4 [LINE CHART OMITTED] Franklin Growth Fund S&P 500 Index 5 10/93 $10,000 $10,000 $10,309 $10,207 $10,330 $10,109 $10,620 $10,232 $10,771 $10,579 $10,447 $10,292 $9,929 $9,844 $10,138 $9,971 $10,311 $10,134 $10,231 $9,886 $10,519 $10,210 $11,059 $10,628 $10,771 $10,368 $10,995 $10,601 $10,707 $10,215 $10,930 $10,366 $11,098 $10,635 $11,550 $11,049 $11,958 $11,374 $12,300 $11,709 $12,570 $12,176 $13,058 $12,459 $13,706 $12,872 $13,685 $12,904 $14,122 $13,448 $14,202 $13,400 $15,003 $13,988 $15,128 $14,257 $15,565 $14,742 $15,898 $14,879 3/96 $15,957 $15,022 $16,282 $15,243 $16,593 $15,636 $16,475 $15,696 $15,624 $15,002 $16,060 $15,319 $16,904 $16,181 $16,949 $16,627 $18,014 $17,883 $17,652 $17,528 $18,245 $18,623 $18,291 $18,769 $17,843 $17,999 $18,481 $19,073 $19,498 $20,233 $19,863 $21,139 $20,661 $22,820 $19,969 $21,543 $20,607 $22,722 $20,433 $21,964 $20,912 $22,980 $21,152 $23,374 $21,378 $23,633 $22,276 $25,336 $22,768 $26,632 $23,073 $26,900 $22,752 $26,439 $23,181 $27,512 $23,104 $27,219 $21,160 $23,288 9/98 $22,354 $24,780 $23,736 $26,794 $24,595 $28,417 $25,131 $30,054 $25,579 $31,310 $25,308 $30,337 $25,994 $31,550 $26,841 $32,772 $26,530 $31,999 $27,648 $33,774 $27,200 $32,721 $27,320 $32,559 $26,577 $31,667 $27,017 $33,670 $27,369 $34,355 $28,260 $36,377 $28,023 $34,550 $27,377 $33,896 $29,765 $37,210 $30,117 $36,091 $30,247 $35,352 $30,689 $36,224 $30,215 $35,658 $31,548 $37,872 $30,256 $35,873 $30,665 $35,721 $29,871 $32,907 $30,457 $33,068 $31,040 $34,241 $29,492 $31,121 3/01 $27,309 $29,150 $29,517 $31,414 $29,979 $31,624 $28,605 $30,855 $28,544 $30,551 $27,257 $28,640 $24,223 $26,328 $25,040 $26,830 $27,431 $28,888 $27,645 $29,141 $27,250 $28,716 $27,065 $28,162 $28,013 $29,221 $26,241 $27,450 $25,732 $27,249 $23,793 $25,309 $21,653 $23,336 $21,705 $23,489 $19,345 $20,939 $20,696 $22,780 $22,118 $24,119 $20,963 $22,703 $20,170 $22,109 $19,712 $21,777 $19,721 $21,987 $21,157 $23,798 $22,549 $25,051 $23,219 $25,371 $23,915 $25,819 $24,444 $26,321 9/03 $23,711 $26,042 ENDNOTES HISTORICALLY, THE FUND HAS FOCUSED ON LARGER COMPANIES. THE FUND'S INVESTMENTS IN FOREIGN COMPANIES CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. THE FUND'S PORTFOLIO INCLUDES INVESTMENTS IN TECHNOLOGY, WHICH HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Subject to the current, maximum 5.75% initial sales charge. Prior to 8/3/98, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: Subject to no initial sales charge, but subject to a contingent deferred sales charge (CDSC) declining from 4% to 0% over six years. These shares have higher annual fees and expenses than Class A shares. CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. CLASS R: No initial sales charge, but subject to 1% CDSC for shares redeemed within 18 months of investment; 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: No initial sales charge or Rule 12b-1 fees; are available to a limited class of investors. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge(s). 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge(s). 4. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +34.33% and +4.47%. 5. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. 16 | Past performance does not guarantee future results. | Annual Report Franklin Income Fund YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: Franklin Income Fund seeks to maximize income while maintaining prospects for capital appreciation through a diversified portfolio of securities. [SIDEBAR] PORTFOLIO BREAKDOWN Franklin Income Fund 9/30/03 - -------------------------------------- % OF TOTAL NET ASSETS - -------------------------------------- Corporate Straight Bonds 29.5% - -------------------------------------- Utilities Stocks 20.9% - -------------------------------------- Corporate Convertible Bonds 5.9% - -------------------------------------- Energy Mineral Stocks 5.7% - -------------------------------------- Real Estate Stocks 2.8% - -------------------------------------- Communication Stocks 2.8% - -------------------------------------- Finance Stocks 2.7% - -------------------------------------- Consumer Durables Stocks 2.3% - -------------------------------------- Health Technology Stocks 2.2% - -------------------------------------- Process Industries Stocks 2.1% - -------------------------------------- Zero Coupon & Step-Up Bonds 1.4% - -------------------------------------- Consumer Non-Durables Stocks 1.4% - -------------------------------------- Municipal Securities 0.9% - -------------------------------------- U.S. Government & Agency Securities 0.6% - -------------------------------------- Foreign Government Bonds 0.1% - -------------------------------------- Other Stocks 5.6% - -------------------------------------- Short-Term Investments & Other Net Assets 13.1% - -------------------------------------- We are pleased to bring you Franklin Income Fund's annual report, covering the fiscal year ended September 30, 2003. PERFORMANCE OVERVIEW Franklin Income Fund - Class A posted a +28.12% cumulative total return for the 12 months ended September 30, 2003, as shown in the Performance Summary beginning on page 22. The Fund outperformed its benchmarks, the Standard & Poor's 500 (S&P 500) Composite Index, which returned 24.38%; the Lehman Brothers U.S. Aggregate Index, which returned 5.41%; the Lehman Brothers U.S. Government/Credit Index, which returned 6.51%; and the Lipper Income Funds Average, which returned 13.88%.1 The Fund changed benchmark indexes from the Lehman Brothers U.S. Government/Credit Index to Lehman Brothers U.S. Aggregate Index because the Lehman Brothers U.S. Aggregate Index provides a broader representation of the bond market and is a more appropriate comparison for the Fund's portfolio. ECONOMIC AND MARKET OVERVIEW During the fiscal year ended September 30, 2003, the U.S. economy expanded within a relatively muted inflation environment, despite rising energy and health care costs. Gross domestic product (GDP) grew at annualized rates of 1.4% in 1. Sources: Standard & Poor's Micropal; Lipper Inc. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The Lehman Brothers U.S. Aggregate Index includes fixed-rate debt issues rated investment grade or higher by Moody's, S&P or Fitch, in that order. All issues have at least one year to maturity and an outstanding par value of at least $100 million for U.S. government issues and $50 million for all others. All returns are market value-weighted inclusive of accrued interest. The index is a composite of the U.S. Government/Credit Index and the Mortgage-Backed Securities Index. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The Lehman Brothers U.S. Government/Credit Index includes fixed-rate debt issues rated investment grade or higher by Moody's, S&P or Fitch, in that order. All issues have at least one year to maturity and an outstanding par value of at least $100 million for U.S. government issues and $50 million for all others. All returns are market value-weighted inclusive of accrued interest. The index includes those issues in the Lehman Brothers Government Bond Index and Corporate Bond Index. The index includes issues of the U.S. government and agencies thereof, domestic corporate issues and foreign dollar-denominated issues. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. As of 9/30/03, the Lipper Income Funds Average consisted of 149 funds. Lipper calculations do not include sales charges. Fund performance relative to the average may have differed if such charges had been considered. 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 COMPLETE LEGAL TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 71. Annual Report | 17 [SIDEBAR] TOP 5 BOND HOLDINGS Franklin Income Fund 9/30/03 - ----------------------------------------- % OF TOTAL NET ASSETS - ----------------------------------------- Charter Communications Holdings 2.8% - ----------------------------------------- Calpine Corp. 1.9% - ----------------------------------------- Dynegy Holdings Inc. 1.7% - ----------------------------------------- Qwest Capital Funding 1.3% - ----------------------------------------- Meristar Hospitality Corp. 1.3% fourth quarter 2002 and first quarter 2003, 3.3% in the second quarter, and an estimated 7.2% in the third quarter. Much of the momentum resulted from surging government defense spending and the stalwart consumer, whose steady participation in retail, vehicle and home sales was supported by tax cuts, cash raised through aggressive mortgage borrowing, and increasingly attractive price discounting and financing. Indeed, consumers' contribution to economic output, which historically accounts for about two-thirds of GDP, rose to a record 70% in 2003's second quarter. Business spending began to pick up in 2003 as businesses sought to upgrade or replace aging computer hardware and software. Slowly improving activity, profitability and cash flow accompanied by substantial new tax depreciation benefits also enticed businesses to spend more. An accommodative Federal Reserve Board, in an attempt to bolster the sluggish economy, continued to cut interest rates during the year under review. The federal funds target rate fell from 1.75% at the beginning of the reporting period to 1.00% by period-end. Additionally, the U.S. government injected fiscal stimulus into the economy, approving another round of tax cuts and rebates that included dividend tax reductions. However, with unemployment hovering above 6% and with little new job creation, continued economic recovery was not assured. On a brighter note, U.S. equity markets, which often serve as a leading indicator of economic recovery, rallied from 2003's second quarter into September. Overall, during the Fund's fiscal year stock markets sank and rose seemingly in response to war news, improving corporate earnings and profit margins, and mixed unemployment and production data. For the 12-month reporting period, broad equity indexes posted double-digit gains, with technology stocks rallying especially strongly to return 53.32% as measured by the Nasdaq Composite Index.2 INVESTMENT STRATEGY Based on our independent analysis of debt, convertible and equity securities, we search for undervalued or out-of-favor securities we believe offer opportunities for income today and significant growth tomorrow. We consider such factors as a company's experience and managerial strength; its responsiveness to changes in interest rates and business conditions; debt maturity schedules and borrowing requirements; a company's changing financial condition and market recognition of the change; and a security's relative value based on such factors as anticipated cash flow, interest or dividend coverage, asset coverage, and earnings. 2. Source: Standard & Poor's Micropal. The unmanaged Nasdaq Composite Index measures all domestic and international common stocks listed on The Nasdaq Stock Market. The index is market value-weighted and includes over 4,000 companies. 18 | Annual Report MANAGER'S DISCUSSION Over the course of the year we gradually reduced the Fund's exposure to primarily interest rate-sensitive securities including our holdings of mortgage-backed bonds issued by FNMA, GNMA and FHLMC. The substantial interest rate decline during 2002, as represented by the benchmark 10-year U.S. Treasury note, enabled these positions to deliver attractive total return for the portfolio through the first half of 2003. As a result, we took profits and redeployed the proceeds into securities we believe had greater potential to help us meet the Fund's dual objective of income and growth. Other interest rate-sensitive positions where profit-taking opportunities arose included corporate bonds, specifically those trading at substantial premiums to their par value and offering only slightly higher yields than comparable maturity U.S. Treasuries. Examples included our divestiture of AT&T Wireless 7.875% senior notes due 2011 and Louisiana Pacific 10.875% senior subordinate notes due 2008, as improving fundamentals and greater risk tolerance among bond investors led to a substantial decline in the overall yield these securities offered. Other corporate bonds, both investment grade and non-investment grade, performed well as improving fundamentals, stable financial markets (following 2002's turmoil exacerbated by corporate malfeasance) and overall interest rate declines contributed to strong results within the sector. During the course of the Fund's fiscal year, we took profits in securities that appreciated and no longer offered the combination of attractive current yield and longer-term upside appreciation, in line with the Fund's investment strategy. For example, the yield difference between U.S. Treasury securities and non-investment grade corporate bonds tightened over the course of the year, from 10.64 percentage points to 5.99 percentage points, as represented by the CSFB High Yield Bond Index.3 Despite strong performance from the corporate sector, we continued searching for opportunities to add to holdings that we believe still offered the combination of yield with the potential for capital appreciation over the long term. Based on this strategy, we added to holdings in Charter Communications, Calpine and Dynegy Holdings. Electric utilities continued to represent the Fund's largest stock sector weighting at period-end, due to our assessment of the sector's attractive combination of dividend yield and stable earnings growth from regulated utility operations. The sector favorably impacted overall Fund performance, as reflected by the S&P Utilities Index's 22.66% cumulative total return for the one-year period ended September 30, 2003.4 Over the past several years, utilities have generally displayed higher-than-normal [SIDEBAR] TOP 5 STOCK HOLDINGS Franklin Income Fund 9/30/03 - ---------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - ---------------------------------------- Ford Motor Co. Capital Trust II 1.6% CONSUMER DURABLES - ---------------------------------------- ChevronTexaco Corp. 1.6% ENERGY MINERALS - ---------------------------------------- Exelon Corp. 1.5% UTILITIES - ---------------------------------------- FirstEnergy Corp. 1.5% UTILITIES - ---------------------------------------- American Electric Power Co. Inc. 1.3% UTILITIES - ---------------------------------------- 3. Source: Credit Suisse First Boston (CSFB). The CSFB High Yield Bond Index is a trader-priced portfolio constructed to mirror the high yield debt market. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; their interest payments and principal are guaranteed. 4. Source: Standard & Poor's Micropal. The S&P Utilities Index is a market capitalization-weighted index that includes utility stocks in the Standard & Poor's 500 Composite Index. 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. Annual Report | 19 [SIDEBAR] - -------------------------------------------------------------------------------- WHAT IS A MERCHANT POWER PLANT? A merchant power plant produces power as a commodity, so its income stream depends on the market price. In contrast, traditional power plants rely on predetermined rates of return, usually set by a regulatory body, to generate income. - -------------------------------------------------------------------------------- DIVIDEND DISTRIBUTIONS Franklin Income Fund 10/1/02-9/30/03 - -------------------------------------------------------------------------------------- DIVIDEND PER SHARE ------------------------------------------------------------------------- MONTH CLASS A CLASS B CLASS B1* CLASS C CLASS R ADVISOR CLASS - -------------------------------------------------------------------------------------- October 1.30 cents 1.17 cents 1.22 cents 1.22 cents 1.25 cents 1.32 cents - -------------------------------------------------------------------------------------- November 1.30 cents 1.17 cents 1.22 cents 1.22 cents 1.25 cents 1.32 cents - -------------------------------------------------------------------------------------- December 1.30 cents 1.17 cents 1.23 cents 1.24 cents 1.25 cents 1.32 cents - -------------------------------------------------------------------------------------- January 1.30 cents 1.17 cents 1.23 cents 1.24 cents 1.25 cents 1.33 cents - -------------------------------------------------------------------------------------- February 1.30 cents 1.17 cents 1.23 cents 1.24 cents 1.25 cents 1.33 cents - -------------------------------------------------------------------------------------- March 1.30 cents 1.17 cents 1.21 cents 1.21 cents 1.24 cents 1.32 cents - -------------------------------------------------------------------------------------- April 1.30 cents 1.17 cents 1.21 cents 1.21 cents 1.24 cents 1.32 cents - -------------------------------------------------------------------------------------- May 1.30 cents 1.17 cents 1.21 cents 1.21 cents 1.24 cents 1.32 cents - -------------------------------------------------------------------------------------- June 1.30 cents 1.16 cents 1.22 cents 1.21 cents 1.23 cents 1.33 cents - -------------------------------------------------------------------------------------- July 1.30 cents 1.16 cents 1.22 cents 1.21 cents 1.23 cents 1.33 cents - -------------------------------------------------------------------------------------- August 1.30 cents 1.16 cents 1.22 cents 1.21 cents 1.23 cents 1.33 cents - -------------------------------------------------------------------------------------- September 1.30 cents 1.14 cents 1.20 cents 1.20 cents 1.24 cents 1.33 cents - -------------------------------------------------------------------------------------- TOTAL 15.60 CENTS 13.98 CENTS 14.62 CENTS 14.62 CENTS 14.90 CENTS 15.90 CENTS - -------------------------------------------------------------------------------------- *On November 1, 2001, the Fund closed Class B to new investors and changed the name to Class B1; a new Class B became available to investors. volatility as the challenges of deregulation and moves toward unregulated business opportunities -- including merchant power generation and energy marketing and trading -- proved more difficult than anticipated. Amid these concerns, we added to positions in numerous holdings including Exelon, FirstEnergy and Ameren. More recently many in the industry have pursued a "back-to-basics" approach emphasizing a stable, predictable business model capable of generating excess cash flow to be deployed for balance sheet strengthening and dividend increases. Rebounding economic growth in the U.S. and abroad, combined with heightened geopolitical turmoil in the Middle East, supported global oil prices for most of the past year. At period-end, the Fund's positions in international integrated oil companies included ChevronTexaco, Royal Dutch Petroleum and BP, all of which favorably contributed to Fund performance through a combination of attractive dividends yield and share price appreciation. 20 | Annual Report Thank you for your continued participation in Franklin Income Fund. As always, we remain committed to our value-oriented approach and will continually search for new investments across asset classes and industries. [PHOTO] /S/Charles B. Johnson Charles B. Johnson [PHOTO] /S/Edward Perks Edward Perks, CFA Portfolio Management Team Franklin Income Fund THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE FUND'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON 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 ADVISOR MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 21 Performance Summary as of 9/30/03 FRANKLIN INCOME FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects the Fund's dividend income, capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION - -------------------------------------------------------------------------------------------------- CLASS A CHANGE 9/30/03 9/30/02 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.35 $2.25 $1.90 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - -------------------------------------------------------------------------------------------------- Dividend Income $0.1560 - -------------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0050 - -------------------------------------------------------------------------------------------------- TOTAL $0.1610 - -------------------------------------------------------------------------------------------------- CLASS B CHANGE 9/30/03 9/30/02 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.34 $2.24 $1.90 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - -------------------------------------------------------------------------------------------------- Dividend Income $0.1398 - -------------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0050 - -------------------------------------------------------------------------------------------------- TOTAL $0.1448 - -------------------------------------------------------------------------------------------------- CLASS B1 CHANGE 9/30/03 9/30/02 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.35 $2.25 $1.90 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - -------------------------------------------------------------------------------------------------- Dividend Income $0.1462 - -------------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0050 - -------------------------------------------------------------------------------------------------- TOTAL $0.1512 - -------------------------------------------------------------------------------------------------- CLASS C CHANGE 9/30/03 9/30/02 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.35 $2.26 $1.91 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - -------------------------------------------------------------------------------------------------- Dividend Income $0.1462 - -------------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0050 - -------------------------------------------------------------------------------------------------- TOTAL $0.1512 22 | Past performance does not guarantee future results. | Annual Report Performance Summary (CONTINUED) PRICE AND DISTRIBUTION INFORMATION (CONTINUED) - -------------------------------------------------------------------------------------------------- CLASS R CHANGE 9/30/03 9/30/02 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.34 $2.23 $1.89 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - -------------------------------------------------------------------------------------------------- Dividend Income $0.1490 - -------------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0050 - -------------------------------------------------------------------------------------------------- TOTAL $0.1540 - -------------------------------------------------------------------------------------------------- ADVISOR CLASS CHANGE 9/30/03 9/30/02 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.35 $2.24 $1.89 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - -------------------------------------------------------------------------------------------------- Dividend Income $0.1590 - -------------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0050 - -------------------------------------------------------------------------------------------------- TOTAL $0.1640 FRANKLIN INCOME FUND PAID DISTRIBUTIONS DERIVED FROM LONG-TERM CAPITAL GAINS OF 0.5 CENTS ($0.0050) PER SHARE IN DECEMBER 2002. THE FUND HEREBY DESIGNATES SUCH DISTRIBUTIONS AS CAPITAL GAIN DIVIDENDS PER INTERNAL REVENUE CODE SECTION 852 (B)(3). Annual Report | Past performance does not guarantee future results. | 23 Performance Summary (CONTINUED) PERFORMANCE - ----------------------------------------------------------------------------------------------------- CLASS A 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +28.12% +47.29% +117.39% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +22.95% +7.15% +7.60% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $12,295 $14,125 $20,808 - ----------------------------------------------------------------------------------------------------- Distribution Rate 4 6.64% - ----------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 5.25% - ----------------------------------------------------------------------------------------------------- CLASS B 1-YEAR INCEPTION (11/1/01) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +26.58% +19.45% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +22.58% +7.80% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $12,258 $11,545 - ----------------------------------------------------------------------------------------------------- Distribution Rate 4 6.11% - ----------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 4.64% - ----------------------------------------------------------------------------------------------------- CLASS B1 1-YEAR 3-YEAR INCEPTION (1/1/99) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +27.51% +21.69% +39.30% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +23.51% +5.92% +6.92% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $12,351 $11,882 $13,739 - ----------------------------------------------------------------------------------------------------- Distribution Rate 4 6.40% - ----------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 4.99% - ----------------------------------------------------------------------------------------------------- CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +27.37% +44.05% +101.88% Average Annual Total Return 2 +25.06% +7.39% +8.58% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $12,506 $14,283 $20,005 - ----------------------------------------------------------------------------------------------------- Distribution Rate 4 6.32% - ----------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 4.94% - ----------------------------------------------------------------------------------------------------- CLASS R 1-YEAR INCEPTION (1/1/02) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +27.31% +16.70% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +26.31% +9.27% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $12,631 $11,670 - ----------------------------------------------------------------------------------------------------- Distribution Rate 4 6.67% - ----------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 5.14% - ----------------------------------------------------------------------------------------------------- ADVISOR CLASS 6 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +28.47% +47.95% +120.88% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +28.47% +8.15% +8.25% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $12,847 $14,795 $22,088 - ----------------------------------------------------------------------------------------------------- Distribution Rate 4 7.13% - ----------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 5.63% ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SINCE MARKETS CAN GO DOWN AS WELL AS UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. FOR MORE CURRENT PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 24 | Past performance does not guarantee future results. | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes the current, applicable, maximum sales charge(s), Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvested dividends. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. CLASS A (10/1/93-9/30/03) [LINE CHART OMITTED] Franklin Income S&P LB U.S. Gov't./ LB U.S. Aggregate Lipper Fund 500 7 Credit Index 7 Index 7 Income Average 7 10/93 $9,572 $10,000 $10,000 $10,000 $10,000 $9,748 $10,207 $10,041 $10,037 $10,104 $9,650 $10,109 $9,927 $9,952 $9,967 $9,867 $10,232 $9,971 $10,006 $10,128 $9,967 $10,579 $10,121 $10,141 $10,347 $9,745 $10,292 $9,901 $9,965 $10,100 $9,357 $9,844 $9,659 $9,719 $9,764 $9,337 $9,971 $9,579 $9,642 $9,787 $9,275 $10,134 $9,561 $9,640 $9,810 $9,212 $9,886 $9,538 $9,619 $9,689 $9,359 $10,210 $9,729 $9,810 $9,899 $9,506 $10,628 $9,733 $9,822 $10,084 $9,442 $10,368 $9,586 $9,678 $9,939 $9,464 $10,601 $9,575 $9,669 $9,975 $9,357 $10,215 $9,558 $9,647 $9,759 $9,238 $10,366 $9,621 $9,714 $9,760 $9,349 $10,635 $9,806 $9,906 $9,924 $9,505 $11,049 $10,033 $10,142 $10,152 $9,617 $11,374 $10,100 $10,204 $10,295 $9,866 $11,709 $10,241 $10,347 $10,493 $10,208 $12,176 $10,670 $10,747 $10,832 $10,322 $12,459 $10,756 $10,826 $10,931 $10,438 $12,872 $10,714 $10,802 $11,096 $10,554 $12,904 $10,851 $10,932 $11,189 $10,764 $13,448 $10,962 $11,038 $11,443 $10,788 $13,400 $11,123 $11,182 $11,431 $10,954 $13,988 $11,306 $11,349 $11,714 $11,205 $14,257 $11,472 $11,509 $11,928 $11,520 $14,742 $11,544 $11,585 $12,146 $11,300 $14,879 $11,299 $11,384 $12,090 3/96 $11,274 $15,022 $11,204 $11,305 $12,109 $11,249 $15,243 $11,127 $11,241 $12,142 $11,374 $15,636 $11,108 $11,218 $12,238 $11,600 $15,696 $11,257 $11,369 $12,340 $11,423 $15,002 $11,283 $11,400 $12,088 $11,600 $15,319 $11,255 $11,381 $12,228 $11,780 $16,181 $11,455 $11,579 $12,508 $12,012 $16,627 $11,722 $11,836 $12,796 $12,297 $17,883 $11,938 $12,038 $13,230 $12,375 $17,528 $11,805 $11,927 $13,186 $12,560 $18,623 $11,819 $11,963 $13,414 $12,693 $18,769 $11,844 $11,993 $13,506 $12,399 $17,999 $11,703 $11,860 $13,250 $12,479 $19,073 $11,875 $12,037 $13,450 $12,885 $20,233 $11,985 $12,151 $13,870 $13,130 $21,139 $12,129 $12,295 $14,193 $13,486 $22,820 $12,500 $12,627 $14,740 $13,404 $21,543 $12,360 $12,519 $14,479 $13,819 $22,722 $12,554 $12,704 $14,933 $13,623 $21,964 $12,755 $12,888 $14,814 $14,044 $22,980 $12,823 $12,948 $15,061 $14,460 $23,374 $12,957 $13,078 $15,310 $14,316 $23,633 $13,140 $13,246 $15,362 $14,519 $25,336 $13,113 $13,236 $15,731 $14,955 $26,632 $13,154 $13,281 $16,094 $14,750 $26,900 $13,220 $13,351 $16,107 $14,603 $26,439 $13,362 $13,477 $16,055 $14,632 $27,512 $13,498 $13,592 $16,189 $14,364 $27,219 $13,508 $13,621 $16,038 $13,434 $23,288 $13,772 $13,842 $15,223 9/98 $14,127 $24,780 $14,166 $14,166 $15,698 $14,158 $26,794 $14,066 $14,091 $15,993 $14,616 $28,417 $14,150 $14,171 $16,360 $14,598 $30,054 $14,185 $14,214 $16,639 $14,380 $31,310 $14,285 $14,315 $16,719 $13,973 $30,337 $13,946 $14,066 $16,388 $14,194 $31,550 $14,015 $14,144 $16,619 $14,924 $32,772 $14,050 $14,188 $17,070 $15,019 $31,999 $13,905 $14,064 $16,916 $14,988 $33,774 $13,862 $14,019 $17,104 $14,826 $32,721 $13,823 $13,960 $16,933 $14,858 $32,559 $13,812 $13,952 $16,802 $14,695 $31,667 $13,937 $14,114 $16,681 $14,662 $33,670 $13,973 $14,167 $16,960 $14,429 $34,355 $13,965 $14,165 $17,031 $14,490 $36,377 $13,880 $14,097 $17,323 $14,593 $34,550 $13,876 $14,051 $17,061 $14,354 $33,896 $14,050 $14,221 $17,073 $14,595 $37,210 $14,253 $14,408 $17,655 $15,114 $36,091 $14,184 $14,367 $17,436 $15,358 $35,352 $14,171 $14,360 $17,413 $15,463 $36,224 $14,460 $14,659 $17,619 $15,639 $35,658 $14,613 $14,792 $17,612 $16,529 $37,872 $14,820 $15,007 $18,207 $16,851 $35,873 $14,875 $15,101 $18,080 $16,598 $35,721 $14,969 $15,201 $18,011 $16,489 $32,907 $15,225 $15,450 $17,617 $17,473 $33,068 $15,525 $15,736 $18,098 $17,438 $34,241 $15,785 $15,993 $18,400 $17,775 $31,121 $15,948 $16,133 $18,067 3/01 $17,510 $29,150 $16,021 $16,214 $17,747 $17,853 $31,414 $15,901 $16,146 $18,226 $18,196 $31,624 $15,993 $16,244 $18,337 $17,773 $30,855 $16,070 $16,305 $18,189 $17,579 $30,551 $16,470 $16,670 $18,243 $17,774 $28,640 $16,681 $16,861 $18,054 $16,949 $26,328 $16,835 $17,057 $17,460 $17,068 $26,830 $17,262 $17,414 $17,701 $17,426 $28,888 $16,979 $17,174 $18,019 $17,587 $29,141 $16,845 $17,065 $18,086 $17,708 $28,716 $16,969 $17,203 $18,010 $17,830 $28,162 $17,113 $17,370 $17,994 $18,365 $29,221 $16,766 $17,081 $18,265 $18,473 $27,450 $17,090 $17,412 $18,200 $18,414 $27,249 $17,248 $17,560 $18,221 $17,266 $25,309 $17,395 $17,712 $17,693 $16,448 $23,336 $17,604 $17,926 $17,065 $16,983 $23,489 $17,999 $18,228 $17,266 $16,241 $20,939 $18,386 $18,523 $16,626 $16,352 $22,780 $18,210 $18,439 $16,930 $17,244 $24,119 $18,221 $18,434 $17,384 $17,400 $22,703 $18,704 $18,815 $17,302 $17,513 $22,109 $18,703 $18,831 $17,169 $17,274 $21,777 $19,037 $19,092 $17,122 $17,656 $21,987 $19,012 $19,077 $17,181 $18,760 $23,798 $19,215 $19,234 $17,871 $19,780 $25,051 $19,761 $19,593 $18,493 $20,170 $25,371 $19,682 $19,554 $18,632 $19,923 $25,819 $18,857 $18,897 $18,503 $20,227 $26,321 $18,981 $19,022 $18,696 9/03 $20,808 $26,042 $19,582 $19,526 $18,920 CLASS B (11/1/01-9/30/03) [LINE CHART OMITTED] Franklin Income S&P LB U.S. Aggregate LB U.S. Gov't./ Lipper Income Fund 500 7 Index 7 Credit Index 7 Average 7 11/1/2001 $10,000 $10,000 $10,000 $10,000 $10,000 11/30/2001 $10,139 $10,767 $9,862 $9,836 $10,180 12/31/2001 $10,182 $10,861 $9,799 $9,758 $10,218 1/31/2002 $10,296 $10,703 $9,879 $9,830 $10,175 2/28/2002 $10,363 $10,496 $9,975 $9,913 $10,166 3/31/2002 $10,622 $10,891 $9,809 $9,712 $10,319 4/30/2002 $10,724 $10,231 $9,999 $9,901 $10,282 5/31/2002 $10,681 $10,156 $10,084 $9,992 $10,294 6/30/2002 $9,960 $9,433 $10,171 $10,077 $9,996 7/31/2002 $9,527 $8,698 $10,294 $10,198 $9,641 8/31/2002 $9,829 $8,755 $10,468 $10,427 $9,755 9/30/2002 $9,393 $7,804 $10,637 $10,651 $9,393 10/31/2002 $9,401 $8,490 $10,589 $10,549 $9,565 11/30/2002 $9,909 $8,990 $10,586 $10,556 $9,821 12/31/2002 $10,044 $8,462 $10,804 $10,835 $9,775 1/31/2003 $10,051 $8,241 $10,814 $10,835 $9,700 2/28/2003 $9,958 $8,117 $10,963 $11,028 $9,673 3/31/2003 $10,120 $8,195 $10,955 $11,014 $9,706 4/30/2003 $10,801 $8,870 $11,045 $11,131 $10,096 5/31/2003 $11,329 $9,337 $11,251 $11,448 $10,448 6/30/2003 $11,599 $9,456 $11,229 $11,402 $10,526 7/31/2003 $11,449 $9,623 $10,851 $10,924 $10,454 8/31/2003 $11,617 $9,810 $10,923 $10,996 $10,562 9/30/2003 $11,545 $9,706 $11,213 $11,344 $10,689 Annual Report | Past performance does not guarantee future results. | 25 Performance Summary (CONTINUED) [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - -------------------------------------- CLASS B1 9/30/03 - -------------------------------------- 1-Year +23.51% - -------------------------------------- 3-Year +5.92% - -------------------------------------- Since Inception (1/1/99) +6.92% CLASS B1 (11/1/99-9/30/03) [LINE CHART OMITTED] Franklin Income S&P LB U.S. Aggregate LB U.S. Gov't./ Lipper Fund 500 7 Index 7 Credit Index 7 Income Average 7 1/99 $10,000 $10,000 $10,000 $10,000 $10,000 $9,851 $10,418 $10,071 $10,071 $10,048 $9,568 $10,094 $9,896 $9,832 $9,849 $9,717 $10,498 $9,950 $9,880 $9,988 $10,213 $10,905 $9,982 $9,905 $10,259 $10,230 $10,647 $9,894 $9,803 $10,166 $10,248 $11,238 $9,863 $9,772 $10,279 $10,133 $10,887 $9,821 $9,745 $10,176 $10,150 $10,834 $9,816 $9,737 $10,098 $10,035 $10,537 $9,930 $9,825 $10,025 $10,009 $11,203 $9,967 $9,851 $10,193 $9,845 $11,431 $9,966 $9,845 $10,235 $9,883 $12,104 $9,918 $9,785 $10,411 $9,949 $11,496 $9,885 $9,782 $10,253 $9,782 $11,279 $10,005 $9,905 $10,260 3/00 $9,941 $12,381 $10,137 $10,048 $10,610 $10,290 $12,009 $10,108 $9,999 $10,479 $10,452 $11,763 $10,103 $9,990 $10,465 $10,519 $12,053 $10,313 $10,194 $10,589 $10,633 $11,865 $10,407 $10,302 $10,584 $11,233 $12,601 $10,558 $10,448 $10,942 $11,448 $11,936 $10,624 $10,487 $10,866 $11,271 $11,886 $10,694 $10,553 $10,824 $11,242 $10,949 $10,869 $10,733 $10,587 $11,856 $11,003 $11,071 $10,945 $10,876 $11,827 $11,393 $11,252 $11,129 $11,058 $12,051 $10,355 $11,350 $11,243 $10,858 $11,867 $9,699 $11,407 $11,295 $10,666 $12,093 $10,453 $11,360 $11,210 $10,954 $12,321 $10,523 $11,428 $11,275 $11,020 6/01 $12,030 $10,267 $11,471 $11,329 $10,931 $11,894 $10,166 $11,728 $11,611 $10,964 $12,021 $9,530 $11,862 $11,760 $10,850 $11,460 $8,760 $12,000 $11,868 $10,493 $11,535 $8,927 $12,251 $12,170 $10,638 $11,772 $9,612 $12,082 $11,970 $10,829 $11,877 $9,696 $12,006 $11,875 $10,869 $11,954 $9,555 $12,103 $11,963 $10,824 $12,031 $9,371 $12,220 $12,064 $10,814 $12,388 $9,723 $12,017 $11,820 $10,977 $12,455 $9,134 $12,250 $12,048 $10,938 $12,410 $9,067 $12,354 $12,160 $10,951 $11,630 $8,421 $12,461 $12,263 $10,633 $11,074 $7,765 $12,611 $12,411 $10,256 $11,429 $7,816 $12,824 $12,689 $10,377 9/02 $10,925 $6,967 $13,032 $12,962 $9,992 $10,995 $7,580 $12,972 $12,838 $10,175 $11,590 $8,025 $12,969 $12,846 $10,447 $11,690 $7,554 $13,237 $13,186 $10,398 $11,762 $7,357 $13,248 $13,186 $10,318 $11,597 $7,246 $13,431 $13,421 $10,290 $11,849 $7,316 $13,421 $13,403 $10,325 $12,583 $7,919 $13,532 $13,546 $10,740 $13,261 $8,335 $13,784 $13,931 $11,114 $13,517 $8,442 $13,757 $13,875 $11,197 $13,347 $8,591 $13,294 $13,294 $11,120 $13,546 $8,758 $13,383 $13,381 $11,236 9/30/03 $13,739 $8,665 $13,737 $13,805 $11,371 [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - -------------------------------------- CLASS C 9/30/03 - -------------------------------------- 1-Year +25.06% - -------------------------------------- 5-Year +7.39% - -------------------------------------- Since Inception (5/1/95) +8.58% CLASS C (5/1/95-9/30/03) [LINE CHART OMITTED] Franklin Income S&P LB U.S. Aggregate LB U.S. Gov't./ Lipper Fund 500 7 Index 7 Credit Index 7 Income Average 7 5/95 $9,909 $10,000 $10,000 $10,000 $10,000 $10,228 $10,399 $10,387 $10,419 $10,323 $10,338 $10,640 $10,463 $10,502 $10,417 $10,449 $10,993 $10,440 $10,462 $10,574 $10,561 $11,020 $10,566 $10,596 $10,663 $10,771 $11,485 $10,669 $10,703 $10,905 $10,790 $11,444 $10,807 $10,861 $10,894 $10,951 $11,946 $10,969 $11,039 $11,163 $11,197 $12,176 $11,123 $11,202 $11,368 $11,507 $12,590 $11,197 $11,272 $11,576 $11,331 $12,707 $11,002 $11,033 $11,522 $11,301 $12,829 $10,926 $10,940 $11,540 $11,222 $13,018 $10,864 $10,865 $11,572 $11,341 $13,354 $10,842 $10,847 $11,663 $11,562 $13,404 $10,988 $10,991 $11,760 $11,380 $12,813 $11,018 $11,017 $11,520 $11,552 $13,083 $11,000 $10,990 $11,654 $11,725 $13,819 $11,191 $11,185 $11,921 $11,951 $14,200 $11,439 $11,446 $12,195 $12,281 $15,272 $11,635 $11,657 $12,608 $12,302 $14,970 $11,527 $11,527 $12,567 $12,480 $15,905 $11,562 $11,541 $12,784 $12,660 $16,029 $11,591 $11,565 $12,871 $12,363 $15,372 $11,463 $11,428 $12,628 $12,384 $16,289 $11,634 $11,595 $12,819 $12,780 $17,280 $11,744 $11,703 $13,218 6/97 $13,071 $18,054 $11,884 $11,844 $13,526 $13,419 $19,489 $12,204 $12,206 $14,047 $13,332 $18,398 $12,100 $12,069 $13,799 $13,686 $19,405 $12,278 $12,259 $14,232 $13,542 $18,758 $12,456 $12,455 $14,118 $13,897 $19,626 $12,514 $12,521 $14,354 $14,302 $19,962 $12,640 $12,652 $14,591 $14,153 $20,183 $12,802 $12,830 $14,640 $14,347 $21,638 $12,792 $12,804 $14,992 $14,772 $22,745 $12,836 $12,844 $15,338 $14,622 $22,974 $12,903 $12,908 $15,350 $14,413 $22,579 $13,026 $13,047 $15,301 $14,494 $23,496 $13,136 $13,180 $15,428 $14,223 $23,246 $13,164 $13,190 $15,285 $13,300 $19,889 $13,378 $13,448 $14,508 $13,919 $21,163 $13,692 $13,832 $14,961 $14,003 $22,883 $13,619 $13,735 $15,242 $14,448 $24,269 $13,697 $13,817 $15,591 $14,363 $25,667 $13,738 $13,851 $15,858 $14,204 $26,740 $13,836 $13,949 $15,934 $13,797 $25,909 $13,594 $13,617 $15,618 $14,008 $26,945 $13,670 $13,685 $15,839 $14,719 $27,988 $13,713 $13,719 $16,268 $14,744 $27,329 $13,593 $13,577 $16,121 $14,770 $28,844 $13,550 $13,535 $16,300 $14,605 $27,945 $13,492 $13,498 $16,137 8/99 $14,568 $27,806 $13,485 $13,487 $16,013 $14,401 $27,045 $13,642 $13,608 $15,898 $14,427 $28,756 $13,692 $13,644 $16,163 $14,194 $29,340 $13,691 $13,636 $16,231 $14,247 $31,067 $13,625 $13,553 $16,509 $14,275 $29,506 $13,580 $13,549 $16,259 $14,101 $28,949 $13,745 $13,719 $16,271 $14,330 $31,779 $13,926 $13,917 $16,826 $14,831 $30,823 $13,886 $13,850 $16,617 $14,995 $30,192 $13,879 $13,837 $16,595 $15,091 $30,937 $14,168 $14,119 $16,791 $15,325 $30,453 $14,297 $14,269 $16,784 $16,187 $32,344 $14,504 $14,470 $17,352 $16,495 $30,637 $14,595 $14,525 $17,230 $16,242 $30,507 $14,692 $14,616 $17,165 $16,129 $28,103 $14,932 $14,866 $16,789 $17,080 $28,241 $15,209 $15,159 $17,247 $17,039 $29,243 $15,458 $15,414 $17,535 $17,359 $26,578 $15,592 $15,573 $17,218 $17,095 $24,895 $15,671 $15,644 $16,913 $17,420 $26,828 $15,606 $15,527 $17,370 $17,746 $27,008 $15,700 $15,616 $17,476 $17,329 $26,351 $15,759 $15,691 $17,334 $17,134 $26,092 $16,111 $16,082 $17,386 $17,316 $24,460 $16,296 $16,289 $17,205 $16,509 $22,485 $16,486 $16,438 $16,639 10/01 $16,616 $22,914 $16,831 $16,855 $16,869 $16,955 $24,671 $16,599 $16,579 $17,173 $17,104 $24,887 $16,493 $16,448 $17,236 $17,214 $24,524 $16,627 $16,569 $17,164 $17,326 $24,051 $16,788 $16,710 $17,148 $17,835 $24,956 $16,509 $16,371 $17,407 $17,933 $23,444 $16,829 $16,688 $17,345 $17,869 $23,271 $16,972 $16,842 $17,365 $16,753 $21,614 $17,118 $16,985 $16,862 $15,956 $19,930 $17,325 $17,190 $16,263 $16,465 $20,060 $17,618 $17,575 $16,455 $15,743 $17,882 $17,903 $17,953 $15,845 $15,843 $19,455 $17,821 $17,781 $16,135 $16,696 $20,599 $17,817 $17,792 $16,567 $16,842 $19,389 $18,185 $18,263 $16,489 $16,860 $18,882 $18,200 $18,263 $16,362 $16,710 $18,598 $18,452 $18,588 $16,318 $17,070 $18,777 $18,438 $18,564 $16,373 $18,123 $20,325 $18,590 $18,762 $17,032 $19,096 $21,394 $18,936 $19,295 $17,624 $19,463 $21,668 $18,899 $19,218 $17,757 $19,218 $22,050 $18,264 $18,413 $17,634 $19,502 $22,479 $18,385 $18,534 $17,817 9/30/03 $20,005 $22,241 $18,871 $19,121 $18,031 26 | Past performance does not guarantee future results. | Annual Report Performance Summary (CONTINUED) [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - -------------------------------------- CLASS R 9/30/03 - -------------------------------------- 1-Year +26.31% - -------------------------------------- Since Inception (1/1/02) +9.27% CLASS R (1/1/02-9/30/03) [LINE CHART OMITTED] Franklin S&P LB U.S. Aggregate LB Gov't./Credit Lipper Income Income Fund 500 7 Index 7 Index 7 Average 7 1/02 $10,000 $10,000 $10,000 $10,000 $10,000 $10,069 $9,854 $10,081 $10,073 $9,958 $10,136 $9,664 $10,179 $10,159 $9,949 $10,390 $10,028 $10,009 $9,953 $10,099 $10,448 $9,420 $10,203 $10,146 $10,063 $10,412 $9,351 $10,290 $10,239 $10,075 6/02 $9,709 $8,685 $10,379 $10,326 $9,783 $9,289 $8,008 $10,504 $10,451 $9,436 $9,590 $8,061 $10,682 $10,685 $9,547 $9,166 $7,185 $10,855 $10,915 $9,193 $9,178 $7,817 $10,805 $10,811 $9,361 $9,681 $8,277 $10,802 $10,817 $9,612 12/02 $9,817 $7,791 $11,025 $11,104 $9,567 $9,829 $7,587 $11,035 $11,103 $9,493 $9,741 $7,473 $11,188 $11,301 $9,467 $9,905 $7,545 $11,179 $11,286 $9,499 $10,577 $8,167 $11,271 $11,407 $9,881 $11,102 $8,596 $11,481 $11,731 $10,225 6/03 $11,319 $8,706 $11,459 $11,684 $10,302 $11,227 $8,860 $11,073 $11,194 $10,231 $11,344 $9,032 $11,147 $11,268 $10,337 9/03 $11,670 $8,937 $11,442 $11,625 $10,461 [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - -------------------------------------- ADVISOR CLASS 6 9/30/03 - -------------------------------------- 1-Year +28.47% - -------------------------------------- 5-Year +8.15% - -------------------------------------- 10-Year +8.25% ADVISOR CLASS (10/1/93-9/30/03) 6 [LINE CHART OMITTED] Franklin S&P LB U.S. Aggregate LB Gov't./Credit Lipper Income Income Fund 500 7 Index 7 Index 7 Average 7 10/93 $10,000 $10,000 $10,000 $10,000 $10,000 $10,184 $10,207 $10,037 $10,041 $10,104 $10,082 $10,109 $9,952 $9,927 $9,967 $10,308 $10,232 $10,006 $9,971 $10,128 $10,413 $10,579 $10,141 $10,121 $10,347 $10,180 $10,292 $9,965 $9,901 $10,100 $9,775 $9,844 $9,719 $9,659 $9,764 $9,754 $9,971 $9,642 $9,579 $9,787 $9,690 $10,134 $9,640 $9,561 $9,810 $9,624 $9,886 $9,619 $9,538 $9,689 $9,777 $10,210 $9,810 $9,729 $9,899 $9,931 $10,628 $9,822 $9,733 $10,084 $9,865 $10,368 $9,678 $9,586 $9,939 $9,888 $10,601 $9,669 $9,575 $9,975 $9,775 $10,215 $9,647 $9,558 $9,759 $9,651 $10,366 $9,714 $9,621 $9,760 $9,767 $10,635 $9,906 $9,806 $9,924 $9,930 $11,049 $10,142 $10,033 $10,152 $10,047 $11,374 $10,204 $10,100 $10,295 $10,307 $11,709 $10,347 $10,241 $10,493 $10,664 $12,176 $10,747 $10,670 $10,832 $10,784 $12,459 $10,826 $10,756 $10,931 $10,904 $12,872 $10,802 $10,714 $11,096 $11,026 $12,904 $10,932 $10,851 $11,189 $11,246 $13,448 $11,038 $10,962 $11,443 $11,270 $13,400 $11,182 $11,123 $11,431 $11,444 $13,988 $11,349 $11,306 $11,714 $11,706 $14,257 $11,509 $11,472 $11,928 $12,035 $14,742 $11,585 $11,544 $12,146 $11,805 $14,879 $11,384 $11,299 $12,090 3/96 $11,779 $15,022 $11,305 $11,204 $12,109 $11,752 $15,243 $11,241 $11,127 $12,142 $11,882 $15,636 $11,218 $11,108 $12,238 $12,119 $15,696 $11,369 $11,257 $12,340 $11,934 $15,002 $11,400 $11,283 $12,088 $12,119 $15,319 $11,381 $11,255 $12,228 $12,307 $16,181 $11,579 $11,455 $12,508 $12,549 $16,627 $11,836 $11,722 $12,796 $12,847 $17,883 $12,038 $11,938 $13,230 $12,929 $17,528 $11,927 $11,805 $13,186 $13,067 $18,623 $11,963 $11,819 $13,414 $13,263 $18,769 $11,993 $11,844 $13,506 $12,957 $17,999 $11,860 $11,703 $13,250 $13,044 $19,073 $12,037 $11,875 $13,450 $13,413 $20,233 $12,151 $11,985 $13,870 $13,728 $21,139 $12,295 $12,129 $14,193 $14,102 $22,820 $12,627 $12,500 $14,740 $14,018 $21,543 $12,519 $12,360 $14,479 $14,397 $22,722 $12,704 $12,554 $14,933 $14,252 $21,964 $12,888 $12,755 $14,814 $14,635 $22,980 $12,948 $12,823 $15,061 $15,132 $23,374 $13,078 $12,957 $15,310 $14,924 $23,633 $13,246 $13,140 $15,362 $15,138 $25,336 $13,236 $13,113 $15,731 $15,596 $26,632 $13,281 $13,154 $16,094 $15,445 $26,900 $13,351 $13,220 $16,107 $15,231 $26,439 $13,477 $13,362 $16,055 $15,325 $27,512 $13,592 $13,498 $16,189 $15,046 $27,219 $13,621 $13,508 $16,038 $14,074 $23,288 $13,842 $13,772 $15,223 9/98 $14,803 $24,780 $14,166 $14,166 $15,698 $14,837 $26,794 $14,091 $14,066 $15,993 $15,319 $28,417 $14,171 $14,150 $16,360 $15,302 $30,054 $14,214 $14,185 $16,639 $15,075 $31,310 $14,315 $14,285 $16,719 $14,650 $30,337 $14,066 $13,946 $16,388 $14,884 $31,550 $14,144 $14,015 $16,619 $15,652 $32,772 $14,188 $14,050 $17,070 $15,687 $31,999 $14,064 $13,905 $16,916 $15,723 $33,774 $14,019 $13,862 $17,104 $15,555 $32,721 $13,960 $13,823 $16,933 $15,523 $32,559 $13,952 $13,812 $16,802 $15,352 $31,667 $14,114 $13,937 $16,681 $15,389 $33,670 $14,167 $13,973 $16,960 $15,147 $34,355 $14,165 $13,965 $17,031 $15,213 $36,377 $14,097 $13,880 $17,323 $15,252 $34,550 $14,051 $13,876 $17,061 $15,074 $33,896 $14,221 $14,050 $17,073 $15,329 $37,210 $14,408 $14,253 $17,655 $15,804 $36,091 $14,367 $14,184 $17,436 $16,062 $35,352 $14,360 $14,171 $17,413 $16,174 $36,224 $14,659 $14,460 $17,619 $16,361 $35,658 $14,792 $14,613 $17,612 $17,298 $37,872 $15,007 $14,820 $18,207 $17,639 $35,873 $15,101 $14,875 $18,080 $17,376 $35,721 $15,201 $14,969 $18,011 $17,339 $32,907 $15,450 $15,225 $17,617 $18,300 $33,068 $15,736 $15,525 $18,098 $18,344 $34,241 $15,993 $15,785 $18,400 $18,701 $31,121 $16,133 $15,948 $18,067 3/01 $18,346 $29,150 $16,214 $16,021 $17,747 $18,788 $31,414 $16,146 $15,901 $18,226 $19,072 $31,624 $16,244 $15,993 $18,337 $18,629 $30,855 $16,305 $16,070 $18,189 $18,428 $30,551 $16,670 $16,470 $18,243 $18,635 $28,640 $16,861 $16,681 $18,054 $17,852 $26,328 $17,057 $16,835 $17,460 $17,896 $26,830 $17,414 $17,262 $17,701 $18,275 $28,888 $17,174 $16,979 $18,019 $18,448 $29,141 $17,065 $16,845 $18,086 $18,663 $28,716 $17,203 $16,969 $18,010 $18,794 $28,162 $17,370 $17,113 $17,994 $19,274 $29,221 $17,081 $16,766 $18,265 $19,478 $27,450 $17,412 $17,090 $18,200 $19,419 $27,249 $17,560 $17,248 $18,221 $18,123 $25,309 $17,712 $17,395 $17,693 $17,351 $23,336 $17,926 $17,604 $17,065 $17,829 $23,489 $18,228 $17,999 $17,266 $17,047 $20,939 $18,523 $18,386 $16,626 $17,167 $22,780 $18,439 $18,210 $16,930 $18,110 $24,119 $18,434 $18,221 $17,384 $18,277 $22,703 $18,815 $18,704 $17,302 $18,398 $22,109 $18,831 $18,703 $17,169 $18,242 $21,777 $19,092 $19,037 $17,122 $18,554 $21,987 $19,077 $19,012 $17,181 $19,722 $23,798 $19,234 $19,215 $17,871 $20,802 $25,051 $19,593 $19,761 $18,493 $21,217 $25,371 $19,554 $19,682 $18,632 $20,959 $25,819 $18,897 $18,857 $18,503 $21,283 $26,321 $19,022 $18,981 $18,696 9/03 $22,088 $26,042 $19,526 $19,582 $18,920 Annual Report | Past performance does not guarantee future results. | 27 Performance Summary (CONTINUED) ENDNOTES THE RISKS ASSOCIATED WITH HIGHER YIELDING, LOWER-RATED SECURITIES INCLUDE HIGHER RISK OF DEFAULT AND LOSS OF PRINCIPAL. THE FUND MAY ALSO INVEST IN FOREIGN COMPANIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. INTEREST RATE MOVEMENTS MAY AFFECT THE FUND'S SHARE PRICE AND YIELD. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: Subject to no initial sales charge, but subject to a contingent deferred sales charge (CDSC) declining from 4% to 0% over six years. These shares have higher annual fees and expenses than Class A shares. CLASS B1(formerly Class B): Subject to no initial sales charge, but subject to a CDSC declining from 4% to 0% over six years. (formerly Class B): These shares have higher annual fees and expenses than Class A shares. Effective 11/1/01, closed to new investors. CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. CLASS R: No initial sales charge, but subject to 1% CDSC for shares redeemed within 18 months of investment; 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: No initial sales charge or Rule 12b-1 fees; are available to a limited class of investors. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge(s). 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge(s). 4. Distribution rate is based on an annualization of the respective class's September dividend and the maximum offering price (NAV for Classes B, B1, R and Advisor) per share on 9/30/03. 5. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 9/30/03. 6. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +70.85% and +8.26%. 7. Sources: Standard & Poor's Micropal; Lipper Inc. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The LB U.S. Gov't/Credit Index includes Treasuries, agency securities, publicly issued U.S. corporate and foreign debentures and secured notes that meet specified maturity, liquidity and quality requirements. The LB U.S. Aggregate Index includes fixed-rate debt issues rated investment grade or higher by Moody's, S&P or Fitch, in that order. All issues have at least one year to maturity and an outstanding par value of at least $100 million for U.S. government issues and $50 million for all others. All returns are market value-weighted inclusive of accrued interest. The index is a composite of the Government/Credit Index and the Mortgage-Backed Securities Index. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. As of 9/30/03, the Lipper Income Funds Average consisted of 149 funds. Lipper calculations do not include sales charges. Fund performance relative to the average may have differed if such charges had been considered. 28 | Past performance does not guarantee future results. | Annual Report Franklin U.S. Government Securities Fund YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: Franklin U.S. Government Securities Fund seeks high, current income from a portfolio of U.S. government securities. [SIDEBAR] Since 1983, the Fund has invested primarily in Ginnie Mae securities, which carry a guarantee backed by the full faith and credit of the U.S. government as to the timely payment of interest and principal. 1 Issued by the Government National Mortgage Association (GNMA), Ginnie Maes have been among the highest yielding U.S. government obligations available. We are pleased to bring you Franklin U.S. Government Securities Fund's annual report covering the fiscal year ended September 30, 2003. PERFORMANCE OVERVIEW During the 12 months under review, Franklin U.S. Government Securities Fund - Class A posted a +2.66% cumulative total return, as shown in the Performance Summary beginning on page 33. The Fund - Class A outperformed the Lehman FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS A VS. COMPARABLE INVESTMENTS* Risk vs. Return (10/98-9/03) Risk Return - -------------------------------------------------------------------------------- 1-Year Treasury Bill 0.92% 4.43% 10-Year Treasury Note 8.03% 5.87% 30-Year Treasury Bond 12.16% 5.50% Franklin U.S. Government Securities Fund - Class A 2.85% 5.78% *Source: Standard & Poor's Micropal (Payden & Rygel). Indexes are unmanaged. Investors cannot invest directly in an index. Average annual total return represents the average annual change in value of an investment over the period indicated. These figures assume reinvestment of distributions and do not include sales charges. Risk is measured by the annualized standard deviation of monthly total returns. In general, the higher the standard deviation, the greater the volatility. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. The Fund's Class A shares' average annual total return does not include the current, maximum 4.25% initial sales charge. The Fund's investment return and share price will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. The figures do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Past performance does not guarantee future results. 1. U.S. government securities owned by the Fund, but not shares of the Fund, are guaranteed by the U.S. government as to timely payment of principal and interest. The Fund's yield and share price are not guaranteed and will vary with market conditions. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 86. Annual Report | 29 [SIDEBAR] YIELD COMPARISON 9/30/03 Franklin U.S. Government Securities Fund - Class A* 3.28% 10-Year Treasury Note* 3.96% Lipper GNMA Funds Average* 2.27% Money Market Funds Average* 0.37% *Sources: Standard & Poor's Micropal; Lipper Inc. Franklin U.S. Government Securities Fund - Class A shares' yield, calculated as required by the SEC, is based on earnings of the Fund's portfolio for the 30 days ended 9/30/03. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. Money funds attempt to maintain a stable net asset value of $1.00 per share, while shares of Franklin U.S. Government Securities Fund will fluctuate with market conditions. Lipper averages do not include sales charges. Brothers Intermediate U.S. Government Bond Index, which returned 2.49%, and the Lipper GNMA Funds Average, which returned 2.62% for the same period.2 The Fund's return reflects the effect of management fees and expenses, while indexes do not have such costs. ECONOMIC AND MARKET OVERVIEW Uncertainty about the economy's strength and geopolitical events pushed interest rates down during the first part of the reporting period. By mid-June, 10-year U.S. Treasury yields fell to 3.11%, the lowest level in more than 45 years. For consumers, historically low mortgage rates enabled many homeowners to refinance their mortgages, and refinancing applications reached their highest levels on record. Prepayments on mortgage-backed securities increased as well. Additionally, refinancing activity, stabilized equity markets, rising home values and improved consumer net worths allowed consumers to continue spending. In fact, retail sales grew 7.5% in September 2003 from a year earlier, helping the economy expand. Many businesses took the opportunity of a lower interest rate environment to refinance their old debt at more attractive levels. This helped enhance business operating performance. Credit-related fixed income products also benefited from this improvement. Additionally, businesses continued to achieve productivity gains by reducing their labor forces and taking advantage of recent technology investments. Higher productivity levels helped dampen inflation. In fact, core inflation (excluding food and energy) for September 2003 increased at a rate of 1.2% compared with the same month a year earlier. Expectations for continued low inflation contributed to a historically lower overall interest rate environment during the period. As some of the immediate perceived risks related to the Iraq war subsided in late spring, and economic activity and domestic equity markets rebounded, interest rates rose as investors tolerated more risk in their portfolios. Rising interest rates led to higher mortgage rates, and prepayments declined. 2. Source: Standard & Poor's Micropal; Lipper Inc. The unmanaged Lehman Brothers Intermediate U.S. Government Bond Index includes fixed-rate debt issues rated investment grade or higher by Moody's, S&P or Fitch, in that order. All issues have at least one year to maturity and an outstanding par value of at least $100 million for U.S. government issues. All returns are market value-weighted inclusive of accrued interest. The index includes issues of the U.S. government or any agency thereof. It includes only issues with a remaining term to maturity of less than 10 years. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The total return index is rebalanced monthly by market capitalization. The Lipper GNMA Funds Average consisted of 66 funds on 9/30/03, and does not include sales charges. Fund performance relative to the average might have differed if such charges had been considered. The indexes include reinvested distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 30 | Annual Report DIVIDEND DISTRIBUTIONS Franklin U.S. Government Securities Fund 10/1/02-9/30/03 - ---------------------------------------------------------------------------------- DIVIDEND PER SHARE ----------------------------------------------------------------- MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS - ---------------------------------------------------------------------------------- October 3.38 cents 3.09 cents 3.09 cents 3.17 cents 3.44 cents - ---------------------------------------------------------------------------------- November 2.98 cents 2.69 cents 2.69 cents 2.77 cents 3.05 cents - ---------------------------------------------------------------------------------- December 2.98 cents 2.67 cents 2.68 cents 2.77 cents 3.06 cents - ---------------------------------------------------------------------------------- January 2.98 cents 2.67 cents 2.68 cents 2.77 cents 3.05 cents - ---------------------------------------------------------------------------------- February 2.98 cents 2.67 cents 2.68 cents 2.77 cents 3.05 cents - ---------------------------------------------------------------------------------- March 2.98 cents 2.67 cents 2.71 cents 2.77 cents 3.05 cents - ---------------------------------------------------------------------------------- April 2.98 cents 2.67 cents 2.71 cents 2.77 cents 3.05 cents - ---------------------------------------------------------------------------------- May 2.98 cents 2.67 cents 2.71 cents 2.77 cents 3.05 cents - ---------------------------------------------------------------------------------- June 2.98 cents 2.69 cents 2.66 cents 2.77 cents 3.07 cents - ---------------------------------------------------------------------------------- July 2.98 cents 2.69 cents 2.66 cents 2.77 cents 3.05 cents - ---------------------------------------------------------------------------------- August 2.98 cents 2.69 cents 2.66 cents 2.77 cents 3.05 cents - ---------------------------------------------------------------------------------- September 2.98 cents 2.70 cents 2.67 cents 2.79 cents 3.05 cents - ---------------------------------------------------------------------------------- TOTAL 36.16 CENTS 32.57 CENTS 32.60 CENTS 33.66 CENTS 37.02 CENTS INVESTMENT STRATEGY We seek to invest substantially all of the Fund's assets in Ginnie Mae obligations. We analyze securities using proprietary models to help us identify attractive investment opportunities. The Fund's short-term investments include short-term government securities and cash. MANAGER'S DISCUSSION During the Fund's fiscal year, we sought areas of the Ginnie Mae market where we believed prepayment risk was mispriced, which led us to securities primarily in the 5% to 7% coupon range. We also purchased some higher coupon securities when we saw value. Our main focus was coupon and maturity selection in managing the Fund's duration, or sensitivity to changing interest rates, rather than predicting interest rate movements. Ginnie Mae mortgage passthroughs have historically been a lower volatility asset class across interest rate cycles. We continued to see favorable return characteristics over the past year, as is evidenced by the Fund's returns. Annual Report | 31 Thank you for your continued participation in Franklin U.S. Government Securities Fund. We welcome your comments and questions and look forward to serving your investment needs in the years to come. [PHOTO] /s/Jack Lemein Jack Lemein [PHOTO] /s/Roger A. Bayston, CFA Roger A. Bayston, CFA [PHOTO] /s/T. Anthony Coffey, CFA T. Anthony Coffey, CFA Portfolio Management Team Franklin U.S. Government Securities Fund THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE FUND'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON 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 ADVISOR 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. 32 | Annual Report Performance Summary as of 9/30/03 FRANKLIN U.S. GOVERNMENT SECURITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects the Fund's dividend income, capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION - -------------------------------------------------------------------------------------------------- CLASS A CHANGE 9/30/03 9/30/02 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.18 $6.81 $6.99 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - -------------------------------------------------------------------------------------------------- Dividend Income $0.3616 - -------------------------------------------------------------------------------------------------- CLASS B CHANGE 9/30/03 9/30/02 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.18 $6.80 $6.98 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - -------------------------------------------------------------------------------------------------- Dividend Income $0.3257 - -------------------------------------------------------------------------------------------------- CLASS C CHANGE 9/30/03 9/30/02 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.19 $6.78 $6.97 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - -------------------------------------------------------------------------------------------------- Dividend Income $0.3260 - -------------------------------------------------------------------------------------------------- CLASS R CHANGE 9/30/03 9/30/02 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.18 $6.81 $6.99 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - -------------------------------------------------------------------------------------------------- Dividend Income $0.3366 - -------------------------------------------------------------------------------------------------- ADVISOR CLASS CHANGE 9/30/03 9/30/02 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.18 $6.83 $7.01 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - -------------------------------------------------------------------------------------------------- Dividend Income $0.3702 Annual Report | Past performance does not guarantee future results. | 33 Performance Summary (CONTINUED) PERFORMANCE - ------------------------------------------------------------------------------------------------------ CLASS A 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +2.66% +32.42% +83.83% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 -1.70% +4.86% +5.82% - ------------------------------------------------------------------------------------------------------ Distribution Rate 3 5.03% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 4 3.28% - ------------------------------------------------------------------------------------------------------ CLASS B 1-YEAR 3-YEAR INCEPTION (1/1/99) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +2.13% +20.52% +28.50% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 -1.76% +5.53% +5.08% - ------------------------------------------------------------------------------------------------------ Distribution Rate 3 4.76% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 4 2.90% - ------------------------------------------------------------------------------------------------------ CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +2.00% +28.88% +68.10% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +0.02% +5.00% +6.23% - ------------------------------------------------------------------------------------------------------ Distribution Rate 3 4.68% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 4 2.87% - ------------------------------------------------------------------------------------------------------ CLASS R 1-YEAR INCEPTION (1/1/02) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +2.29% +9.49% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +1.32% +5.34% - ------------------------------------------------------------------------------------------------------ Distribution Rate 3 4.92% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 4 3.05% - ------------------------------------------------------------------------------------------------------ ADVISOR CLASS5 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +2.79% +33.33% +86.19% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +2.79% +5.92% +6.41% - ------------------------------------------------------------------------------------------------------ Distribution Rate 3 5.36% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 4 3.54% ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SINCE MARKETS CAN GO DOWN AS WELL AS UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. FOR MORE CURRENT PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 34 | Past performance does not guarantee future results. | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes the current, applicable, maximum sales charge(s), Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvested distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. The Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics, is a commonly used measure of the inflation rate. CLASS A (10/1/93-9/30/03) [LINE GRAPH] Franklin U.S. Government B Intermediate U.S. Lipper GNMA Securities Fund overnment Bond Index 6 Funds Average 6 CPI 6 10/1/93 $9,574 $10,000 $10,000 $10,000 $9,593 $10,024 $10,026 $10,041 $9,558 $9,974 $9,969 $10,048 $9,631 $10,015 $10,049 $10,048 $9,719 $10,114 $10,145 $10,076 $9,628 $9,975 $10,053 $10,110 $9,358 $9,830 $9,798 $10,145 $9,295 $9,766 $9,727 $10,159 $9,301 $9,773 $9,742 $10,165 $9,258 $9,775 $9,713 $10,200 $9,428 $9,904 $9,874 $10,227 $9,456 $9,932 $9,892 $10,269 $9,327 $9,850 $9,760 $10,296 $9,299 $9,852 $9,729 $10,303 $9,285 $9,809 $9,703 $10,317 $9,372 $9,841 $9,795 $10,317 $9,563 $10,001 $9,982 $10,358 $9,799 $10,193 $10,224 $10,400 $9,844 $10,250 $10,266 $10,434 $9,978 $10,368 $10,401 $10,469 $10,311 $10,661 $10,741 $10,489 $10,373 $10,729 $10,803 $10,510 $10,389 $10,734 $10,797 $10,510 $10,498 $10,822 $10,910 $10,538 $10,592 $10,895 $11,020 $10,558 $10,702 $11,014 $11,125 $10,593 $10,813 $11,149 $11,265 $10,586 $10,940 $11,259 $11,409 $10,579 $11,005 $11,354 $11,474 $10,641 $10,911 $11,234 $11,327 $10,675 $10,864 $11,182 $11,277 $10,731 4/30/96 $10,818 $11,150 $11,230 $10,772 $10,787 $11,144 $11,184 $10,793 $10,918 $11,257 $11,306 $10,799 $10,953 $11,292 $11,345 $10,820 $10,954 $11,305 $11,340 $10,841 $11,138 $11,451 $11,521 $10,875 $11,340 $11,639 $11,753 $10,910 $11,509 $11,779 $11,932 $10,930 $11,443 $11,716 $11,847 $10,930 $11,513 $11,761 $11,921 $10,965 $11,548 $11,780 $11,945 $10,999 $11,515 $11,713 $11,820 $11,027 $11,690 $11,845 $12,002 $11,041 $11,792 $11,937 $12,117 $11,034 $11,931 $12,040 $12,256 $11,048 $12,157 $12,262 $12,507 $11,061 $12,120 $12,215 $12,457 $11,082 $12,261 $12,347 $12,621 $11,110 $12,384 $12,491 $12,751 $11,137 $12,400 $12,519 $12,781 $11,130 $12,525 $12,621 $12,903 $11,116 $12,650 $12,785 $13,033 $11,137 $12,649 $12,772 $13,046 $11,158 $12,702 $12,812 $13,088 $11,178 $12,793 $12,873 $13,157 $11,199 $12,880 $12,961 $13,257 $11,220 $12,931 $13,048 $13,314 $11,234 $13,000 $13,099 $13,370 $11,247 $13,127 $13,346 $13,501 $11,261 $13,292 $13,658 $13,677 $11,275 10/31/98 $13,229 $13,680 $13,611 $11,303 $13,301 $13,639 $13,687 $11,303 $13,353 $13,692 $13,736 $11,296 $13,444 $13,753 $13,816 $11,323 $13,360 $13,564 $13,710 $11,337 $13,433 $13,654 $13,795 $11,371 $13,486 $13,691 $13,847 $11,454 $13,381 $13,607 $13,747 $11,454 $13,315 $13,627 $13,669 $11,454 $13,209 $13,629 $13,586 $11,489 $13,219 $13,648 $13,568 $11,516 $13,432 $13,765 $13,781 $11,571 $13,504 $13,792 $13,831 $11,592 $13,514 $13,802 $13,839 $11,599 $13,463 $13,758 $13,773 $11,599 $13,349 $13,712 $13,661 $11,633 $13,505 $13,826 $13,821 $11,702 $13,704 $13,983 $14,029 $11,799 $13,672 $13,978 $14,004 $11,806 $13,727 $14,015 $14,053 $11,819 $13,953 $14,238 $14,299 $11,881 $14,029 $14,332 $14,358 $11,909 $14,237 $14,493 $14,562 $11,909 $14,359 $14,620 $14,687 $11,971 $14,461 $14,720 $14,775 $11,992 $14,672 $14,936 $14,991 $11,999 $14,884 $15,199 $15,208 $11,992 $15,098 $15,402 $15,439 $12,068 $15,179 $15,543 $15,529 $12,116 $15,260 $15,656 $15,617 $12,143 4/30/01 $15,275 $15,606 $15,591 $12,192 $15,380 $15,671 $15,691 $12,247 $15,418 $15,721 $15,741 $12,267 $15,707 $16,014 $16,040 $12,233 $15,814 $16,156 $16,157 $12,233 $16,014 $16,501 $16,385 $12,288 $16,235 $16,759 $16,604 $12,247 $16,084 $16,559 $16,432 $12,226 $16,026 $16,479 $16,343 $12,178 $16,153 $16,550 $16,500 $12,205 $16,351 $16,687 $16,673 $12,254 $16,146 $16,435 $16,470 $12,323 $16,443 $16,743 $16,773 $12,391 $16,548 $16,859 $16,882 $12,391 $16,678 $17,070 $17,018 $12,398 $16,857 $17,392 $17,214 $12,412 $17,013 $17,591 $17,354 $12,453 $17,145 $17,893 $17,503 $12,474 $17,203 $17,881 $17,527 $12,495 $17,203 $17,739 $17,519 $12,495 $17,401 $18,067 $17,708 $12,467 $17,451 $18,027 $17,743 $12,522 $17,525 $18,231 $17,843 $12,619 $17,525 $18,234 $17,830 $12,695 $17,575 $18,286 $17,875 $12,667 $17,574 $18,573 $17,916 $12,646 $17,625 $18,542 $17,948 $12,660 $17,215 $18,092 $17,557 $12,674 $17,343 $18,125 $17,673 $12,722 9/30/03 $17,601 $18,518 $17,966 $12,764 CLASS B (1/1/99-9/30/03) [LINE GRAPH] Franklin U.S. Government LB Intermediate U.S. Lipper GNMA Securities Fund Government Bond Index 6 Funds Average 6 CPI 6 1/1/99 $10,000 $10,000 $10,000 $10,000 $10,068 $10,045 $10,058 $10,024 $9,986 $9,907 $9,981 $10,037 $10,051 $9,973 $10,042 $10,067 $10,087 $10,000 $10,081 $10,140 $10,005 $9,938 $10,008 $10,140 $9,936 $9,953 $9,951 $10,140 $9,868 $9,954 $9,890 $10,171 $9,856 $9,968 $9,877 $10,195 $10,025 $10,053 $10,032 $10,244 $10,074 $10,073 $10,069 $10,262 $10,062 $10,080 $10,075 $10,268 $10,019 $10,049 $10,026 $10,268 $9,946 $10,015 $9,945 $10,299 $10,042 $10,098 $10,061 $10,360 3/31/00 $10,186 $10,213 $10,213 $10,445 $10,174 $10,209 $10,195 $10,451 $10,210 $10,236 $10,231 $10,464 $10,373 $10,399 $10,410 $10,519 $10,410 $10,468 $10,452 $10,543 $10,560 $10,585 $10,601 $10,543 $10,662 $10,678 $10,692 $10,598 $10,717 $10,751 $10,756 $10,616 $10,869 $10,909 $10,913 $10,622 $11,021 $11,101 $11,071 $10,616 $11,191 $11,249 $11,240 $10,683 $11,230 $11,352 $11,305 $10,726 $11,302 $11,434 $11,369 $10,750 $11,291 $11,398 $11,350 $10,793 5/31/01 $11,364 $11,446 $11,423 $10,842 $11,403 $11,482 $11,459 $10,860 $11,595 $11,696 $11,677 $10,830 $11,669 $11,800 $11,762 $10,830 $11,829 $12,052 $11,928 $10,879 $11,970 $12,240 $12,088 $10,842 $11,871 $12,094 $11,962 $10,824 $11,806 $12,035 $11,898 $10,781 $11,912 $12,087 $12,012 $10,805 $12,035 $12,187 $12,138 $10,848 $11,879 $12,004 $11,990 $10,909 $12,092 $12,228 $12,210 $10,970 $12,164 $12,314 $12,290 $10,970 $12,254 $12,468 $12,389 $10,976 7/31/02 $12,381 $12,703 $12,532 $10,988 $12,490 $12,848 $12,633 $11,025 $12,582 $13,068 $12,742 $11,043 $12,620 $13,059 $12,760 $11,062 $12,614 $12,956 $12,753 $11,062 $12,754 $13,196 $12,891 $11,037 $12,785 $13,166 $12,917 $11,086 $12,834 $13,315 $12,989 $11,171 $12,828 $13,318 $12,980 $11,239 $12,859 $13,355 $13,013 $11,214 $12,871 $13,565 $13,043 $11,196 $12,884 $13,543 $13,066 $11,208 $12,578 $13,214 $12,781 $11,220 $12,667 $13,238 $12,866 $11,263 9/30/03 $12,653 $13,525 $13,079 $11,300 Annual Report | Past performance does not guarantee future results. | 35 Performance Summary (CONTINUED) [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - -------------------------------------- CLASS C 9/30/03 - -------------------------------------- 1-Year +0.02% - -------------------------------------- 5-Year +5.00% - -------------------------------------- Since Inception (5/1/95) +6.23% CLASS C (5/1/95-9/30/03) [LINE CHART OMITTED] Franklin U.S. Government LB Intermediate U.S. Lipper GNMA Securities Fund Government Bond Index 6 Funds Average 6 CPI 6 5/1/95 $9,896 $10,000 $10,000 $10,000 $10,194 $10,282 $10,326 $10,020 $10,249 $10,347 $10,386 $10,039 $10,260 $10,352 $10,381 $10,039 $10,362 $10,438 $10,489 $10,066 $10,454 $10,508 $10,595 $10,086 $10,557 $10,623 $10,695 $10,119 $10,661 $10,753 $10,830 $10,112 $10,780 $10,859 $10,969 $10,105 $10,853 $10,950 $11,031 $10,165 $10,754 $10,834 $10,890 $10,197 $10,687 $10,785 $10,842 $10,250 $10,652 $10,754 $10,796 $10,290 $10,616 $10,748 $10,752 $10,309 $10,725 $10,857 $10,869 $10,316 $10,754 $10,891 $10,907 $10,336 $10,766 $10,903 $10,902 $10,355 $10,930 $11,044 $11,076 $10,388 $11,123 $11,225 $11,299 $10,421 $11,301 $11,361 $11,472 $10,441 $11,214 $11,300 $11,389 $10,441 $11,294 $11,343 $11,461 $10,474 $11,307 $11,361 $11,484 $10,507 $11,269 $11,297 $11,363 $10,533 $11,434 $11,424 $11,538 $10,546 $11,546 $11,513 $11,649 $10,540 $11,675 $11,612 $11,783 $10,553 $11,892 $11,826 $12,025 $10,566 $11,833 $11,781 $11,977 $10,586 9/30/97 $11,966 $11,909 $12,134 $10,612 $12,081 $12,047 $12,259 $10,639 $12,091 $12,074 $12,288 $10,632 $12,208 $12,172 $12,405 $10,619 $12,324 $12,331 $12,530 $10,639 $12,317 $12,318 $12,542 $10,658 $12,363 $12,356 $12,583 $10,678 $12,446 $12,415 $12,649 $10,698 $12,526 $12,501 $12,745 $10,718 $12,569 $12,585 $12,800 $10,731 $12,632 $12,633 $12,854 $10,744 $12,749 $12,872 $12,980 $10,757 $12,905 $13,173 $13,149 $10,770 $12,819 $13,194 $13,086 $10,797 $12,901 $13,154 $13,159 $10,797 $12,946 $13,205 $13,206 $10,790 $13,028 $13,264 $13,283 $10,816 $12,941 $13,082 $13,181 $10,829 $13,006 $13,169 $13,262 $10,862 $13,051 $13,205 $13,313 $10,941 $12,943 $13,124 $13,217 $10,941 $12,874 $13,143 $13,142 $10,941 $12,765 $13,144 $13,061 $10,974 $12,770 $13,163 $13,044 $11,001 9/30/99 $12,970 $13,276 $13,249 $11,053 $13,033 $13,302 $13,297 $11,073 $13,037 $13,311 $13,305 $11,080 $12,982 $13,269 $13,241 $11,080 $12,867 $13,225 $13,134 $11,113 $13,012 $13,334 $13,287 $11,178 $13,198 $13,487 $13,488 $11,271 $13,161 $13,481 $13,464 $11,277 $13,208 $13,517 $13,511 $11,290 $13,420 $13,732 $13,747 $11,350 $13,468 $13,823 $13,804 $11,376 $13,662 $13,978 $14,000 $11,376 $13,795 $14,100 $14,120 $11,435 $13,886 $14,197 $14,205 $11,455 $14,062 $14,405 $14,412 $11,461 $14,260 $14,659 $14,621 $11,455 $14,480 $14,854 $14,843 $11,527 $14,530 $14,991 $14,930 $11,573 $14,624 $15,099 $15,015 $11,600 $14,631 $15,052 $14,989 $11,646 $14,704 $15,114 $15,085 $11,698 $14,755 $15,162 $15,133 $11,718 $15,004 $15,445 $15,421 $11,685 $15,100 $15,582 $15,533 $11,685 $15,307 $15,915 $15,752 $11,738 $15,490 $16,163 $15,963 $11,698 11/30/01 $15,361 $15,970 $15,797 $11,679 $15,276 $15,893 $15,712 $11,633 $15,413 $15,962 $15,863 $11,659 $15,573 $16,094 $16,030 $11,705 $15,370 $15,851 $15,834 $11,771 $15,647 $16,148 $16,125 $11,837 $15,741 $16,260 $16,230 $11,837 $15,858 $16,464 $16,362 $11,843 $16,023 $16,774 $16,550 $11,856 $16,165 $16,965 $16,684 $11,896 $16,307 $17,257 $16,827 $11,916 $16,333 $17,245 $16,851 $11,935 $16,325 $17,109 $16,842 $11,935 $16,507 $17,425 $17,024 $11,909 $16,547 $17,387 $17,058 $11,962 $16,635 $17,583 $17,154 $12,054 $16,604 $17,586 $17,142 $12,126 $16,645 $17,636 $17,185 $12,100 $16,638 $17,913 $17,224 $12,080 $16,678 $17,883 $17,255 $12,093 $16,281 $17,449 $16,879 $12,107 $16,395 $17,481 $16,991 $12,153 9/30/03 $16,635 $17,860 $17,273 $12,192 [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - -------------------------------------- CLASS R 9/30/03 - -------------------------------------- 1-Year +1.32% - -------------------------------------- Since Inception (1/1/02) +5.34% CLASS R (1/1/02-9/30/03) [LINE CHART OMITTED] Franklin U.S. Government LB Intermediate U.S. Lipper GNMA Securities Fund Government Bond Index 6 Funds Average 6 CPI 6 1/1/02 $10,000 $10,000 $10,000 $10,000 $10,079 $10,043 $10,096 $10,023 $10,185 $10,126 $10,202 $10,062 $10,068 $9,974 $10,078 $10,119 $10,250 $10,160 $10,263 $10,175 $10,312 $10,231 $10,330 $10,175 $10,390 $10,359 $10,413 $10,181 7/31/02 $10,499 $10,554 $10,533 $10,192 $10,593 $10,675 $10,618 $10,226 $10,672 $10,858 $10,710 $10,243 $10,690 $10,851 $10,725 $10,260 $10,701 $10,765 $10,719 $10,260 $10,822 $10,964 $10,835 $10,238 1/31/03 $10,834 $10,940 $10,857 $10,283 $10,892 $11,063 $10,918 $10,362 $10,889 $11,065 $10,910 $10,424 $10,916 $11,097 $10,937 $10,402 $10,913 $11,271 $10,962 $10,385 $10,925 $11,252 $10,982 $10,396 7/31/03 $10,683 $10,979 $10,743 $10,407 $10,759 $10,999 $10,814 $10,447 9/30/03 $10,949 $11,237 $10,993 $10,481 36 | Past performance does not guarantee future results. | Annual Report Performance Summary (CONTINUED) [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - -------------------------------------- ADVISOR CLASS 5 9/30/03 - -------------------------------------- 1-Year +2.79% - -------------------------------------- 5-Year +5.92% - -------------------------------------- 10-Year +6.41% ADVISOR CLASS (10/1/93-9/30/03) 5 [LINE CHART OMITTED] Franklin U.S. Government LB Intermediate U.S. Lipper GNMA Securities Fund Government Bond Index 6 Funds Average 6 CPI 6 10/1/93 $10,000 $10,000 $10,000 $10,000 $10,020 $10,024 $10,026 $10,041 $9,983 $9,974 $9,969 $10,048 $10,060 $10,015 $10,049 $10,048 $10,151 $10,114 $10,145 $10,076 $10,056 $9,975 $10,053 $10,110 $9,774 $9,830 $9,798 $10,145 $9,708 $9,766 $9,727 $10,159 $9,714 $9,773 $9,742 $10,165 $9,670 $9,775 $9,713 $10,200 $9,847 $9,904 $9,874 $10,227 $9,877 $9,932 $9,892 $10,269 $9,742 $9,850 $9,760 $10,296 $9,712 $9,852 $9,729 $10,303 $9,697 $9,809 $9,703 $10,317 $9,789 $9,841 $9,795 $10,317 $9,988 $10,001 $9,982 $10,358 $10,235 $10,193 $10,224 $10,400 $10,281 $10,250 $10,266 $10,434 $10,422 $10,368 $10,401 $10,469 $10,769 $10,661 $10,741 $10,489 $10,834 $10,729 $10,803 $10,510 $10,851 $10,734 $10,797 $10,510 $10,965 $10,822 $10,910 $10,538 $11,063 $10,895 $11,020 $10,558 $11,178 $11,014 $11,125 $10,593 $11,294 $11,149 $11,265 $10,586 $11,426 $11,259 $11,409 $10,579 $11,494 $11,354 $11,474 $10,641 $11,396 $11,234 $11,327 $10,675 $11,347 $11,182 $11,277 $10,731 4/30/96 $11,298 $11,150 $11,230 $10,772 $11,266 $11,144 $11,184 $10,793 $11,404 $11,257 $11,306 $10,799 $11,440 $11,292 $11,345 $10,820 $11,441 $11,305 $11,340 $10,841 $11,633 $11,451 $11,521 $10,875 $11,843 $11,639 $11,753 $10,910 $12,020 $11,779 $11,932 $10,930 $11,952 $11,716 $11,847 $10,930 $12,042 $11,761 $11,921 $10,965 $12,063 $11,780 $11,945 $10,999 $12,029 $11,713 $11,820 $11,027 $12,230 $11,845 $12,002 $11,041 $12,338 $11,937 $12,117 $11,034 $12,484 $12,040 $12,256 $11,048 $12,722 $12,262 $12,507 $11,061 $12,665 $12,215 $12,457 $11,082 $12,832 $12,347 $12,621 $11,110 $12,943 $12,491 $12,751 $11,137 $12,980 $12,519 $12,781 $11,130 $13,112 $12,621 $12,903 $11,116 $13,225 $12,785 $13,033 $11,137 $13,243 $12,772 $13,046 $11,158 $13,300 $12,812 $13,088 $11,178 $13,376 $12,873 $13,157 $11,199 $13,488 $12,961 $13,257 $11,220 $13,542 $13,048 $13,314 $11,234 $13,596 $13,099 $13,370 $11,247 $13,730 $13,346 $13,501 $11,261 $13,924 $13,658 $13,677 $11,275 10/31/98 $13,839 $13,680 $13,611 $11,303 $13,934 $13,639 $13,687 $11,303 $13,990 $13,692 $13,736 $11,296 $14,087 $13,753 $13,816 $11,323 $13,980 $13,564 $13,710 $11,337 $14,058 $13,654 $13,795 $11,371 $14,135 $13,691 $13,847 $11,454 $14,027 $13,607 $13,747 $11,454 $13,938 $13,627 $13,669 $11,454 $13,849 $13,629 $13,586 $11,489 $13,840 $13,648 $13,568 $11,516 $14,085 $13,765 $13,781 $11,571 $14,162 $13,792 $13,831 $11,592 $14,153 $13,802 $13,839 $11,599 $14,100 $13,758 $13,773 $11,599 $14,004 $13,712 $13,661 $11,633 $14,147 $13,826 $13,821 $11,702 $14,357 $13,983 $14,029 $11,799 $14,347 $13,978 $14,004 $11,806 $14,406 $14,015 $14,053 $11,819 $14,644 $14,238 $14,299 $11,881 $14,703 $14,332 $14,358 $11,909 $14,922 $14,493 $14,562 $11,909 $15,074 $14,620 $14,687 $11,971 $15,181 $14,720 $14,775 $11,992 $15,381 $14,936 $14,991 $11,999 $15,629 $15,199 $15,208 $11,992 $15,854 $15,402 $15,439 $12,068 $15,917 $15,543 $15,529 $12,116 $16,028 $15,656 $15,617 $12,143 4/30/01 $16,044 $15,606 $15,591 $12,192 $16,131 $15,671 $15,691 $12,247 $16,218 $15,721 $15,741 $12,267 $16,499 $16,014 $16,040 $12,233 $16,612 $16,156 $16,157 $12,233 $16,824 $16,501 $16,385 $12,288 $17,058 $16,759 $16,604 $12,247 $16,926 $16,559 $16,432 $12,226 $16,842 $16,479 $16,343 $12,178 $16,977 $16,550 $16,500 $12,205 $17,186 $16,687 $16,673 $12,254 $16,973 $16,435 $16,470 $12,323 $17,286 $16,743 $16,773 $12,391 $17,398 $16,859 $16,882 $12,391 $17,536 $17,070 $17,018 $12,398 $17,726 $17,392 $17,214 $12,412 $17,891 $17,591 $17,354 $12,453 $18,057 $17,893 $17,503 $12,474 $18,094 $17,881 $17,527 $12,495 $18,096 $17,739 $17,519 $12,495 $18,306 $18,067 $17,708 $12,467 $18,360 $18,027 $17,743 $12,522 $18,467 $18,231 $17,843 $12,619 $18,468 $18,234 $17,830 $12,695 $18,496 $18,286 $17,875 $12,667 $18,524 $18,573 $17,916 $12,646 $18,553 $18,542 $17,948 $12,660 $18,123 $18,092 $17,557 $12,674 $18,260 $18,125 $17,673 $12,722 9/30/03 $18,619 $18,518 $17,966 $12,764 Annual Report | Past performance does not guarantee future results. | 37 Performance Summary (CONTINUED) ENDNOTES THE FUND'S SHARE PRICE AND YIELD MAY BE AFFECTED BY INTEREST RATE MOVEMENTS AND MORTGAGE PREPAYMENTS. SECURITIES OWNED BY THE FUND, BUT NOT SHARES OF THE FUND, ARE GUARANTEED BY THE U.S. GOVERNMENT AS TO TIMELY PAYMENT OF PRINCIPAL AND INTEREST. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: Subject to no initial sales charge, but subject to a contingent deferred sales charge (CDSC) declining from 4% to 0% over six years. These shares have higher annual fees and expenses than Class A shares. CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. CLASS R: No initial sales charge, but subject to 1% CDSC for shares redeemed within 18 months of investment; 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: No initial sales charge or Rule 12b-1 fees; are available to a limited class of investors. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge(s). 3. Distribution rate is based on an annualization of the respective class's September dividend and the maximum offering price (NAV for Classes B, R and Advisor) per share on 9/30/03. 4. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 9/30/03. 5. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +55.79% and +6.79%. 6. Source: Standard & Poor's Micropal; Lipper Inc. The Lehman Brothers Intermediate U.S. Government Bond index includes fixed-rate debt issues rated investment grade or higher by Moody's, S&P or Fitch, in that order. All issues have at least one year to maturity and an outstanding par value of at least $100 million for U.S. government issues. All returns are market value-weighted inclusive of accrued interest. The index includes issues of the U.S. government or any agency thereof. It includes only issues with a remaining term to maturity of less than 10 years. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The total return index is rebalanced monthly by market capitalization. As of 9/30/03, the Lipper GNMA Funds Average consisted of 66 mutual funds. The Lipper average does not include sales charges. Fund performance relative to the average might have differed if such charges had been considered. 38 | Past performance does not guarantee future results. | Annual Report Franklin Utilities Fund YOUR FUND'S GOALS AND PRIMARY INVESTMENTS: Franklin Utilities Fund seeks both capital appreciation and current income from a portfolio of public utility industry securities. [SIDEBAR] PORTFOLIO BREAKDOWN Franklin Utilities Fund Based on Total Net Assets as of 9/30/03 Utilities 89.6% Communications 3.0% Producer Manufacturing 2.0% Distribution Services 1.6% Electronic Technology 1.1% Finance 0.9% Short-Term Investments & Other Net Assets 1.8% We are pleased to bring you Franklin Utilities Fund's annual report for the fiscal year ended September 30, 2003. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Utilities Fund - Class A delivered a +16.38% cumulative total return, as shown in the Performance Summary beginning on page 42. The Fund underperformed its benchmark, the Standard & Poor's 500 (S&P 500) Composite Index, which returned 24.38% for the same period. 1 ECONOMIC AND MARKET OVERVIEW During the fiscal year ended September 30, 2003, the U.S. economy expanded within a relatively muted inflation environment, despite rising energy and health care costs. Gross domestic product (GDP) grew at annualized rates of 1.4% in fourth quarter 2002 and first quarter 2003, 3.3% in the second quarter, and an estimated 7.2% in the third quarter. Much of the momentum resulted from surging government defense spending and the stalwart consumer, whose steady participation in retail, vehicle and home sales was supported by tax cuts, cash raised through aggressive mortgage borrowing, and increasingly attractive price discounting and financing. Indeed, consumers' contribution to economic output, which historically accounts for about two-thirds of GDP, rose to a record 70% in 2003's second quarter. Business spending began to pick up in 2003 as businesses sought to upgrade or replace aging computer hardware and software. Slowly improving activity, profitability and cash flow accompanied by substantial new tax depreciation benefits also enticed businesses to spend more. An accommodative Federal Reserve Board, in an attempt to bolster the sluggish economy, continued to cut interest rates during the year under review. The federal funds target rate fell from 1.75% at the beginning of the reporting period to 1.00% by period-end. Additionally, the U.S. government injected fiscal stimulus into the economy, approving another round of tax cuts and rebates that included 1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 93. Annual Report | 39 [SIDEBAR] TOP 10 HOLDINGS Franklin Utilities Fund 9/30/03 - ------------------------------------------ % OF TOTAL COMPANY NET ASSETS - ------------------------------------------ Exelon Corp. 5.1% - ------------------------------------------ Entergy Corp. 4.7% - ------------------------------------------ FPL Group Inc. 4.7% - ------------------------------------------ American Electric Power Co. Inc. 4.5% - ------------------------------------------ Dominion Resources Inc. 4.4% - ------------------------------------------ Progress Energy Inc. 4.1% - ------------------------------------------ Cinergy Corp. 3.8% - ------------------------------------------ Southern Co. 3.8% - ------------------------------------------ FirstEnergy Corp. 3.3% - ------------------------------------------ DTE Energy Co. 2.7% dividend tax reductions. However, with unemployment hovering above 6% and with little new job creation, continued economic recovery was not assured. On a brighter note, U.S. equity markets, which often serve as a leading indicator of economic recovery, rallied from 2003's second quarter into September. Overall, during the Fund's fiscal year stock markets sank and rose seemingly in response to war news, improving corporate earnings and profit margins, and mixed unemployment and production data. For the 12-month reporting period, broad equity indexes posted double-digit gains, with technology stocks rallying especially strongly to return 53.32% as measured by the Nasdaq Composite Index. 2 INVESTMENT STRATEGY We search for the best return opportunities available in the global utilities arena with a specific focus on the U.S. electricity sector. Generally, we look for companies producing a high percentage of earnings from regulated utility franchise operations. MANAGER'S DISCUSSION Four of the Fund's top 10 holdings at period-end, Exelon, Entergy, FPL Group and Cinergy, were among our top 10 at the beginning of the reporting period. All contributed positively to Fund performance during the 12-month period and represent the type of utilities we prefer. For example, Exelon, the Fund's top holding as of September 30, 2003, at 5.1% of total net assets, is a Midwest-based electric utility with a solid track record for operating performance. Management boosted Exelon's quarterly dividend twice during the period as the company delivered significant earnings and cash flow results. Entergy, our second largest holding at 4.7% of total net assets, raised its dividend following the dividend tax relief legislation passed by Congress in May 2003. We appreciated these two companies' greater level of cash distribution to shareholders because the utilities industry, which has historically distributed larger dividends, reduced dividends over the past several years. Despite our focus on electric utilities, we also increased our weightings in gas and telephone utilities. On September 30, 2003, we held 13.0% of total net assets in gas utilities. New positions ONEOK, KeySpan and AGL Resources contributed positive performance during the Fund's fiscal year. Many of our holdings, Keyspan included, provide electric and gas services to customers. 2. Source: Standard & Poor's Micropal. The Nasdaq Composite Index measures all domestic and international common stocks listed on the Nasdaq Stock Market. The index is market value-weighted and includes over 4,000 companies. 40 | Annual Report The telecommunications industry experienced deregulation earlier than the electric and gas industries. Thus, we saw fewer opportunities to pursue our investment strategy in telecommunications. Our telecommunications weighting, comprising SBC Communications and Verizon Communications, represented only 3.0% of the Fund's total net assets as of September 30, 2003. Although Verizon negatively impacted the Fund during the period under review, we held both companies for their attractive dividend yields. DTE Energy is a major holding that negatively affected Fund performance during the period. DTE, a utility holding company that provides electricity and natural gas services in Michigan, paid a yearly dividend of $2.06 since 1993. We remained attracted to this investment based on its dividend payment history. Thank you for your continued participation in Franklin Utilities Fund. We look forward to serving your future investment needs. [PHOTO] /S/John C. Kohli John C. Kohli, CFA Portfolio Manager Franklin Utilities Fund THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE FUND'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON 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 ADVISOR MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 41 Performance Summary as of 9/30/03 FRANKLIN UTILITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects the Fund's dividend income, capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION - --------------------------------------------------------------------------------------------------- CLASS A CHANGE 9/30/03 9/30/02 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.84 $8.80 $7.96 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - --------------------------------------------------------------------------------------------------- Dividend Income $0.4260 - --------------------------------------------------------------------------------------------------- CLASS B CHANGE 9/30/03 9/30/02 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.84 $8.80 $7.96 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - --------------------------------------------------------------------------------------------------- Dividend Income $0.3901 - --------------------------------------------------------------------------------------------------- CLASS C CHANGE 9/30/03 9/30/02 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.83 $8.78 $7.95 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - --------------------------------------------------------------------------------------------------- Dividend Income $0.3900 - --------------------------------------------------------------------------------------------------- CLASS R CHANGE 9/30/03 9/30/02 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.83 $8.79 $7.96 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - --------------------------------------------------------------------------------------------------- Dividend Income $0.4045 - --------------------------------------------------------------------------------------------------- ADVISOR CLASS CHANGE 9/30/03 9/30/02 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.85 $8.84 $7.99 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/02-9/30/03) - --------------------------------------------------------------------------------------------------- Dividend Income $0.4377 42 |Past performance does not guarantee future results. | Annual Report Performance Summary (CONTINUED) PERFORMANCE - ------------------------------------------------------------------------------------------------------ CLASS A 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +16.38% +11.09% +66.18% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +11.48% +1.25% +4.75% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 3 $11,148 $10,640 $15,910 - ------------------------------------------------------------------------------------------------------ Distribution Rate 4 4.40% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 5 4.21% - ------------------------------------------------------------------------------------------------------ CLASS B 1-YEAR 3-YEAR INCEPTION (1/1/99) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +15.88% -3.67% +6.88% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +11.88% -2.07% +1.09% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 3 $11,188 $9,391 $10,529 - ------------------------------------------------------------------------------------------------------ Distribution Rate 4 4.17% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 5 3.89% - ------------------------------------------------------------------------------------------------------ CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/95) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +15.77% +8.28% +76.79% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +13.63% +1.41% +6.87% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 3 $11,363 $10,724 $17,501 - ------------------------------------------------------------------------------------------------------ Distribution Rate 4 4.04% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 5 3.85% - ------------------------------------------------------------------------------------------------------ CLASS R 1-YEAR INCEPTION (1/1/02) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +15.96% -2.60% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +14.96% -1.50% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 3 $11,496 $9,740 - ------------------------------------------------------------------------------------------------------ Distribution Rate 4 4.34% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 5 4.04% - ------------------------------------------------------------------------------------------------------ ADVISOR CLASS 6 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +16.61% +11.97% +69.75% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +16.61% +2.29% +5.43% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 3 $11,661 $11,197 $16,975 - ------------------------------------------------------------------------------------------------------ Distribution Rate 4 4.72% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 5 4.53% - ------------------------------------------------------------------------------------------------------ ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SINCE MARKETS CAN GO DOWN AS WELL AS UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. FOR MORE CURRENT PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Annual Report | Past performance does not guarantee future results. | 43 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes the current, applicable, maximum sales charge(s), Fund expenses, account fees and reinvested distributions. The unmanaged index includes reinvested dividends. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index. [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - ------------------------------------- CLASS A 9/30/03 - ------------------------------------- 1-Year +11.48% - ------------------------------------- 5-Year +1.25% - ------------------------------------- 10-Year +4.75% CLASS A (10/1/93-9/30/03) [LINE CHART OMITTED] FRANKLIN UTILITIES FUND S&P 500 7 10/93 $9,574 $10,000 $9,520 $10,207 $9,085 $10,109 $9,204 $10,232 $9,023 $10,579 $8,580 $10,292 $8,288 $9,844 $8,407 $9,971 $7,940 $10,134 $7,679 $9,886 $8,023 $10,210 $8,070 $10,628 $7,865 $10,368 $8,007 $10,601 $8,101 $10,215 $8,128 $10,366 $8,608 $10,635 $8,598 $11,049 $8,474 $11,374 $8,659 $11,709 $9,156 $12,176 $9,157 $12,459 $9,127 $12,872 $9,266 $12,904 $9,767 $13,448 $9,968 $13,400 $10,128 $13,988 $10,621 $14,257 $10,795 $14,742 $10,519 $14,879 3/96 $10,509 $15,022 $10,157 $15,243 $10,271 $15,636 $10,818 $15,696 $10,220 $15,002 $10,367 $15,319 $10,348 $16,181 $10,688 $16,627 $10,837 $17,883 $10,837 $17,528 $10,893 $18,623 $10,983 $18,769 $10,676 $17,999 $10,596 $19,073 $10,927 $20,233 $11,287 $21,139 $11,553 $22,820 $11,299 $21,543 $11,768 $22,722 $11,826 $21,964 $12,611 $22,980 $13,535 $23,374 $13,012 $23,633 $13,219 $25,336 $14,045 $26,632 $13,540 $26,900 $13,368 $26,439 $13,689 $27,512 $13,191 $27,219 $13,640 $23,288 9/98 $14,322 $24,780 $14,057 $26,794 $14,209 $28,417 $14,560 $30,054 $13,785 $31,310 $13,128 $30,337 $12,903 $31,550 $13,716 $32,772 $14,342 $31,999 $13,832 $33,774 $13,630 $32,721 $13,603 $32,559 $13,099 $31,667 $13,331 $33,670 $12,552 $34,355 $12,375 $36,377 $13,081 $34,550 $12,116 $33,896 $12,528 $37,210 $13,273 $36,091 $13,448 $35,352 $12,845 $36,224 $13,377 $35,658 $14,796 $37,872 $16,278 $35,873 $16,203 $35,721 $16,786 $32,907 $17,525 $33,068 $15,726 $34,241 $16,648 $31,121 3/01 $16,865 $29,150 $17,568 $31,414 $17,659 $31,624 $16,769 $30,855 $16,183 $30,551 $16,399 $28,640 $15,621 $26,328 $15,637 $26,830 $15,497 $28,888 $16,108 $29,141 $15,910 $28,716 $15,860 $28,162 $16,765 $29,221 $16,648 $27,450 $16,246 $27,249 $15,524 $25,309 $14,185 $23,336 $14,745 $23,489 $13,670 $20,939 $13,670 $22,780 $13,945 $24,119 $14,420 $22,703 $13,828 $22,109 $13,445 $21,777 $13,925 $21,987 $14,685 $23,798 $15,974 $25,051 $16,028 $25,371 $15,296 $25,819 $15,314 $26,321 9/03 $15,910 $26,042 AVERAGE ANNUAL TOTAL RETURN - ------------------------------------- CLASS B 9/30/03 - ------------------------------------- 1-Year +11.88% - ------------------------------------- 3-Year -2.07% - ------------------------------------- Since Inception (1/1/99) +1.09% CLASS B (1/1/99-9/30/03) [LINE CHART OMITTED] FRANKLIN UTILITIES FUND S&P 500 7 1/99 $10,000 $10,000 $9,468 $10,418 $9,016 $10,094 $8,859 $10,498 $9,416 $10,905 $9,845 $10,647 $9,487 $11,238 $9,339 $10,887 $9,321 $10,834 $8,964 $10,537 $9,133 $11,203 $8,600 $11,431 $8,479 $12,104 $8,961 $11,496 $8,282 $11,279 3/00 $8,572 $12,381 $9,071 $12,009 $9,190 $11,763 $8,768 $12,053 $9,131 $11,865 $10,088 $12,601 $11,097 $11,936 $11,035 $11,886 $11,433 $10,949 $11,932 $11,003 $10,708 $11,393 $11,325 $10,355 $11,468 $9,699 $11,936 $10,453 $11,998 $10,523 6/01 $11,390 $10,267 $10,982 $10,166 $11,128 $9,530 $10,588 $8,760 $10,599 $8,927 $10,504 $9,612 $10,916 $9,696 $10,770 $9,555 $10,737 $9,371 $11,336 $9,723 $11,257 $9,134 $10,985 $9,067 $10,498 $8,421 $9,570 $7,765 $9,948 $7,816 9/02 $9,225 $6,967 $9,225 $7,580 $9,410 $8,025 $9,719 $7,554 $9,320 $7,357 $9,062 $7,246 $9,375 $7,316 $9,875 $7,919 $10,743 $8,335 $10,782 $8,442 $10,289 $8,591 $10,289 $8,758 9/03 $10,529 $8,665 44 | Past performance does not guarantee future results. | Annual Report Performance Summary (CONTINUED) CLASS C (5/1/95-9/30/03) [LINE CHART OMITTED] FRANKLIN UTILITIES FUND S&P 500 7 5/95 $9,899 $10,000 $10,492 $10,399 $10,500 $10,640 $10,454 $10,993 $10,613 $11,020 $11,188 $11,485 $11,406 $11,444 $11,578 $11,946 $12,150 $12,176 $12,325 $12,590 $12,021 $12,707 $12,005 $12,829 $11,603 $13,018 $11,721 $13,354 $12,331 $13,404 $11,648 $12,813 $11,816 $13,083 $11,791 $13,819 $12,167 $14,200 $12,337 $15,272 $12,333 $14,970 $12,397 $15,905 $12,487 $16,029 $12,125 $15,372 $12,034 $16,289 $12,398 $17,280 6/97 $12,804 $18,054 $13,106 $19,489 $12,804 $18,398 $13,331 $19,405 $13,397 $18,758 $14,275 $19,626 $15,320 $19,962 $14,727 $20,183 $14,948 $21,638 $15,875 $22,745 $15,304 $22,974 $15,096 $22,579 $15,454 $23,496 $14,891 $23,246 $15,383 $19,889 $16,163 $21,163 $15,849 $22,883 $16,006 $24,269 $16,398 $25,667 $15,524 $26,740 $14,784 $25,909 $14,528 $26,945 $15,428 $27,988 $16,132 $27,329 $15,542 $28,844 $15,299 $27,945 8/99 $15,269 $27,806 $14,698 $27,045 $14,958 $28,756 $14,069 $29,340 $13,865 $31,067 $14,657 $29,506 $13,558 $28,949 $14,033 $31,779 $14,851 $30,823 $15,047 $30,192 $14,353 $30,937 $14,949 $30,453 $16,520 $32,344 $18,174 $30,637 $18,073 $30,507 $18,725 $28,103 $19,543 $28,241 $17,535 $29,243 $18,547 $26,578 $18,783 $24,895 $19,549 $26,828 $19,651 $27,008 $18,654 $26,351 $17,984 $26,092 $18,224 $24,460 $17,356 $22,485 10/01 $17,373 $22,914 $17,200 $24,671 $17,875 $24,887 $17,654 $24,524 $17,599 $24,051 $18,582 $24,956 $18,433 $23,444 $17,987 $23,271 $17,187 $21,614 $15,684 $19,930 $16,304 $20,060 $15,117 $17,882 $15,098 $19,455 $15,421 $20,599 $15,929 $19,389 $15,274 $18,882 $14,850 $18,598 $15,366 $18,777 $16,186 $20,325 $17,611 $21,394 $17,657 $21,668 $16,848 $22,050 $16,867 $22,479 9/03 $17,501 $22,241 [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - ------------------------------------- CLASS C 9/30/03 - ------------------------------------- 1-Year +13.63% - ------------------------------------- 5-Year +1.41% - ------------------------------------- Since Inception (5/1/95) +6.87% CLASS R (1/1/02-9/30/03) [LINE CHART OMITTED] FRANKLIN UTILITIES FUND S&P 500 7 1/02 $10,000 $10,000 $9,876 $9,854 $9,845 $9,664 $10,388 $10,028 $10,315 $9,420 $10,066 $9,351 6/02 $9,621 $8,685 $8,791 $8,008 $9,127 $8,061 $8,468 $7,185 $8,468 $7,817 $8,638 $8,277 12/02 $8,924 $7,791 $8,558 $7,587 $8,320 $7,473 $8,616 $7,545 $9,075 $8,167 $9,874 $8,596 6/03 $9,899 $8,706 $9,446 $8,860 $9,457 $9,032 9/03 $9,740 $8,937 [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - ------------------------------------- CLASS R 9/30/03 - ------------------------------------- 1-Year +14.96% - ------------------------------------- Since Inception (1/1/02) -1.50% Annual Report | Past performance does not guarantee future results. | 45 Performance Summary (CONTINUED) [SIDEBAR] AVERAGE ANNUAL TOTAL RETURN - -------------------------------------- ADVISOR CLASS 6 9/30/03 - -------------------------------------- 1-Year +16.61% - -------------------------------------- 5-Year +2.29% - -------------------------------------- 10-Year +5.43% ADVISOR CLASS (10/1/93-9/30/03) 6 [LINE CHART OMITTED] FRANKLIN UTILITIES FUND S&P 500 7 10/93 $10,000 $10,000 $9,944 $10,207 $9,490 $10,109 $9,613 $10,232 $9,425 $10,579 $8,962 $10,292 $8,657 $9,844 $8,781 $9,971 $8,293 $10,134 $8,021 $9,886 $8,380 $10,210 $8,429 $10,628 $8,215 $10,368 $8,363 $10,601 $8,462 $10,215 $8,490 $10,366 $8,991 $10,635 $8,981 $11,049 $8,851 $11,374 $9,045 $11,709 $9,563 $12,176 $9,565 $12,459 $9,534 $12,872 $9,678 $12,904 $10,202 $13,448 $10,412 $13,400 $10,579 $13,988 $11,094 $14,257 $11,276 $14,742 $10,987 $14,879 3/96 $10,977 $15,022 $10,609 $15,243 $10,728 $15,636 $11,300 $15,696 $10,675 $15,002 $10,829 $15,319 $10,809 $16,181 $11,164 $16,627 $11,320 $17,883 $11,319 $17,528 $11,378 $18,623 $11,472 $18,769 $11,155 $17,999 $11,072 $19,073 $11,417 $20,233 $11,797 $21,139 $12,075 $22,820 $11,797 $21,543 $12,304 $22,722 $12,353 $21,964 $13,174 $22,980 $14,157 $23,374 $13,610 $23,633 $13,826 $25,336 $14,695 $26,632 $14,180 $26,900 $13,987 $26,439 $14,328 $27,512 $13,807 $27,219 $14,263 $23,288 9/98 $15,035 $24,780 $14,758 $26,794 $14,916 $28,417 $15,276 $30,054 $14,478 $31,310 $13,790 $30,337 $13,560 $31,550 $14,411 $32,772 $15,066 $31,999 $14,538 $33,774 $14,312 $32,721 $14,298 $32,559 $13,760 $31,667 $14,018 $33,670 $13,187 $34,355 $13,021 $36,377 $13,761 $34,550 $12,734 $33,896 $13,186 $37,210 $13,968 $36,091 $14,151 $35,352 $13,507 $36,224 $14,081 $35,658 $15,570 $37,872 $17,131 $35,873 $17,052 $35,721 $17,680 $32,907 $18,446 $33,068 $16,557 $34,241 $17,526 $31,121 3/01 $17,759 $29,150 $18,497 $31,414 $18,609 $31,624 $17,664 $30,855 $17,048 $30,551 $17,275 $28,640 $16,465 $26,328 $16,481 $26,830 $16,334 $28,888 $16,983 $29,141 $16,774 $28,716 $16,739 $28,162 $17,679 $29,221 $17,556 $27,450 $17,151 $27,249 $16,381 $25,309 $14,955 $23,336 $15,561 $23,489 $14,436 $20,939 $14,436 $22,780 $14,743 $24,119 $15,230 $22,703 $14,607 $22,109 $14,204 $21,777 $14,714 $21,987 $15,514 $23,798 $16,890 $25,051 $16,952 $25,371 $16,180 $25,819 $16,199 $26,321 9/03 $16,975 $26,042 46 |Past performance does not guarantee future results. | Annual Report Performance Summary (CONTINUED) ENDNOTES SECURITIES ISSUED BY UTILITY COMPANIES ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS. WHEN INTEREST RATES FALL, UTILITY SECURITIES PRICES TEND TO RISE; WHEN INTEREST RATES RISE, THEIR PRICES GENERALLY FALL. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to 7/1/94, Fund shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: Subject to no initial sales charge, but subject to a contingent deferred sales charge (CDSC) declining from 4% to 0% over six years. These shares have higher annual fees and expenses than Class A shares. CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares. CLASS R: No initial sales charge, but subject to 1% CDSC for shares redeemed within 18 months of investment; 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: No initial sales charge or Rule 12b-1 fees; are available to a limited class of investors. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge(s). 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge(s). 4. Distribution rate is based on an annualization of the respective class's current quarterly dividend and the maximum offering price (NAV for Classes B, R and Advisor) per share on 9/30/03. 5. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 9/30/03. 6. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +49.97% and +6.19%. 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. Annual Report | Past performance does not guarantee future results.| 47 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN DYNATECH FUND ---------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS A 2003 2002 2001 2000 1999 ---------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............................. $15.37 $18.76 $28.60 $23.11 $17.84 ---------------------------------------------------------- Income from investment operations: Net investment income (loss)a .................................. (.06) .03 .44 .56 .37 Net realized and unrealized gains (losses) ..................... 4.86 (3.11) (9.70) 5.30 5.14 ---------------------------------------------------------- Total from investment operations ................................ 4.80 (3.08) (9.26) 5.86 5.51 ---------------------------------------------------------- Less distributions from: Net investment income .......................................... -- (.29) (.58) (.37) (.24) Tax return of capital .......................................... -- (.02) -- -- -- Net realized gains ............................................. -- -- -- -- -- ---------------------------------------------------------- Total distributions ............................................. -- (.31) (.58) (.37) (.24) ---------------------------------------------------------- Net asset value, end of year .................................... $20.17 $15.37 $18.76 $28.60 $23.11 ---------------------------------------------------------- Total return b .................................................. 31.23% (16.83)% (32.86)% 25.57% 31.15% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................. $558,687 $413,309 $530,074 $809,140 $499,471 Ratios to average net assets: Expenses ....................................................... 1.04% 1.00% .95% .94% 1.00% Net investment income (loss) ................................... (.40)% .13% 1.93% 1.98% 1.70% Portfolio turnover rate ......................................... 13.68% 8.11% 4.07% 5.45% 6.49% <FN> a Based on average shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. </FN> 48 | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND (CONTINUED) ------------------------------------------------ YEAR ENDED SEPTEMBER 30, CLASS B 2003 2002 2001 2000 C ------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......................................... $15.20 $18.57 $28.45 $28.05 ------------------------------------------------ Income from investment operations: Net investment income (loss)a .............................................. (.25) (.12) .25 .28 Net realized and unrealized gains (losses) ................................. 4.84 (3.08) (9.62) .12 ------------------------------------------------ Total from investment operations ............................................ 4.59 (3.20) (9.37) .40 ------------------------------------------------ Less distributions from: Net investment income ...................................................... -- (.16) (.51) -- Tax return of capital ...................................................... -- (.01) -- -- ------------------------------------------------ Total distributions ........................................................ -- (.17) (.51) -- ------------------------------------------------ Net asset value, end of year ................................................ $19.79 $15.20 $18.57 $28.45 ------------------------------------------------ Total return b .............................................................. 30.20% (17.51)% (33.37)% 1.43% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............................................. $10,406 $5,066 $5,473 $4,749 Ratios to average net assets: Expenses ................................................................... 1.79% 1.75% 1.70% 1.73%d Net investment income (loss) ............................................... (1.15)% (.62)% 1.13% 1.43%d Portfolio turnover rate ..................................................... 13.68% 8.11% 4.07% 5.45% <FN> a Based on average shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c For the period February 1, 2000 (effective date) to September 30, 2000. d Annualized </FN> Annual Report | 49 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND (CONTINUED) ---------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS C 2003 2002 2001 2000 1999 ---------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............................. $15.04 $18.34 $27.95 $22.64 $17.53 ---------------------------------------------------------- Income from investment operations: Net investment income (loss)a .................................. (.25) (.11) .27 .34 .22 Net realized and unrealized gains (losses) ..................... 4.80 (3.05) (9.50) 5.21 5.05 ---------------------------------------------------------- Total from investment operations ................................ 4.55 (3.16) (9.23) 5.55 5.27 ---------------------------------------------------------- Less distributions from: Net investment income .......................................... -- (.13) (.38) (.24) (.16) Tax return of capital .......................................... -- (.01) -- -- -- Net realized gains ............................................. -- -- -- -- -- ---------------------------------------------------------- Total distributions ............................................. -- (.14) (.38) (.24) (.16) ---------------------------------------------------------- Net asset value, end of year .................................... $19.59 $15.04 $18.34 $27.95 $22.64 ---------------------------------------------------------- Total return b .................................................. 30.25% (17.48)% (33.36)% 24.65% 30.20% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................. $66,952 $51,809 $77,204 $126,313 $73,890 Ratios to average net assets: Expenses ....................................................... 1.79% 1.74% 1.70% 1.69% 1.75% Net investment income (loss) ................................... (1.15)% (.61)% 1.19% 1.23% 1.00% Portfolio turnover rate ......................................... 13.68% 8.11% 4.07% 5.45% 6.49% <FN> a Based on average shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. </FN> 50 |See notes to financial statements. | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 91.1% AIR FREIGHT/COURIERS 2.0% C.H. Robinson Worldwide Inc. ........................................................ 100,000 $ 3,721,000 United Parcel Service Inc., B ....................................................... 140,000 8,932,000 --------------- 12,653,000 --------------- BIOTECHNOLOGY 7.9% a Amgen Inc. .......................................................................... 300,000 19,371,000 a Chiron Corp. ........................................................................ 150,000 7,753,500 a Genentech Inc. ...................................................................... 290,000 23,240,600 --------------- 50,365,100 --------------- BROADCASTING 1.6% Clear Channel Communications Inc. ................................................... 200,000 7,660,000 a Entercom Communications Corp. ....................................................... 60,000 2,689,200 --------------- 10,349,200 --------------- CABLE/SATELLITE TV 1.3% a Comcast Corp., A .................................................................... 170,000 5,021,800 a Liberty Media Corp., A .............................................................. 300,000 2,991,000 --------------- 8,012,800 --------------- CASINOS/GAMING 2.7% International Game Technology ....................................................... 600,000 16,890,000 --------------- CHEMICALS: SPECIALTY 1.0% Sigma-Aldrich Corp. ................................................................. 125,000 6,492,500 --------------- COMPUTER COMMUNICATIONS 2.2% a Cisco Systems Inc. .................................................................. 720,000 14,068,800 --------------- COMPUTER PERIPHERALS .8% a EMC Corp. ........................................................................... 240,000 3,031,200 a Storage Technology Corp. ............................................................ 75,000 1,810,500 --------------- 4,841,700 --------------- COMPUTER PROCESSING HARDWARE 2.4% a Dell Inc. ........................................................................... 145,000 4,841,550 Hewlett-Packard Co. ................................................................. 450,862 8,728,688 a Sun Microsystems Inc. ............................................................... 430,000 1,423,300 --------------- 14,993,538 --------------- DATA PROCESSING SERVICES 4.4% a Computer Sciences Corp. ............................................................. 190,000 7,138,300 First Data Corp. .................................................................... 300,000 11,988,000 Paychex Inc. ........................................................................ 270,000 9,161,100 --------------- 28,287,400 --------------- Annual Report | 51 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) ELECTRONIC COMPONENTS .4% a Flextronics International Ltd. (Singapore) .......................................... 100,000 $ 1,418,000 a OmniVision Technologies Inc. ........................................................ 30,000 1,267,200 --------------- 2,685,200 --------------- ELECTRONIC EQUIPMENT/INSTRUMENTS 3.1% a Agilent Technologies Inc. ........................................................... 300,000 6,633,000 a JDS Uniphase Corp. .................................................................. 350,000 1,260,000 Rockwell Automation Inc. ............................................................ 250,000 6,562,500 a Waters Corp. ........................................................................ 180,000 4,937,400 --------------- 19,392,900 --------------- ELECTRONIC PRODUCTION EQUIPMENT 4.7% a Applied Materials Inc. .............................................................. 500,000 9,070,000 a KLA-Tencor Corp. .................................................................... 200,000 10,280,000 a Lam Research Corp. .................................................................. 125,000 2,768,750 a Novellus Systems Inc. ............................................................... 100,000 3,375,000 a Teradyne Inc. ....................................................................... 100,000 1,860,000 a Varian Semiconductor Equipment Associates Inc. ...................................... 75,000 2,808,750 --------------- 30,162,500 --------------- ELECTRONICS/APPLIANCE STORES .7% a Best Buy Co. Inc. ................................................................... 100,000 4,752,000 --------------- FINANCIAL CONGLOMERATES 1.4% Citigroup Inc. ...................................................................... 190,000 8,646,900 --------------- HOUSEHOLD/PERSONAL CARE .5% Estee Lauder Cos. Inc., A ........................................................... 100,000 3,410,000 --------------- INFORMATION TECHNOLOGY SERVICES 2.8% International Business Machines Corp. ............................................... 200,000 17,666,000 --------------- INSURANCE BROKERS/SERVICES .6% a ChoicePoint Inc. .................................................................... 120,000 4,020,000 --------------- INTERNET RETAIL .6% a Amazon.com Inc. ..................................................................... 45,000 2,176,200 a Interactive Corp. ................................................................... 50,000 1,652,500 --------------- 3,828,700 --------------- INTERNET SOFTWARE/SERVICES 1.4% a Check Point Software Technologies Ltd. (Israel) ..................................... 100,000 1,680,000 a Yahoo! Inc. ......................................................................... 210,000 7,429,800 --------------- 9,109,800 --------------- 52 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) MAJOR PHARMACEUTICALS 5.1% Bristol-Myers Squibb Co. ............................................................ 150,000 $ 3,849,000 Johnson & Johnson ................................................................... 130,000 6,437,600 Merck & Co. Inc. .................................................................... 150,000 7,593,000 Pfizer Inc. ......................................................................... 470,000 14,278,600 --------------- 32,158,200 --------------- MANAGED HEALTH CARE 2.7% UnitedHealth Group Inc. ............................................................. 340,000 17,108,800 --------------- MEDIA CONGLOMERATES 1.3% a AOL Time Warner Inc. ................................................................ 280,000 4,230,800 News Corp. Ltd., ADR (Australia) .................................................... 120,000 3,936,000 --------------- 8,166,800 --------------- MEDICAL DISTRIBUTORS 1.2% McKesson Corp. ...................................................................... 225,000 7,490,250 --------------- MEDICAL SPECIALTIES 6.3% Alcon Inc. (Switzerland) ............................................................ 150,000 8,422,500 Medtronic Inc. ...................................................................... 250,000 11,730,000 a Steris Corp. ........................................................................ 75,000 1,726,500 Stryker Corp. ....................................................................... 140,000 10,543,400 a Zimmer Holdings Inc. ................................................................ 140,000 7,714,000 --------------- 40,136,400 --------------- OILFIELD SERVICES/EQUIPMENT .4% Schlumberger Ltd. ................................................................... 50,000 2,420,000 --------------- OTHER CONSUMER SERVICES 4.0% a Apollo Group Inc., A ................................................................ 40,000 2,641,200 a eBay Inc. ........................................................................... 420,000 22,474,200 --------------- 25,115,400 --------------- OTHER PHARMACEUTICALS 1.3% Teva Pharmaceutical Industries Ltd., ADR (Israel) ................................... 150,000 8,572,500 --------------- PACKAGED SOFTWARE 8.9% Adobe Systems Inc. .................................................................. 250,000 9,815,000 a Intuit Inc. ......................................................................... 230,000 11,095,200 Microsoft Corp. ..................................................................... 950,000 26,400,500 a Oracle Corp. ........................................................................ 220,000 2,468,400 a Symantec Corp. ...................................................................... 110,000 6,932,200 --------------- 56,711,300 --------------- Annual Report | 53 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) RECREATIONAL PRODUCTS 2.3% a Electronic Arts Inc. ................................................................ 160,000 $ 14,756,800 --------------- SEMICONDUCTORS 11.4% a Analog Devices Inc. ................................................................. 300,000 11,406,000 Intel Corp. ......................................................................... 1,150,000 31,636,500 a International Rectifier Corp. ....................................................... 70,000 2,620,800 a Intersil Corp. ...................................................................... 100,000 2,380,000 Linear Technology Corp. ............................................................. 400,000 14,324,000 Microchip Technology Inc. ........................................................... 50,000 1,197,000 a Xilinx Inc. ......................................................................... 320,000 9,123,200 --------------- 72,687,500 --------------- TELECOMMUNICATIONS EQUIPMENT 3.7% Motorola Inc. ....................................................................... 680,750 8,148,578 Nokia Corp., ADR (Finland) .......................................................... 330,000 5,148,000 QUALCOMM Inc. ....................................................................... 240,000 9,993,600 --------------- 23,290,178 --------------- TOTAL COMMON STOCKS (COST $473,772,049) ............................................. 579,242,166 --------------- SHORT TERM INVESTMENT (COST $32,222,471) 5.1% b Franklin Institutional Fiduciary Trust Money Market Portfolio ....................... 32,222,471 32,222,471 --------------- TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $505,994,520) .................. 611,464,637 --------------- 54 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT 3.7% (COST $23,765,898) c Joint Repurchase Agreement, .976%, 10/01/03 (Maturity Value $23,766,542) ............ $ 23,765,898 $ 23,765,898 ABN AMRO Bank, N.V., New York Branch (Maturity Value $2,185,066) Banc of America Securities LLC (Maturity Value $2,185,066) Barclays Capital Inc. (Maturity Value $2,185,066) Bear, Stearns & Co. Inc. (Maturity Value $1,344,656) BNP Paribas Securities Corp. (Maturity Value $2,185,066) Deutsche Bank Securities Inc. (Market Value $2,185,066) Dresdner Kleinwort Wasserstein Securities LLC (Maturity Value $2,353,148) Goldman, Sachs & Co. (Maturity Value $2,185,066) Greenwich Capital Markets Inc. (Maturity Value $2,185,066) Lehman Brothers Inc. (Maturity Value $403,144) Morgan Stanley & Co. Inc. (Maturity Value $2,185,066) UBS Securities LLC (Maturity Value $2,185,066) Collateralized by U.S. Treasury Bills, Notes, and Bonds, and U.S. Government Agency Securities --------------- TOTAL INVESTMENTS (COST $529,760,418) 99.9% ......................................... 635,230,535 OTHER ASSETS, LESS LIABILITIES .1% .................................................. 814,472 --------------- NET ASSETS 100.0% ................................................................... $ 636,045,007 --------------- <FN> a Non-income producing b See Note 6 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. c See Note 1(c) regarding repurchase agreements. </FN> Annual Report | See notes to financial statements. | 55 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN GROWTH FUND ------------------------------------------------------------------ YEAR ENDED SEPTEMBER 30, CLASS A 2003 2002 2001 2000 1999 ------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................... $22.02 $27.81 $36.91 $33.21 $28.58 ------------------------------------------------------------------ Income from investment operations: Net investment income a ................................ .08 .07 .23 .45 .39 Net realized and unrealized gains (losses) ............. 4.81 (5.65) (7.26) 3.96 4.89 ------------------------------------------------------------------ Total from investment operations ........................ 4.89 (5.58) (7.03) 4.41 5.28 ------------------------------------------------------------------ Less distributions from: Net investment income .................................. (.04) (.16) (.40) (.45) (.44) Net realized gains ..................................... -- (.05) (1.67) (.26) (.21) ------------------------------------------------------------------ Total distributions ..................................... (.04) (.21) (2.07) (.71) (.65) ------------------------------------------------------------------ Net asset value, end of year ............................ $26.87 $22.02 $27.81 $36.91 $33.21 ------------------------------------------------------------------ Total return b .......................................... 22.27% (20.35)% (20.12)% 13.53% 18.63% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................... $1,433,742 $1,249,745 $1,657,387 $2,149,928 $2,119,740 Ratios to average net assets: Expenses ............................................... 1.06% .96% .91% .93% .89% Net investment income .................................. .31% .24% .69% 1.27% 1.19% Portfolio turnover rate ................................. 5.12% 2.16% .29% 8.12% 3.74% <FN> a Based on average shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge and is not annualized for periods less than one year. </FN> 56 | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED) ---------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS B 2003 2002 2001 2000 1999C ---------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............................. $21.70 $27.46 $36.54 $33.03 $31.45 ---------------------------------------------------------- Income from investment operations: Net investment income (loss)a .................................. (.11) (.14) (.03) .16 .14 Net realized and unrealized gains (losses) ..................... 4.73 (5.57) (7.18) 3.96 1.44 ---------------------------------------------------------- Total from investment operations ................................ 4.62 (5.71) (7.21) 4.12 1.58 ---------------------------------------------------------- Less distributions from: Net investment income .......................................... -- -- (.20) (.35) -- Net realized gains ............................................. -- (.05) (1.67) (.26) -- ---------------------------------------------------------- Total distributions ............................................. -- (.05) (1.87) (.61) -- ---------------------------------------------------------- Net asset value, end of year .................................... $26.32 $21.70 $27.46 $36.54 $33.03 ---------------------------------------------------------- Total return b .................................................. 21.29% (20.90)% (20.74)% 12.68% 5.02% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................. $103,499 $75,141 $66,095 $38,353 $17,271 Ratios to average net assets: Expenses ....................................................... 1.81% 1.71% 1.66% 1.68% 1.65%d Net investment income (loss) ................................... (.44)% (.51)% (.10)% .45% .57%d Portfolio turnover rate ......................................... 5.12% 2.16% .29% 8.12% 3.74% <FN> a Based on average shares outstanding. b Total return does not reflect contingent deferred sales charge and is not annualized for periods less than one year. c For the period January 1, 1999 (effective date) to September 30, 1999. d Annualized </FN> Annual Report | 57 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED) ---------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS C 2003 2002 2001 2000 1999 ---------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............................. $21.51 $27.24 $36.19 $32.58 $28.11 ---------------------------------------------------------- Income from investment operations: Net investment income (loss)a .................................. (.11) (.14) (.02) .18 .14 Net realized and unrealized gains (losses) ..................... 4.69 (5.54) (7.13) 3.91 4.81 ---------------------------------------------------------- Total from investment operations ................................ 4.58 (5.68) (7.15) 4.09 4.95 ---------------------------------------------------------- Less distributions from: Net investment income .......................................... -- -- (.13) (.22) (.27) Net realized gains ............................................. -- (.05) (1.67) (.26) (.21) ---------------------------------------------------------- Total distributions ............................................. -- (.05) (1.80) (.48) (.48) ---------------------------------------------------------- Net asset value, end of year .................................... $26.09 $21.51 $27.24 $36.19 $32.58 ---------------------------------------------------------- Total return b .................................................. 21.29% (20.92)% (20.72)% 12.71% 17.71% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................. $259,169 $232,307 $310,650 $374,483 $362,216 Ratios to average net assets: Expenses ....................................................... 1.82% 1.70% 1.66% 1.68% 1.65% Net investment income (loss) ................................... (.45)% (.51)% (.06)% .52% .45% Portfolio turnover rate ......................................... 5.12% 2.16% .29% 8.12% 3.74% <FN> a Based on average shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge and is not annualized for periods less than one year. </FN> 58 | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED) ---------------------- YEAR ENDED SEPTEMBER 30, CLASS R 2003 2002 B ---------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......................................... $21.98 $31.59 ---------------------- Income from investment operations-net realized and unrealized gains (losses) 4.81 (9.61) ---------------------- Less distributions from net investment income ............................... (.05) -- ---------------------- Net asset value, end of year ................................................ $26.74 $21.98 ---------------------- Total return a .............................................................. 21.92% (30.42)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............................................. $14,755 $2,788 Ratios to average net assets: Expenses ................................................................... 1.31% 1.21%c Net investment income ...................................................... .06% .02%c Portfolio turnover rate ..................................................... 5.12% 2.16% <FN> a Total return does not reflect contingent deferred sales charge and is not annualized for periods less than one year. b For the period January 1, 2002 (effective date) to September 30, 2002. c Annualized </FN> Annual Report | 59 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED) --------------------------------------------------------- YEAR ENDED SEPTEMBER 30, ADVISOR CLASS 2003 2002 2001 2000 1999 --------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................... $22.06 $27.86 $36.99 $33.27 $28.63 --------------------------------------------------------- Income from investment operations: Net investment income a ......................................... .14 .14 .31 .54 .46 Net realized and unrealized gains (losses) ...................... 4.82 (5.65) (7.28) 3.97 4.90 --------------------------------------------------------- Total from investment operations ................................. 4.96 (5.51) (6.97) 4.51 5.36 --------------------------------------------------------- Less distributions from: Net investment income ........................................... (.11) (.24) (.49) (.53) (.51) Net realized gains .............................................. -- (.05) (1.67) (.26) (.21) --------------------------------------------------------- Total distributions .............................................. (.11) (.29) (2.16) (.79) (.72) --------------------------------------------------------- Net asset value, end of year ..................................... $26.91 $22.06 $27.86 $36.99 $33.27 --------------------------------------------------------- Total return b ................................................... 22.58% (20.14)% (19.94)% 13.84% 18.89% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................................. $41,216 $27,431 $32,498 $39,442 $35,461 Ratios to average net assets: Expenses ........................................................ .81% .71% .66% .68% .65% Net investment income ........................................... .56% .49% .94% 1.51% 1.41% Portfolio turnover rate .......................................... 5.12% 2.16% .29% 8.12% 3.74% <FN> a Based on average shares outstanding. b Total return is not annualized for periods less than one year. </FN> 60 |See notes to financial statements. | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 98.9% COMMERCIAL SERVICES 2.7% a Dun & Bradstreet Corp. ................................................................ 122,000 $ 5,067,880 Equifax Inc. .......................................................................... 400,000 8,908,000 Moody's Corp. ......................................................................... 244,000 13,412,680 a Robert Half International Inc. ........................................................ 300,000 5,850,000 Sabre Holdings Corp., A ............................................................... 800,000 17,192,000 ----------------- 50,430,560 ----------------- CONSUMER DURABLES 2.2% Harley-Davidson Inc. .................................................................. 200,000 9,640,000 Hasbro Inc. ........................................................................... 600,000 11,208,000 Mattel Inc. ........................................................................... 1,000,000 18,960,000 ----------------- 39,808,000 ----------------- CONSUMER NON-DURABLES 3.0% Hershey Foods Corp. ................................................................... 258,200 18,765,976 International Flavors & Fragrances Inc. ............................................... 500,000 16,540,000 Tootsie Roll Industries Inc. .......................................................... 21,198 657,138 V.F. Corp. ............................................................................ 500,000 19,455,000 ----------------- 55,418,114 ----------------- CONSUMER SERVICES 4.9% a AOL Time Warner Inc. .................................................................. 1,350,000 20,398,500 Carnival Corp. ........................................................................ 500,000 16,445,000 Clear Channel Communications Inc. ..................................................... 500,000 19,150,000 Fairmont Hotels & Resorts Inc. (Canada) ............................................... 125,000 3,218,750 Viacom Inc., A ........................................................................ 200,000 7,680,000 Viacom Inc., B ........................................................................ 100,000 3,830,000 The Walt Disney Co. ................................................................... 1,000,000 20,170,000 ----------------- 90,892,250 ----------------- DISTRIBUTION SERVICES 2.8% Cardinal Health Inc. .................................................................. 236,250 13,794,638 Genuine Parts Co. ..................................................................... 461,700 14,765,166 W.W. Grainger Inc. .................................................................... 500,000 23,775,000 ----------------- 52,334,804 ----------------- ELECTRONIC TECHNOLOGY 17.2% a Agilent Technologies Inc. ............................................................. 400,000 8,844,000 a Apple Computer Inc. ................................................................... 500,000 10,315,000 Boeing Co. ............................................................................ 1,000,000 34,330,000 a Cisco Systems Inc. .................................................................... 1,350,000 26,379,000 a Conexant Systems Inc. ................................................................. 300,000 1,698,000 a Dell Inc. ............................................................................. 500,000 16,695,000 a EMC Corp. ............................................................................. 1,000,000 12,630,000 a Gateway Inc. .......................................................................... 500,000 2,830,000 General Dynamics Corp. ................................................................ 500,000 39,030,000 Annual Report | 61 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) ELECTRONIC TECHNOLOGY (CONT.) Hewlett-Packard Co. ................................................................... 1,116,250 $ 21,610,600 Intel Corp. ........................................................................... 800,000 22,008,000 Lockheed Martin Corp. ................................................................. 500,000 23,075,000 a Micrel Inc. ........................................................................... 25,000 304,750 a Mindspeed Technologies Inc. ........................................................... 100,000 539,000 a Mykrolis Corp. ........................................................................ 270,725 3,286,602 Northrop Grumman Corp. ................................................................ 500,000 43,110,000 Raytheon Co. .......................................................................... 600,000 16,800,000 Rockwell Automation Inc. .............................................................. 100,000 2,625,000 Rockwell Collins Inc. ................................................................. 100,000 2,525,000 a Sun Microsystems Inc. ................................................................. 1,600,000 5,296,000 Texas Instruments Inc. ................................................................ 515,000 11,742,000 a Waters Corp. .......................................................................... 500,000 13,715,000 ----------------- 319,387,952 ----------------- ENERGY MINERALS 2.0% BP PLC, ADR (United Kingdom) .......................................................... 295,200 12,427,920 Encana Corp. (Canada) ................................................................. 342,000 12,441,960 Royal Dutch Petroleum Co., N.Y. shs. (Netherlands) .................................... 280,000 12,376,000 ----------------- 37,245,880 ----------------- FINANCE .3% a ChoicePoint Inc. ...................................................................... 160,000 5,359,997 ----------------- HEALTH SERVICES .7% a Caremark RX Inc. ...................................................................... 75,625 1,709,125 IMS Health Inc. ....................................................................... 500,000 10,550,000 a Medco Health Solutions Inc. ........................................................... 48,240 1,250,863 ----------------- 13,509,988 ----------------- HEALTH TECHNOLOGY 23.0% Abbott Laboratories ................................................................... 400,000 17,020,000 a Advanced Medical Optics Inc. .......................................................... 88,888 1,596,428 Allergan Inc. ......................................................................... 400,000 31,492,000 a Amgen Inc. ............................................................................ 932,000 60,179,240 Baxter International Inc. ............................................................. 500,000 14,530,000 Bristol-Myers Squibb Co. .............................................................. 640,000 16,422,400 a Edwards Lifesciences Corp. ............................................................ 50,000 1,354,000 Eli Lilly & Co. ....................................................................... 400,000 23,760,000 a Genentech Inc. ........................................................................ 500,000 40,070,000 Johnson & Johnson ..................................................................... 996,000 49,321,920 Merck & Co. Inc. ...................................................................... 400,000 20,248,000 a Millipore Corp. ....................................................................... 400,000 18,424,000 Pall Corp. ............................................................................ 500,000 11,220,000 62 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) HEALTH TECHNOLOGY (CONT.) Pfizer Inc. ........................................................................... 2,000,000 $ 60,760,000 Schering-Plough Corp. ................................................................. 1,800,000 27,432,000 Wyeth ................................................................................. 600,000 27,660,000 a Zimmer Holdings Inc. .................................................................. 64,000 3,526,400 ----------------- 425,016,388 ----------------- INDUSTRIAL SERVICES 1.7% a Ionics Inc. ........................................................................... 400,000 9,784,000 Schlumberger Ltd. ..................................................................... 400,000 19,360,000 Transocean Inc. ....................................................................... 77,440 1,548,800 ----------------- 30,692,800 ----------------- PROCESS INDUSTRIES 1.8% Air Products & Chemicals Inc. ......................................................... 500,000 22,550,000 Sigma-Aldrich Corp. ................................................................... 200,000 10,388,000 ----------------- 32,938,000 ----------------- PRODUCER MANUFACTURING 18.5% 3M Co. ................................................................................ 800,000 55,256,000 a American Power Conversion Corp. ....................................................... 500,000 8,570,000 ArvinMeritor Inc. ..................................................................... 12,499 222,607 Avery Dennison Corp. .................................................................. 462,000 23,340,240 a CUNO Inc. ............................................................................. 86,200 3,378,187 Deere & Co. ........................................................................... 300,000 15,993,000 a Dionex Corp. .......................................................................... 250,000 9,840,000 Emerson Electric Co. .................................................................. 500,000 26,325,000 Illinois Tool Works Inc. .............................................................. 500,000 33,130,000 Ingersoll Rand Co., A ................................................................. 501,000 26,773,440 Johnson Controls Inc. ................................................................. 200,000 18,920,000 Molex Inc. ............................................................................ 146,483 4,187,949 Molex Inc., A ......................................................................... 146,483 3,594,693 Teleflex Inc. ......................................................................... 500,000 21,715,000 Textron Inc. .......................................................................... 525,000 20,711,250 a Thomas & Betts Corp. 500,000 7,925,000 Tyco International Ltd. ............................................................... 1,550,052 31,667,562 United Technologies Corp. ............................................................. 400,000 30,912,000 ----------------- 342,461,928 ----------------- RETAIL TRADE 2.2% Family Dollar Stores Inc. ............................................................. 200,000 7,978,000 a Interactive Corp. ..................................................................... 600,200 19,836,610 Tiffany & Co. ......................................................................... 350,000 13,065,500 ----------------- 40,880,110 ----------------- Annual Report | 63 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) TECHNOLOGY SERVICES 10.6% Automatic Data Processing Inc. ........................................................ 800,000 $ 28,680,000 Certegy Inc. .......................................................................... 200,000 6,422,000 a Computer Sciences Corp. ............................................................... 1,000,000 37,570,000 International Business Machines Corp. ................................................. 560,000 49,464,800 Microsoft Corp. ....................................................................... 1,000,000 27,790,000 a Oracle Corp. .......................................................................... 500,000 5,610,000 a Sungard Data Systems Inc. ............................................................. 500,000 13,155,000 a Yahoo! Inc. ........................................................................... 800,000 28,304,000 ----------------- 196,995,800 ----------------- TRANSPORTATION 5.3% a Alaska Air Group Inc. ................................................................. 500,000 13,910,000 a AMR Corp. ............................................................................. 1,080,000 12,366,000 a British Airways PLC, ADR (United Kingdom) ............................................. 500,000 14,110,000 Canadian Pacific Railway Ltd. (Canada) ................................................ 250,000 5,902,500 a Continental Airlines Inc., B .......................................................... 500,000 8,290,000 Delta Air Lines Inc. .................................................................. 950,000 12,635,000 KLM Royal Dutch Airlines, N.Y. shs. (Netherlands) ..................................... 500,000 7,790,000 a Northwest Airlines Corp. .............................................................. 500,000 4,850,000 Providence & Worchester Railroad Co. .................................................. 42,000 374,220 Southwest Airlines Co. ................................................................ 65,200 1,154,040 Union Pacific Corp. ................................................................... 300,000 17,451,000 ----------------- 98,832,760 ----------------- TOTAL COMMON STOCKS (COST $1,011,122,558) ............................................. 1,832,205,331 ----------------- SHORT TERM INVESTMENT (COST $19,325,482) 1.1% b Franklin Institutional Fiduciary Trust Money Market Portfolio ......................... 19,325,482 19,325,482 ----------------- TOTAL INVESTMENTS (COST $1,030,448,040) 100.0% ........................................ 1,851,530,813 OTHER ASSETS, LESS LIABILITIES ........................................................ 849,976 ----------------- NET ASSETS 100.0% ..................................................................... $ 1,852,380,789 ----------------- <FN> a Non-income producing b See Note 6 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. </FN> 64 |See notes to financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN INCOME FUND -------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS A 2003 2002 2001 2000 1999 -------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................... $1.90 $2.16 $2.35 $2.23 $2.34 -------------------------------------------------------------------- Income from investment operations: Net investment income a ............................. .14 .14 .17 .18 .17 Net realized and unrealized gains (losses) .......... .38 (.21) (.15) .13 (.09) -------------------------------------------------------------------- Total from investment operations ..................... .52 (.07) .02 .31 .08 -------------------------------------------------------------------- Less distributions from: Net investment income ............................... (.16) (.17) (.18) (.18) (.18) Net realized gains .................................. (.01) (.02) (.03) (.01) (.01) -------------------------------------------------------------------- Total distributions .................................. (.17) (.19) (.21) (.19) (.19) -------------------------------------------------------------------- Net asset value, end of year ......................... $2.25 $1.90 $2.16 $2.35 $2.23 -------------------------------------------------------------------- Total return b ....................................... 28.12% (4.18)% .58% 14.68% 4.02% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................... $9,640,156 $6,001,117 $5,960,990 $6,083,135 $6,776,804 Ratios to average net assets: Expenses ............................................ .73% .72% .73% .76% .73% Net investment income ............................... 6.63% 6.67% 7.54% 8.01% 7.46% Portfolio turnover rate .............................. 48.36% 51.16% 28.13% 24.41% 17.35% <FN> a Based on average shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. </FN> Annual Report | 65 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED) ------------------------- YEAR ENDED SEPTEMBER 30, CLASS B 2003 2002 C ------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................................ $1.90 $2.15 ------------------------- Income from investment operations: Net investment income a ...................................................... .12 .11 Net realized and unrealized gains (losses) ................................... .37 (.21) ------------------------- Total from investment operations .............................................. .49 (.10) ------------------------- Less distributions from: Net investment income ........................................................ (.14) (.13) Net realized gains ........................................................... (.01) (.02) ------------------------- Total distributions ........................................................... (.15) (.15) ------------------------- Net asset value, end of year .................................................. $2.24 $1.90 ------------------------- Total return b ................................................................ 26.58% (5.63)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............................................... $2,083,783 $558,580 Ratios to average net assets: Expenses ..................................................................... 1.58% 1.57%d Net investment income ........................................................ 5.78% 6.01%d Portfolio turnover rate ....................................................... 48.36% 51.16% <FN> a Based on average shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c For the period November 1, 2001 (effective date) to September 30, 2002. d Annualized </FN> 66 | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED) ---------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS B1 2003 2002 2001 2000 1999C ---------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................... $1.90 $2.17 $2.35 $2.24 $2.36 ---------------------------------------------------------- Income from investment operations: Net investment income a ......................................... .13 .13 .16 .17 .12 Net realized and unrealized gains (losses) ...................... .38 (.22) (.14) .12 (.11) ---------------------------------------------------------- Total from investment operations ................................. .51 (.09) .02 .29 .01 ---------------------------------------------------------- Less distributions from: Net investment income ........................................... (.15) (.16) (.17) (.17) (.13) Net realized gains .............................................. (.01) (.02) (.03) (.01) -- ---------------------------------------------------------- Total distributions .............................................. (.16) (.18) (.20) (.18) (.13) ---------------------------------------------------------- Net asset value, end of year ..................................... $2.25 $1.90 $2.17 $2.35 $2.24 ---------------------------------------------------------- Total return b ................................................... 27.51% (4.66)% .10% 14.09% .34% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................................. $495,004 $430,226 $446,245 $140,711 $83,031 Ratios to average net assets: Expenses ........................................................ 1.23% 1.22% 1.23% 1.26% 1.23%d Net investment income ........................................... 6.13% 6.15% 7.02% 7.49% 7.22%d Portfolio turnover rate .......................................... 48.36% 51.16% 28.13% 24.41% 17.35% <FN> a Based on average shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c For the period January 1, 1999 (effective date) to September 30, 1999. d Annualized </FN> Annual Report | 67 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED) ------------------------------------------------------------------ YEAR ENDED SEPTEMBER 30, CLASS C 2003 2002 2001 2000 1999 ------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................... $1.91 $2.17 $2.36 $2.24 $2.34 ------------------------------------------------------------------ Income from investment operations: Net investment income a ............................. .13 .13 .16 .17 .16 Net realized and unrealized gains (losses) .......... .38 (.21) (.15) .13 (.08) ------------------------------------------------------------------ Total from investment operations ..................... .51 (.08) .01 .30 .08 ------------------------------------------------------------------ Less distributions from: Net investment income ............................... (.15) (.16) (.17) (.17) (.17) Net realized gains .................................. (.01) (.02) (.03) (.01) (.01) ------------------------------------------------------------------ Total distributions .................................. (.16) (.18) (.20) (.18) (.18) ------------------------------------------------------------------ Net asset value, end of year ......................... $2.26 $1.91 $2.17 $2.36 $2.24 ------------------------------------------------------------------ Total return b ....................................... 27.37% (4.64)% .09% 14.54% 3.46% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................... $3,764,372 $1,545,377 $1,080,315 $872,662 $997,438 Ratios to average net assets: Expenses ............................................ 1.24% 1.21% 1.23% 1.26% 1.23% Net investment income ............................... 6.12% 6.21% 7.04% 7.51% 6.97% Portfolio turnover rate .............................. 48.36% 51.16% 28.13% 24.41% 17.35% <FN> a Based on average shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. </FN> 68 | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED) ----------------------- YEAR ENDED SEPTEMBER 30, CLASS R 2003 2002C ----------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................................ $1.89 $2.18 ----------------------- Income from investment operations: Net investment income a .......................................................... .13 .10 Net realized and unrealized gains (losses) ....................................... .37 (.27) ----------------------- Total from investment operations .................................................. .50 (.17) ----------------------- Less distributions from: Net investment income ............................................................ (.15) (.12) Net realized gains ............................................................... (.01) -- ----------------------- Total distributions ............................................................... (.16) (.12) ----------------------- Net asset value, end of year ...................................................... $2.23 $1.89 ----------------------- Total return b .................................................................... 27.31% (8.34)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................................... $36,417 $6,350 Ratios to average net assets: Expenses ......................................................................... 1.08% 1.07%d Net investment income ............................................................ 6.28% 6.77%d Portfolio turnover rate ........................................................... 48.36% 51.16% <FN> a Based on average shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c For the period January 1, 2002 (effective date) to September 30, 2002. d Annualized </FN> Annual Report | 69 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED) --------------------------------------------------------- YEAR ENDED SEPTEMBER 30, ADVISOR CLASS 2003 2002 2001 2000 1999 --------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................ $1.89 $2.16 $2.34 $2.23 $2.34 --------------------------------------------------------- Income from investment operations: Net investment income a .......................................... .14 .14 .18 .18 .17 Net realized and unrealized gains (losses) ....................... .38 (.22) (.15) .12 (.09) --------------------------------------------------------- Total from investment operations .................................. .52 (.08) .03 .30 .08 --------------------------------------------------------- Less distributions from: Net investment income ............................................ (.16) (.17) (.18) (.18) (.18) Net realized gains ............................................... (.01) (.02) (.03) (.01) (.01) --------------------------------------------------------- Total distributions ............................................... (.17) (.19) (.21) (.19) (.19) --------------------------------------------------------- Net asset value, end of year ...................................... $2.24 $1.89 $2.16 $2.34 $2.23 --------------------------------------------------------- Total return b .................................................... 28.47% (4.50)% 1.21% 14.90% 3.71% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................... $95,009 $30,737 $22,737 $21,220 $23,891 Ratios to average net assets: Expenses ......................................................... .58% .57% .58% .61% .58% Net investment income ............................................ 6.78% 6.85% 7.69% 8.16% 7.60% Portfolio turnover rate ........................................... 48.36% 51.16% 28.13% 24.41% 17.35% <FN> a Based on average shares outstanding. b Total return is not annualized for periods less than one year. </FN> 70 | See notes to financial statements. | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 33.9% COMMUNICATIONS 1.8% a Microcell Telecommunications Inc., B ........................ Canada 154,205 $ 1,829,503 a NII Holdings Inc., B ........................................ United States 106,744 6,371,549 a NTL Inc. .................................................... United States 379,020 17,859,422 SBC Communications Inc. ..................................... United States 5,500,000 122,375,000 a Telecom Argentina Stet - France Telecom SA, B, ADR .......... Argentina 1,700,000 10,931,000 Verizon Communications Inc. ................................. United States 4,000,000 129,760,000 ------------------ 289,126,474 ------------------ CONSUMER NON-DURABLES 1.2% Altria Group Inc. ........................................... United States 3,250,000 142,350,000 Loews Corp. - Carolina Group ................................ United States 2,046,400 47,067,200 ------------------ 189,417,200 ------------------ ENERGY MINERALS 4.6% BP PLC, ADR ................................................. United Kingdom 4,000,000 168,400,000 Canadian Oil Sands Trust .................................... Canada 5,600,000 162,673,682 ChevronTexaco Corp. ......................................... United States 3,500,000 250,075,000 Petroleo Brasileiro SA, ADR ................................. Brazil 1,600,000 36,688,000 Royal Dutch Petroleum Co., N.Y. shs. ........................ Netherlands 3,000,000 132,600,000 ------------------ 750,436,682 ------------------ FINANCE 2.7% Comerica Inc. ............................................... United States 2,500,000 116,500,000 Fleet Boston Financial Corp. ................................ United States 5,400,000 162,810,000 iStar Financial Inc. ........................................ United States 1,586,900 61,809,755 JP Morgan Chase & Co. ....................................... United States 3,000,000 102,990,000 ------------------ 444,109,755 ------------------ HEALTH TECHNOLOGY 1.5% Bristol-Myers Squibb Co. .................................... United States 7,000,000 179,620,000 Pfizer Inc. ................................................. United States 2,000,000 60,760,000 ------------------ 240,380,000 ------------------ NON-ENERGY MINERALS .6% AngloGold Ltd., ADR ......................................... South Africa 2,250,000 84,825,000 Olin Corp. .................................................. United States 335,300 5,304,446 ------------------ 90,129,446 ------------------ PROCESS INDUSTRIES 2.1% Dow Chemical Co. ............................................ United States 2,250,000 73,215,000 E.I. du Pont de Nemours & Co. ............................... United States 3,000,000 120,030,000 Eastman Chemical Co. ........................................ United States 2,000,000 67,000,000 Georgia-Pacific Corp. ....................................... United States 2,500,000 60,600,000 Lyondell Chemical Co. ....................................... United States 1,200,000 15,336,000 ------------------ 336,181,000 ------------------ Annual Report | 71 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) REAL ESTATE .4% Liberty Property Trust ...................................... United States 800,000 $ 29,584,000 ProLogis .................................................... United States 1,000,000 30,250,000 ------------------ 59,834,000 ------------------ TECHNOLOGY SERVICES a Anacomp Inc., A ............................................. United States 76,900 1,622,590 ------------------ UTILITIES 19.0% Alliant Energy Corp. ........................................ United States 5,000,000 110,000,000 Ameren Corp. ................................................ United States 4,000,000 171,640,000 American Electric Power Co. Inc. ............................ United States 5,500,000 165,000,000 CenterPoint Energy Inc. ..................................... United States 3,000,000 27,510,000 Cinergy Corp. ............................................... United States 4,500,000 165,150,000 a CMS Energy Corp. ............................................ United States 3,650,000 26,900,500 Consolidated Edison Inc. .................................... United States 500,000 20,380,000 Dominion Resources Inc. ..................................... United States 3,286,600 203,440,540 DTE Energy Co. .............................................. United States 4,759,000 175,559,510 Duke Energy Corp. ........................................... United States 5,500,000 97,955,000 Energy East Corp. ........................................... United States 4,000,000 89,720,000 Exelon Corp. ................................................ United States 3,918,600 248,831,100 FirstEnergy Corp. ........................................... United States 7,500,000 239,250,000 FPL Group Inc. .............................................. United States 1,000,000 63,200,000 Hawaiian Electric Industries Inc. ........................... United States 860,000 37,435,800 KeySpan Corp. ............................................... United States 3,250,000 114,010,000 NiSource Inc. ............................................... United States 3,500,000 69,930,000 ONEOK Inc. .................................................. United States 2,396,900 48,345,473 Pepco Holdings Inc. ......................................... United States 5,500,000 95,040,000 Pinnacle West Capital Corp. ................................. United States 2,426,600 86,144,300 PPL Corp. ................................................... United States 1,480,000 60,606,000 Progress Energy Inc. ........................................ United States 3,200,000 142,272,000 Public Service Enterprise Group Inc. ........................ United States 2,500,000 105,000,000 Sempra Energy ............................................... United States 2,456,600 72,125,776 Southern Co. ................................................ United States 3,250,000 95,290,000 b TECO Energy Inc. ............................................ United States 11,879,500 164,174,690 TXU Corp. ................................................... United States 4,200,000 98,952,000 Xcel Energy Inc. ............................................ United States 4,332,500 67,023,775 ------------------ 3,060,886,464 ------------------ TOTAL COMMON STOCKS (COST $5,047,311,939) ................... 5,462,123,611 ------------------ PREFERRED STOCKS .1% COMMUNICATIONS a Nortel Inversora SA, B, ADR, pfd. ........................... Argentina 524,000 1,676,800 ------------------ HEALTH SERVICES .1% Fresenius Medical Care Capital Trust II, 7.875%, 2/01/08 .... Germany 12,100,000 12,614,250 ------------------ 72 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCKS (CONT.) PROCESS INDUSTRIES a,c Asia Pulp & Paper Co. Ltd., 12.00%, pfd. .................. Indonesia 75,000,000 $ 1,312,500 ------------------ TOTAL PREFERRED STOCKS (COST $76,153,127) ................... 15,603,550 ------------------ CONVERTIBLE PREFERRED STOCKS 14.5% AEROSPACE/DEFENSE .7% Goldman Sachs Group Inc. into Lockheed Martin, 8.00%, cvt. pfd. ................................................. United States 835,000 39,511,365 Lehman Brothers Holdings Inc. into United Technologies Corp., 6.00%, cvt. pfd. .......................................... United States 1,175,000 81,274,750 ------------------ 120,786,115 ------------------ COMMUNICATIONS 1.0% Alltel Corp. - Equity Units, 7.75%, cvt. pfd. ............... United States 2,900,000 141,781,000 Dobson Communications Corp., 6.00%, cvt. pfd. ............... United States 49,800 9,711,000 a McLeodUSA Inc., 2.50%, cvt. pfd. ............................ United States 177,366 1,257,525 a Microcell Telecommunications Inc, cvt. pfd. ................. Canada 155,130 1,983,025 ------------------ 154,732,550 ------------------ CONSUMER DURABLES 2.3% Ford Motor Co. Capital Trust II, 6.50%, cvt. pfd. ........... United States 5,800,000 251,198,000 General Motors Corp., 6.25%, cvt. pfd. ...................... United States 4,300,000 115,885,000 ------------------ 367,083,000 ------------------ CONSUMER NON-DURABLES .2% Morgan Stanley into Coca-Cola Co., 7.00%, cvt. pfd. ......... United States 650,000 28,439,125 ------------------ CONSUMER SERVICES .5% Goldman Sachs Group Inc. into AOL Time Warner, 6.50%, cvt. pfd. ................................................. United States 5,650,000 81,054,900 ------------------ ELECTRONIC TECHNOLOGY 1.0% Citigroup Global Markets into Motorola, 8.00%, cvt. pfd. .... United States 1,000,000 64,750,000 Motorola Inc., 7.00%, cvt. pfd. ............................. United States 1,250,000 47,400,000 Solectron Corp., 7.25%, cvt. pfd. ........................... United States 2,800,000 46,676,000 ------------------ 158,826,000 ------------------ ENERGY MINERALS 1.1% Nuevo Financing I, 5.75%, cvt. pfd., A ...................... United States 1,582,200 59,728,050 a Range Resources Corp., cvt. pfd. ............................ United States 1,000,000 50,750,000 Unocal Corp., 6.25%, cvt. pfd. .............................. United States 1,250,000 64,375,000 ------------------ 174,853,050 ------------------ HEALTH TECHNOLOGY .7% Goldman Sachs Group Inc. into Wyeth, 7.00%, cvt. pfd. ....... United States 1,400,000 64,927,800 Morgan Stanley into Pfizer Inc., 5.00%, cvt. pfd. ........... United States 1,780,000 54,848,475 ------------------ 119,776,275 ------------------ Annual Report | 73 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS (CONT.) INDUSTRIAL SERVICES 1.2% Citigroup Global Markets into Tyco International, 7.00%, cvt. pfd. ................................................. United States 3,000,000 $ 57,750,000 El Paso Energy Capital Trust I, 4.75%, cvt. pfd. ............ United States 290,000 8,737,700 Lehman Brothers Holdings Inc. into Weatherford International, 6.00%, cvt. pfd. .......................................... United States 2,250,000 87,328,125 Williams Cos. Inc., 144A, 5.50%, cvt. pfd. .................. United States 559,000 33,889,375 ------------------ 187,705,200 ------------------ REAL ESTATE 2.4% Archstone-Smith Trust, 9.16%, cvt. pfd. ..................... United States 1,000,000 35,750,000 Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A .............. United States 2,100,000 47,964,000 Glenborough Realty Trust Inc., 7.75%, cvt. pfd., A .......... United States 3,550,000 85,093,500 Host Marriott Corp., 6.75%, cvt. pfd. ....................... United States 2,670,000 124,304,520 Innkeepers USA Trust, 8.625%, cvt. pfd., A .................. United States 1,968,300 49,404,330 Reckson Associates Realty Corp., 7.625%, cvt. pfd., A ....... United States 1,900,000 47,737,500 ------------------ 390,253,850 ------------------ TECHNOLOGY SERVICES 1.5% Electronic Data Systems Corp., 7.625%, cvt. pfd. ............ United States 2,000,000 40,920,000 Goldman Sachs Group Inc. into IBM, 8.00%, cvt. pfd. ......... United States 525,000 43,464,225 Morgan Stanley into Accenture Inc., 6.00%, cvt. pfd. ........ United States 6,750,000 150,255,000 ------------------ 234,639,225 ------------------ UTILITIES 1.9% American Electric Power Co. Inc., 9.25%, cvt. pfd. .......... United States 950,800 42,358,140 CMS Energy Trust I, 7.75%, cvt. pfd. ........................ United States 1,150,000 41,822,050 FPL Group Inc., 8.50%, cvt. pfd. ............................ United States 750,000 42,720,000 Keyspan Corp., 8.75%, cvt. pfd. ............................. United States 800,000 41,840,000 ONEOK Inc., 8.50%, cvt. pfd. ................................ United States 700,000 20,125,000 Sempra Energy, 8.50%, cvt. pfd. ............................. United States 2,000,000 55,340,000 Sierra Pacific Resources Co., 9.00%, cvt. pfd., PIES ........ United States 341,000 10,011,760 b TECO Energy Inc., ACES, 9.50%, cvt. pfd. .................... United States 831,000 15,415,050 TXU Corp., 8.75%, cvt. pfd. ................................. United States 1,300,000 44,655,000 ------------------ 314,287,000 ------------------ TOTAL CONVERTIBLE PREFERRED STOCKS (COST $2,402,673,783) .... 2,332,436,290 ------------------ ------------------- PRINCIPAL AMOUNT D ------------------- BONDS 29.5% COMMUNICATIONS 3.1% Dobson Communications Corp., senior note, 10.875%, 7/01/10 ................................................... United States $ 35,000,000 38,325,000 Nextel Communications Inc., senior disc. note, 9.95%, 2/15/08 ................................................... United States 48,800,000 51,545,000 c Nextlink Communications Inc., senior note, 10.75%, 6/01/09 .. United States 51,000,000 318,750 Qwest Capital Funding, 7.00%, 8/03/09 ....................... United States 130,000,000 116,675,000 Qwest Capital Funding, 7.25%, 2/15/11 ....................... United States 110,000,000 98,450,000 Qwest Corp., 7.20%, 11/10/26 ................................ United States 38,000,000 34,390,000 74 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT D VALUE - --------------------------------------------------------------------------------------------------------------------------- BONDS (CONT.) COMMUNICATIONS (CONT.) Time Warner Telecom Inc., senior note, 10.125%, 2/01/11 ..... United States $ 47,400,000 $ 47,518,500 US West Communications Inc., 6.875%, 9/15/33 ................ United States 50,500,000 44,692,500 c WorldCom Inc., 8.00%, 5/15/06 ............................... United States 150,000,000 49,875,000 c WorldCom Inc., 7.50%, 5/15/11 ............................... United States 73,000,000 24,272,500 ------------------ 506,062,250 ------------------ CONSUMER DURABLES 1.3% General Motors, 8.25%, 7/15/23 .............................. United States 37,200,000 38,999,364 General Motors, 8.375%, 7/15/33 ............................. United States 160,000,000 167,767,200 ------------------ 206,766,564 ------------------ CONSUMER NON-DURABLES .2% c Compania Alimentos Fargo SA, 13.25%, 8/01/08 ................ Argentina 27,000,000 3,510,000 Revlon Consumer Products Corp., senior sub. note, 8.625%, 2/01/08 ................................................... United States 58,200,000 33,174,000 ------------------ 36,684,000 ------------------ CONSUMER SERVICES 6.4% c,e Adelphia Communications Corp., senior note, 7.875%, 5/01/09 ................................................... United States 53,600,000 36,850,000 c,e Adelphia Communications Corp., senior note, 10.875%, 10/01/10 .................................................. United States 55,000,000 38,775,000 AOL Time Warner Inc., notes, 6.875%, 5/01/12 ................ United States 27,000,000 30,354,615 c Cablevision SA, 13.75%, 5/01/09 ............................. Argentina 29,300,000 10,694,500 CanWest Media Inc., senior sub. note, 10.625%, 5/15/11 ...... Canada 37,900,000 43,206,000 Charter Communications Holdings II, senior note, 144A, 10.25%, 9/15/10 ........................................... United States 405,400,000 410,467,500 CKE Restaurants Inc., senior sub. note, 9.125%, 5/01/09 ..... United States 16,800,000 16,968,000 Coast Hotel & Casino Inc., senior sub. note, 9.50%, 4/01/09 . United States 38,900,000 41,720,250 CSC Holdings Inc., senior note, B, 7.625%, 4/01/11 .......... United States 113,000,000 113,282,500 CSC Holdings Inc., senior sub. deb., 9.875%, 4/01/23 ........ United States 40,000,000 41,400,000 EchoStar DBS Corp., senior note, 10.375%, 10/01/07 .......... United States 49,000,000 54,757,500 Eldorado Resorts LLC, senior sub. note, 10.50%, 8/15/06 ..... United States 8,000,000 8,120,000 f Lone Cypress Co., sub. note, 11.50%, 8/01/09 ................ United States 23,732,503 25,008,125 Six Flags Inc., senior note, 9.50%, 2/01/09 ................. United States 45,000,000 43,087,500 Universal City Development, senior note, 144A, 11.75%, 4/01/10 ................................................... United States 34,000,000 38,420,000 Venetian Casino/LV Sands, 11.00%, 6/15/10 ................... United States 50,200,000 57,479,000 Young Broadcasting Inc., senior sub. note, 10.00%, 3/01/11 .. United States 23,768,000 25,312,920 ------------------ 1,035,903,410 ------------------ ELECTRONIC TECHNOLOGY 1.9% Amkor Technology Inc., senior sub. note, 10.50%, 5/01/09 .... United States 60,000,000 64,200,000 Lucent Technologies, 6.45%, 3/15/29 ......................... United States 180,000,000 125,100,000 Sanmina-SCI Corp., A, 10.375%, 1/15/10 ...................... United States 30,000,000 35,325,000 Solectron Corp., senior note, 9.625%, 2/15/09 ............... United States 67,000,000 74,202,500 ------------------ 298,827,500 ------------------ Annual Report | 75 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT D VALUE - --------------------------------------------------------------------------------------------------------------------------- BONDS (CONT.) ENERGY MINERALS .8% Chesapeake Energy Corp., senior note, 8.125%, 4/01/11 ....... United States $ 50,000,000 $ 54,500,000 Chesapeake Energy Corp., senior note, 9.00%, 8/15/12 ........ United States 15,000,000 16,950,000 Hanover Equipment Trust 01, senior secured note, B, 8.75%, 9/01/11 ................................................... United States 16,200,000 16,767,000 Mission Resources Corp., senior sub. note, C, 10.875%, 4/01/07 ................................................... United States 47,000,000 35,485,000 ------------------ 123,702,000 ------------------ FINANCE .5% Ford Motor Credit Co., 7.00%, 10/01/13 ...................... United States 85,000,000 85,692,070 ------------------ HEALTH SERVICES .7% Healthsouth Corp., 7.625%, 6/01/12 .......................... United States 75,000,000 64,875,000 Tenet Healthcare Corp., 6.375%, 12/01/11 .................... United States 45,000,000 43,312,500 ------------------ 108,187,500 ------------------ INDUSTRIAL SERVICES 1.4% Allied Waste North America Inc., 10.00%, 8/01/09 ............ United States 25,000,000 27,218,750 El Paso Corp., senior note, 6.75%, 5/15/09 .................. United States 135,000,000 113,400,000 Tyco International Group, 6.375%, 10/15/11 .................. Luxembourg 50,000,000 51,812,500 Williams Co. Inc., 7.125%, 9/01/11 .......................... United States 30,000,000 29,775,000 ------------------ 222,206,250 ------------------ NON-ENERGY MINERALS .1% Century Aluminum Co., first mortgage, senior secured note, 11.75%, 4/15/08 ........................................... United States 15,000,000 16,125,000 ------------------ PROCESS INDUSTRIES 3.0% Buckeye Technologies Inc., senior sub. note, 8.50%, 12/15/05 .................................................. United States 22,300,000 22,725,930 Consoltex Group Inc., PIK, 11.00%, 1/31/09 .................. United States 55,919,626 5,592 Equistar Chemicals LP, senior note, 10.125%, 9/01/08 ........ United States 82,000,000 81,590,000 Four M Corp., senior note, B, 12.00%, 6/01/06 ............... United States 30,000,000 30,375,000 Georgia-Pacific Corp., senior sub. note, 9.375%, 2/01/13 .... United States 39,500,000 44,289,375 Graphic Packaging International, 144A, senior sub. note, 9.50%, 8/15/13 ................................................... United States 55,000,000 60,637,500 Huntsman LLC, 144A, 11.625%, 10/15/10 ....................... United States 44,600,000 43,708,000 IMC Global Inc., senior note, 144A, 10.875%, 8/01/13 ........ United States 80,000,000 83,200,000 Lyondell Chemical Co., 9.625%, 5/01/07 ...................... United States 25,000,000 23,875,000 Lyondell Chemical Co., senior note, 10.50%, 6/01/13 ......... United States 71,500,000 68,640,000 c Tjiwi Kimia Finance Mauritius, 10.00%, 8/01/04 .............. Indonesia 87,000,000 30,885,000 ------------------ 489,931,397 ------------------ PRODUCER MANUFACTURING 1.6% Case New Holland Inc., senior note, 144A, 9.25%, 8/01/11 .... Netherlands 90,000,000 97,200,000 Dana Corp., 7.00%, 3/01/29 .................................. United States 41,000,000 37,105,000 H&E Equipment/Finance, 11.125%, 6/15/12 ..................... United States 26,000,000 22,230,000 Nortek Inc., senior sub. note, 9.875%, 6/15/11 .............. United States 48,500,000 51,531,250 76 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT D VALUE - ------------------------------------------------------------------------------------------------------------------------------ BONDS (CONT.) PRODUCER MANUFACTURING (CONT.) Outsourcing Services Group Inc., senior sub. note, 11.375%, 3/01/06 ................................................... United States $ 22,000,000 $ 11,660,000 Trench Electric & Trench Inc., senior sub. deb., 10.25%, 12/15/07 .................................................. Canada 30,000,000 30,675,000 ------------------ 250,401,250 ------------------ REAL ESTATE 1.7% Felcor Lodging LP, 9.50%, 9/15/08 ........................... United States 74,000,000 79,920,000 HMH Properties Inc., 7.875%, 8/01/08 ........................ United States 75,000,000 77,437,500 HMH Properties Inc., senior note, C, 8.45%, 12/01/08 ........ United States 27,200,000 28,458,000 Meristar Hospitality Corp., senior sub. note, 8.75%, 8/15/07 United States 18,000,000 17,865,000 Meristar Hospitality Corp., 9.125%, 1/15/11 ................. United States 72,500,000 76,487,500 ------------------ 280,168,000 ------------------ TRANSPORTATION .3% Great Lakes Dredge & Dock Corp., senior sub. note, 11.25%, 8/15/08 ................................................... United States 15,100,000 16,024,875 Laidlaw International Inc., senior note, 144A, 10.75%, 6/15/11 ................................................... United States 24,700,000 26,305,500 ------------------ 42,330,375 ------------------ UTILITIES 6.5% AES Corp., senior note, 8.75%, 6/15/08 ...................... United States 33,000,000 33,247,500 Allegheny Energy Supply, 7.80%, 3/15/11 ..................... United States 43,000,000 36,765,000 Allegheny Energy Supply, 144A, 8.25%, 4/15/12 ............... United States 110,000,000 97,350,000 Aquila Inc., 14.875%, 7/01/12 ............................... United States 97,500,000 122,850,000 Calpine Canada Energy Finance, senior note, 8.50%, 5/01/08 .. Canada 150,000,000 108,750,000 Calpine Corp., senior secured note, 144A, 8.50%, 7/15/10 .... United States 95,000,000 87,875,000 Calpine Corp., senior note, 8.50%, 2/15/11 .................. United States 130,000,000 92,300,000 Calpine Corp., secured note, 144A, 8.75%, 7/15/13 ........... United States 25,000,000 23,000,000 CMS Energy Corp., 9.875%, 10/15/07 .......................... United States 40,000,000 43,000,000 CMS Energy Corp., senior note, 144A, 7.75%, 8/01/10 ......... United States 40,000,000 39,800,000 Dynegy Holdings Inc., 9.875%, 7/15/10 ....................... United States 100,000,000 105,000,000 Dynegy Holdings Inc., senior note, 6.875%, 4/01/11 .......... United States 49,500,000 41,703,750 Dynegy Holdings Inc., senior note, 8.75%, 2/15/12 ........... United States 22,500,000 20,700,000 Dynegy Holdings Inc., secured note, 144A, 10.125%, 7/15/13 .. United States 97,000,000 102,820,000 FirstEnergy Corp., 6.45%, 11/15/11 .......................... United States 60,000,000 62,728,200 Sierra Pacific Resources, 8.75%, 5/15/05 .................... United States 30,000,000 28,125,000 ------------------ 1,046,014,450 ------------------ TOTAL BONDS (COST $4,702,488,665) ........................... 4,749,002,016 ------------------ CONVERTIBLE BONDS 5.9% COMMUNICATIONS .3% Nextel Communications Inc., cvt., 5.25%, 1/15/10 ............ United States 60,000,000 56,250,000 ------------------ CONSUMER DURABLES .1% K2 Inc., cvt., 144A, 5.00%, 6/15/10 ......................... United States 12,900,000 17,038,836 ------------------ Annual Report | 77 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT D VALUE - --------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE BONDS (CONT.) CONSUMER SERVICES .5% c,e Adelphia Communications Corp., junior sub. note, cvt., 6.00%, 2/15/06 ................................................... United States $ 95,000,000 $ 32,775,000 EchoStar Communications Corp., cvt., 4.875%, 1/01/07 ........ United States 55,000,000 56,306,250 ------------------ 89,081,250 ------------------ ELECTRONIC TECHNOLOGY 3.4% Advanced Micro Devices Inc., cvt., FRN, 4.75%, 2/01/22 ...... United States 70,000,000 62,562,500 Agere Systems Inc., cvt., 6.50%, 12/15/09 ................... United States 14,800,000 19,181,836 Amkor Technology Inc., cvt., 5.00%, 3/15/07 ................. United States 86,000,000 79,227,500 Fairchild Semiconductor Corp., cvt., 5.00%, 11/01/08 ........ United States 15,500,000 15,248,125 Lam Research Corp., cvt., 4.00%, 6/01/06 .................... United States 20,000,000 19,475,000 Nortel Networks Corp., senior note, cvt., 4.25%, 9/01/08 .... Canada 235,000,000 208,562,500 PMC-Sierra Inc., cvt., 3.75%, 8/15/06 ....................... United States 40,000,000 38,500,000 SCI Systems Inc., cvt., sub. note, 3.00%, 3/15/07 ........... United States 100,000,000 91,125,000 Trans-Lux Corp., cvt., sub. note, 7.50%, 12/01/06 ........... United States 8,000,000 7,350,000 ------------------ 541,232,461 ------------------ HEALTH TECHNOLOGY .3% Enzon Pharmaceuticals Inc., cvt., 4.50%, 7/01/08 ............ United States 13,500,000 11,306,250 ICN Pharmaceuticals Inc., cvt., sub. note, 6.50%, 7/15/08 ... United States 31,000,000 29,566,250 ------------------ 40,872,500 ------------------ INDUSTRIAL SERVICES .1% Hanover Compressor Co., cvt., 4.75%, 3/15/08 ................ United States 25,200,000 22,774,500 ------------------ NON-ENERGY MINERALS .3% Trizec Hahn Corp. into Barrick Gold, cvt., senior deb., 3.00%, 1/29/21 ................................................... Canada 58,000,000 40,310,000 ------------------ REAL ESTATE .7% Meristar Hospitality Corp., cvt., 9.50%, 4/01/10 ............ United States 95,000,000 115,425,000 ------------------ UTILITIES .2% Sierra Pacific Resources Co., cvt., 144A, 7.25%, 2/14/10 .... United States 19,100,000 26,740,000 ------------------ TOTAL CONVERTIBLE BONDS (COST $853,677,358) ................. 949,724,547 ------------------ ZERO COUPON/STEP-UP BONDS 1.4% COMMERCIAL SERVICES .3% Johnsondiversey Inc., zero cpn. to 5/15/07, 10.67% thereafter, 5/15/13 ................................................... United States 62,000,000 43,400,000 ------------------ COMMUNICATIONS c Nextlink Communications Inc., senior disc. note, zero cpn. to 6/01/04, 12.25% thereafter, 6/01/09 ....................... United States 44,000,000 275,000 ------------------ 78 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT D VALUE - --------------------------------------------------------------------------------------------------------------------------- ZERO COUPON/STEP-UP BONDS (CONT.) CONSUMER SERVICES .8% Charter Communications Holdings LLC, senior disc. note, zero cpn. to 1/15/06, 13.50% thereafter, 1/15/11 .......... United States $ 90,000,000 $ 56,700,000 Quebecor Media Inc., senior disc. note, zero cpn. to 7/15/06, 13.75% thereafter, 7/15/11 ................................ Canada 55,200,000 47,196,000 Yell Finance BV, senior disc. note, zero cpn. to 8/01/06, 13.50% thereafter, 8/01/11 ....................................... United Kingdom 26,865,000 24,044,175 ------------------ 127,940,175 ------------------ PROCESS INDUSTRIES .3% HMP Equity Holdings Corp., zero cpn., 144A, 5/15/08 ......... United States 21,500,000 10,535,000 Huntsman ICI Chemicals, senior disc. note, zero cpn., 12/31/09 .................................................. United States 111,500,000 44,600,000 ------------------ 55,135,000 ------------------ TOTAL ZERO COUPON/STEP-UP BONDS (COST $256,075,506) ......... 226,750,175 ------------------ U.S. GOVERNMENT AND AGENCY SECURITIES .6% GNMA, 6.00%, 10/15/31 ....................................... United States 20,358,339 21,179,394 GNMA, 6.00%, 1/15/32 ........................................ United States 26,105,615 27,152,722 GNMA, 6.00%, 2/15/32 ........................................ United States 12,668,836 13,176,988 GNMA, 6.00%, 3/15/32 ........................................ United States 6,610,242 6,875,382 GNMA, 6.00%, 4/15/32 ........................................ United States 9,572,288 9,956,236 GNMA, 6.00%, 7/15/32 ........................................ United States 14,852,497 15,448,237 ------------------ TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $88,833,528) ........................................ 93,788,959 ------------------ FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $38,272,973) .1% Republic of South Africa, 12.00%, 2/28/05 ................... South Africa 150,000,000 ZAR 22,516,583 ------------------ MUNICIPAL BONDS .9% California State GO, 5.00%, 2/01/26 ......................... United States 10,450,000 10,215,606 California State GO, 5.25%, 2/01/28 ......................... United States 24,600,000 24,767,034 California State GO, 5.00%, 2/01/32 ......................... United States 65,250,000 63,012,577 California State GO, 5.00%, 2/01/33 ......................... United States 23,250,000 22,416,953 California State GO, 5.25%, 2/01/33 ......................... United States 28,500,000 28,581,225 ------------------ TOTAL MUNICIPAL BONDS (COST $141,604,593) ................... 148,993,395 ------------------ TOTAL LONG TERM INVESTMENTS (COST $13,607,091,472) .......... 14,000,939,126 ------------------ ---------------- SHARES ---------------- SHORT TERM INVESTMENT (COST $149,649,449) .9% g Franklin Institutional Fiduciary Trust Money Market Portfolio United States 149,649,449 149,649,449 ------------------ TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $13,756,740,921) .................................... 14,150,588,575 ------------------ Annual Report | 79 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT D VALUE - --------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENTS 14.0% h Joint Repurchase Agreement, .976%, 10/01/03 (Maturity Value $2,087,399,264) ........................... United States $ 2,087,342,674 $ 2,087,342,674 ABN AMRO Bank, N.V., New York Branch (Maturity Value $191,915,488) Banc of America Securities LLC (Maturity Value $191,915,488) Barclays Capital Inc. (Maturity Value $191,915,488) Bear, Stearns & Co. Inc. (Maturity Value $118,105,050) BNP Paribas Securities Corp. (Maturity Value $191,915,488) Deutsche Bank Securities Inc. (Maturity Value $191,915,488) Dresdner Kleinwort Wasserstein Securities LLC (Maturity Value $206,652,530) Goldman, Sachs & Co. (Maturity Value $191,915,488) Greenwich Capital Markets Inc. (Maturity Value $191,915,488) Lehman Brothers Inc. (Maturity Value $35,402,292) Morgan Stanley & Co. Inc. (Maturity Value $191,915,488) UBS Securities LLC (Maturity Value $191,915,488) Collateralized by U.S. Treasury Bills, Notes, and Bonds, and U.S. Government Agency Securities i Barclays Capital Inc., 1.08%, 10/01/03, (Maturity Value $31,953,918) .............................. United States 31,952,959 31,952,959 Collateralized by U.S. Government Agency Securities i Morgan Stanley & Co. Inc., 1.12%, 10/01/03, (Maturity Value $40,002,488) .............................. United States 40,001,244 40,001,244 Collateralized by U.S. Government Agency Securities i Goldman, Sachs & Co., 1.10%, 10/01/03, (Maturity Value $26,882,642) .............................. United States 26,881,821 26,881,821 Collateralized by U.S. Government Agency Securities i JP Morgan Securities Inc., 1.10%, 10/01/03, (Maturity Value $40,002,444) .............................. United States 40,001,222 40,001,222 Collateralized by U.S. Government Agency Securities i UBS Securities LLC, 1.11%, 10/01/03, (Maturity Value $35,002,159) .............................. United States 35,001,080 35,001,080 Collateralized by U.S. Government Agency Securities ------------------ TOTAL REPURCHASE AGREEMENTS (COST $2,261,181,000) ........... 2,261,181,000 ------------------ TOTAL INVESTMENTS (COST $16,017,921,921) 101.8% ............. 16,411,769,575 OTHER ASSETS, LESS LIABILITIES (1.8)% ....................... (297,028,157) ------------------ NET ASSETS 100.0% ........................................... $ 16,114,741,418 ------------------ <FN> CURRENCY ABBREVIATIONS | ZAR - South African Rand See glossary of terms on page 96. a Non-income producing b See Note 9 regarding holdings of 5% voting securities. c The fund discontinues accruing income on defaulted securities. See Note 7. d The principal amount is stated in U.S. dollars unless otherwise indicated. e See Note 10 regarding other considerations. f See Note 8 regarding restricted securities. g See Note 6 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. h See Note 1(c) regarding repurchase agreements. i Collateral for loaned securities. See Note 1(f). </FN> 80 |See notes to financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN U.S. GOVERNMENT SECURITIES FUND --------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS A 2003 2002 2001 2000 1999 --------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................... $6.99 $6.93 $6.63 $6.62 $6.99 --------------------------------------------------------------------- Income from investment operations: Net investment income a ............................... .28 .38 .41c .43 .44 Net realized and unrealized gains (losses) ............ (.10) .09 .33c .01 (.37) --------------------------------------------------------------------- Total from investment operations ....................... .18 .47 .74 .44 .07 --------------------------------------------------------------------- Less distributions from net investment income .......... (.36) (.41) (.44) (.43) (.44) --------------------------------------------------------------------- Net asset value, end of year ........................... $6.81 $6.99 $6.93 $6.63 $6.62 --------------------------------------------------------------------- Total return b ......................................... 2.66% 7.06% 11.52% 6.90% 1.05% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ........................ $7,286,317 $7,726,914 $7,197,334 $6,852,374 $7,895,906 Ratios to average net assets: Expenses .............................................. .70% .69% .68% .70% .67% Net investment income ................................. 4.11% 5.48% 6.12%c 6.62% 6.43% Portfolio turnover rate ................................ 66.96% 44.62% 19.18% 3.98% 15.04% <FN> a Based on average shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide of Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ............................ $(.008) Net realized and unrealized gains (losses) per share ....... .008 Ratio of net investment income to average net assets ....... (.11)% </FN> Annual Report | 81 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED) --------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS B 2003 2002 2001 2000 1999 D --------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................. $6.98 $6.93 $6.63 $6.62 $6.91 --------------------------------------------------------------- Income from investment operations: Net investment income a ....................................... .25 .34 .37c .39 .30 Net realized and unrealized gains (losses) .................... (.10) .09 .33c .01 (.28) --------------------------------------------------------------- Total from investment operations ............................... .15 .43 .70 .40 .02 --------------------------------------------------------------- Less distributions from net investment income .................. (.33) (.38) (.40) (.39) (.31) --------------------------------------------------------------- Net asset value, end of year ................................... $6.80 $6.98 $6.93 $6.63 $6.62 --------------------------------------------------------------- Total return b ................................................. 2.13% 6.37% 10.94% 6.35% .25% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................ $678,814 $559,966 $225,517 $80,167 $51,433 Ratios to average net assets: Expenses ...................................................... 1.23% 1.22% 1.22% 1.25% 1.22%e Net investment income ......................................... 3.58% 4.95% 5.51%c 6.07% 5.93%e Portfolio turnover rate ........................................ 66.96% 44.62% 19.18% 3.98% 15.04% <FN> a Based on average shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide of Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ........................... $(.008) Net realized and unrealized gains (losses) per share ...... .008 Ratio of net investment income to average net assets ...... (.11)% d For the period January 1, 1999 (effective date) to September 30, 1999. e Annualized </FN> 82 | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED) --------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS C 2003 2002 2001 2000 1999 --------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................. $6.97 $6.91 $6.61 $6.60 $6.97 --------------------------------------------------------------- Income from investment operations: Net investment income a ....................................... .25 .34 .37c .39 .40 Net realized and unrealized gains (losses) .................... (.11) .10 .33c .01 (.37) --------------------------------------------------------------- Total from investment operations ............................... .14 .44 .70 .40 .03 --------------------------------------------------------------- Less distributions from net investment income .................. (.33) (.38) (.40) (.39) (.40) --------------------------------------------------------------- Net asset value, end of year ................................... $6.78 $6.97 $6.91 $6.61 $6.60 --------------------------------------------------------------- Total return b ................................................. 2.00% 6.53% 10.96% 6.36% .50% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................ $814,635 $803,049 $422,114 $264,413 $308,961 Ratios to average net assets: Expenses ...................................................... 1.23% 1.21% 1.22% 1.25% 1.22% Net investment income ......................................... 3.58% 4.96% 5.55%c 6.08% 5.89% Portfolio turnover rate ........................................ 66.96% 44.62% 19.18% 3.98% 15.04% <FN> a Based on average shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide of Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share .......................... $(.008) Net realized and unrealized gains (losses) per share ..... .008 Ratio of net investment income to average net assets ..... (.11)% </FN> Annual Report | 83 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED) ----------------------- YEAR ENDED SEPTEMBER 30, CLASS R 2003 2002 C ----------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................................. $6.99 $6.81 ----------------------- Income from investment operations: Net investment income a ....................................................... .25 .25 Net realized and unrealized gains (losses) .................................... (.09) .22 ----------------------- Total from investment operations ............................................... .16 .47 ----------------------- Less distributions from net investment income .................................. (.34) (.29) ----------------------- Net asset value, end of year ................................................... $6.81 $6.99 ----------------------- Total return b ................................................................. 2.29% 7.03% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................................ $54,042 $14,042 Ratios to average net assets: Expenses ...................................................................... 1.08% 1.07%d Net investment income ......................................................... 3.73% 5.10%d Portfolio turnover rate ........................................................ 66.96% 44.62% <FN> a Based on average shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c For the period January 1, 2002 (effective date) to September 30, 2002. d Annualized </FN> 84 | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED) ---------------------------------------------------------- YEAR ENDED SEPTEMBER 30, ADVISOR CLASS 2003 2002 2001 2000 1999 ---------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................... $7.01 $6.94 $6.64 $6.63 $7.00 ---------------------------------------------------------- Income from investment operations: Net investment income a ......................................... .29 .38 .43c .44 .45 Net realized and unrealized gains (losses) ...................... (.10) .11 .32c -- (.37) ---------------------------------------------------------- Total from investment operations ................................. .19 .49 .75 .44 .08 ---------------------------------------------------------- Less distributions from net investment income .................... (.37) (.42) (.45) (.43) (.45) ---------------------------------------------------------- Net asset value, end of year ..................................... $6.83 $7.01 $6.94 $6.64 $6.63 ---------------------------------------------------------- Total return b ................................................... 2.79% 7.33% 11.63% 7.02% 1.16% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................................. $308,411 $198,437 $19,960 $46,775 $15,544 Ratios to average net assets: Expenses ........................................................ .58% .57% .57% .60% .57% Net investment income ........................................... 4.23% 5.60% 6.30%c 6.73% 6.53% Portfolio turnover rate .......................................... 66.96% 44.62% 19.18% 3.98% 15.04% <FN> a Based on average shares outstanding. b Total return is not annualized for periods less than one year. c Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide of Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share .......................... $(.008) Net realized and unrealized gains (losses) per share ..... .008 Ratio of net investment income to average net assets ..... (.11)% </FN> Annual Report | See notes to financial statements.| 85 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 98.9% GNMA I, 5.00%, 4/15/33 - 10/15/33 ............................................ $ 359,743,816 $ 360,840,663 GNMA I, SF, 5.50%, 5/15/28 - 9/15/33 ......................................... 1,994,645,962 2,047,009,100 GNMA I, SF, 6.00%, 9/15/23 - 8/15/33 ......................................... 2,084,525,959 2,168,740,971 GNMA II, 6.00%, 3/20/24 - 11/20/28 ........................................... 35,236,857 36,620,424 GNMA I, SF, 6.50%, 5/15/23 - 3/15/33 ......................................... 1,769,266,125 1,860,298,134 GNMA II, 6.50%, 6/20/24 - 7/20/28 ............................................ 85,953,215 90,126,037 GNMA I, SF, 6.75%, 3/15/26 - 4/15/26 ......................................... 413,790 439,923 GNMA PL, 6.75%, 1/15/34 ...................................................... 34,547,483 34,886,620 GNMA I, SF, 7.00%, 10/15/09 - 2/15/33 ........................................ 1,470,385,172 1,566,136,790 GNMA PL, 7.00%, 9/15/35 ...................................................... 8,638,949 9,282,769 GNMA I, SF, 7.25%, 10/15/25 - 1/15/26 ........................................ 2,222,550 2,380,499 GNMA I, SF, 7.50%, 6/15/05 - 8/15/32 ......................................... 290,926,233 312,737,526 GNMA II, 7.50%, 10/20/22 - 12/20/26 .......................................... 20,130,272 21,503,079 GNMA I, SF, 7.70%, 12/15/20 - 1/15/22 ........................................ 2,405,346 2,615,278 GNMA I, SF, 8.00%, 10/15/07 - 9/15/30 ........................................ 184,335,598 201,050,665 GNMA II, 8.00%, 8/20/16 - 6/20/30 ............................................ 11,404,209 12,310,065 GNMA I, GP, 8.25%, 3/15/17 - 11/15/17 ........................................ 1,039,191 1,141,060 GNMA I, SF, 8.25%, 3/15/27 - 11/15/27 ........................................ 569,300 617,572 GNMA I, SF, 8.50%, 12/15/09 - 6/15/25 ........................................ 33,734,591 37,185,696 GNMA II, 8.50%, 4/20/16 - 6/20/25 ............................................ 6,073,633 6,653,417 GNMA II, 8.75%, 3/20/17 - 7/20/17 ............................................ 141,486 155,741 GNMA I, SF, 9.00%, 10/15/04 - 7/15/23 ........................................ 42,821,820 47,513,935 GNMA II, 9.00%, 5/20/16 - 11/20/21 ........................................... 1,998,962 2,208,652 GNMA I, GP, 9.25%, 5/15/16 - 12/15/16 ........................................ 922,279 1,016,537 GNMA I, SF, 9.50%, 5/15/09 - 2/15/23 ......................................... 25,254,288 27,965,564 GNMA II, 9.50%, 8/20/17 - 4/20/25 ............................................ 1,535,272 1,698,399 GNMA I, GP, 10.00%, 11/15/09 - 8/15/13 ....................................... 971,279 1,076,098 GNMA I, SF, 10.00%, 4/15/12 - 3/15/25 ........................................ 29,331,781 33,257,958 GNMA II, 10.00%, 8/20/15 - 3/20/21 ........................................... 2,673,864 3,019,040 GNMA I, GP, 10.25%, 6/15/18 - 2/15/21 ........................................ 84,374 95,525 GNMA I, SF, 10.50%, 12/15/09 - 10/15/21 ...................................... 22,509,885 25,673,202 GNMA II, 10.50%, 9/20/13 - 3/20/21 ........................................... 5,809,947 6,595,201 GNMA I, GP, 11.00%, 12/15/09 - 3/15/11 ....................................... 1,939,508 2,177,011 GNMA I, SF, 11.00%, 11/15/09 - 5/15/21 ....................................... 21,159,029 24,098,304 GNMA II, 11.00%, 8/20/13 - 1/20/21 ........................................... 1,143,399 1,305,196 GNMA I, GP, 11.25%, 6/15/13 - 1/15/16 ........................................ 673,948 768,407 GNMA I, GP, 11.50%, 1/15/13 - 6/15/13 ........................................ 160,707 183,559 GNMA I, SF, 11.50%, 2/15/13 - 12/15/17 ....................................... 4,804,659 5,524,275 GNMA II, 11.50%, 8/20/13 - 2/20/18 ........................................... 489,250 560,970 GNMA I, GP, 11.75%, 7/15/13 - 12/15/15 ....................................... 146,325 167,821 GNMA I, GP, 12.00%, 3/15/11 - 1/15/13 ........................................ 75,473 86,485 GNMA I, SF, 12.00%, 5/15/11 - 7/15/18 ........................................ 22,249,863 25,797,381 GNMA II, 12.00%, 9/20/13 - 2/20/16 ........................................... 902,214 1,042,403 GNMA I, GP, 12.50%, 4/15/10 - 7/15/10 ........................................ 213,293 244,037 86 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) (CONT.) GNMA I, SF, 12.50%, 4/15/10 - 8/15/18 ........................................ $ 21,021,780 $ 24,380,378 GNMA II, 12.50%, 10/20/13 - 11/20/15 ......................................... 918,349 1,066,821 GNMA I, GP, 12.75%, 5/15/14 .................................................. 7,072 8,235 GNMA I, SF, 13.00%, 7/15/10 - 1/15/16 ........................................ 22,691,199 26,548,994 GNMA II, 13.00%, 10/20/13 - 9/20/15 .......................................... 695,825 814,878 ----------------- TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) (COST $8,801,457,823) .. 9,037,627,295 ----------------- ----------------- SHARES ----------------- SHORT TERM INVESTMENT (COST $149,649,450) 1.6% a Franklin Institutional Fiduciary Trust Money Market Portfolio ................ 149,649,450 149,649,450 ----------------- TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST $8,951,107,273) .......... 9,187,276,745 ----------------- ----------------- PRINCIPAL AMOUNT ----------------- REPURCHASE AGREEMENT (COST $131,310,000) 1.4% b Barclays Capital Inc., .95%, 10/01/03 (Maturity Value $131,313,465) .......... $ 131,310,000 131,310,000 ----------------- TOTAL INVESTMENTS BEFORE PAYDOWN RESERVES 101.9% ............................. 9,318,586,745 c RESERVE FOR PAYDOWN GAINS (LOSSES) (.1)% ..................................... (13,805,846) ----------------- TOTAL INVESTMENTS (COST $9,082,417,273) 101.8% ............................... 9,304,780,899 OTHER ASSETS, LESS LIABILITIES (1.8)% ........................................ (162,561,957) ----------------- NET ASSETS 100.0% ............................................................ $ 9,142,218,942 ----------------- <FN> See glossary of terms on page 96. a See Note 6 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. b See Note 1(c) regarding repurchase agreements. c See Note 1(e) regarding reserve for paydown. </FN> Annual Report | See notes to financial statements. | 87 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN UTILITIES FUND ------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS A 2003 2002 2001 2000 1999 ------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................ $7.96 $10.02 $10.89 $ 9.58 $11.36 ------------------------------------------------------------------- Income from investment operations: Net investment income a .................................. .42 .46 .46 .43 .48 Net realized and unrealized gains (losses) ............... .85 (1.60) (.86) 1.69 (1.41) ------------------------------------------------------------------- Total from investment operations .......................... 1.27 (1.14) (.40) 2.12 (.93) ------------------------------------------------------------------- Less distributions from: Net investment income .................................... (.43) (.45) (.45) (.45) (.52) Net realized gains ....................................... -- (.47) (.02) (.36) (.33) ------------------------------------------------------------------- Total distributions ....................................... (.43) (.92) (.47) (.81) (.85) ------------------------------------------------------------------- Net asset value, end of year .............................. $8.80 $ 7.96 $10.02 $10.89 $ 9.58 ------------------------------------------------------------------- Total return b ............................................ 16.38% (12.49)% (4.03)% 24.27% (8.54)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...........................$1,259,886 $1,090,216 $1,349,027 $1,574,897 $1,594,862 Ratios to average net assets: Expenses ................................................. .83% .80% .79% .83% .80% Net investment income .................................... 5.00% 4.87% 4.26% 4.74% 4.60% Portfolio turnover rate ................................... 25.81% 30.60% 34.03% 19.86% 33.99% <FN> a Based on average shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. </FN> 88 | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED) ------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS B 2003 2002 2001 2000 1999C ------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............................. $7.97 $10.02 $10.90 $ 9.59 $11.08 ------------------------------------------------------------- Income from investment operations: Net investment income a ........................................ .37 .41 .41 .38 .31 Net realized and unrealized gains (losses) ..................... .85 (1.58) (.87) 1.70 (1.44) ------------------------------------------------------------- Total from investment operations ................................ 1.22 (1.17) (.46) 2.08 (1.13) ------------------------------------------------------------- Less distributions from: Net investment income .......................................... (.39) (.41) (.40) (.41) (.36) Net realized gains ............................................. -- (.47) (.02) (.36) -- ------------------------------------------------------------- Total distributions ............................................. (.39) (.88) (.42) (.77) (.36) ------------------------------------------------------------- Net asset value, end of year .................................... $8.80 $ 7.97 $10.02 $10.90 $ 9.59 ------------------------------------------------------------- Total return b .................................................. 15.88% (12.88)% (4.58)% 23.79% (10.37)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................. $95,321 $32,802 $15,212 $8,819 $3,142 Ratios to average net assets: Expenses ....................................................... 1.34% 1.31% 1.30% 1.34% 1.31%d Net investment income .......................................... 4.49% 4.44% 3.74% 4.11% 4.12%d Portfolio turnover rate ......................................... 25.81% 30.60% 34.03% 19.86% 33.99% <FN> a Based on average shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c For the period January 1, 1999 (effective date) to September 30, 1999. d Annualized </FN> Annual Report | 89 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED) ------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS C 2003 2002 2001 2000 1999 ------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............................. $7.95 $10.01 $10.88 $ 9.57 $11.35 ------------------------------------------------------------- Income from investment operations: Net investment income a ........................................ .36 .41 .41 .38 .43 Net realized and unrealized gains (losses) ..................... .86 (1.59) (.87) 1.69 (1.42) ------------------------------------------------------------- Total from investment operations ................................ 1.22 (1.18) (.46) 2.07 (.99) ------------------------------------------------------------- Less distributions from: Net investment income .......................................... (.39) (.41) (.39) (.40) (.46) Net realized gains ............................................. -- (.47) (.02) (.36) (.33) ------------------------------------------------------------- Total distributions ............................................. (.39) (.88) (.41) (.76) (.79) ------------------------------------------------------------- Net asset value, end of year .................................... $8.78 $ 7.95 $10.01 $10.88 $ 9.57 ------------------------------------------------------------- Total return b .................................................. 15.77% (12.90)% (4.50)% 23.65% (9.06)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................. $222,030 $67,428 $44,985 $37,837 $34,697 Ratios to average net assets: Expenses ....................................................... 1.34% 1.29% 1.30% 1.34% 1.31% Net investment income .......................................... 4.49% 4.43% 3.76% 4.22% 4.08% Portfolio turnover rate ......................................... 25.81% 30.60% 34.03% 19.86% 33.99% <FN> a Based on average shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. </FN> 90 | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED) -------------------------- YEAR ENDED SEPTEMBER 30, CLASS R 2003 2002 C -------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year $7.96 $9.81 -------------------------- Income from investment operations: Net investment income a .37 .32 Net realized and unrealized gains (losses) .86 (1.85) -------------------------- Total from investment operations 1.23 (1.53) -------------------------- Less distributions from net investment income (.40) (.32) -------------------------- Net asset value, end of year $8.79 $7.96 -------------------------- Total return b 15.96% (16.01)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) $1,142 $142 Ratios to average net assets: Expenses 1.19% 1.16%d Net investment income 4.64% 4.82%d Portfolio turnover rate 25.81% 30.60% <FN> a Based on average shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c For the period January 1, 2002 (effective date) to September 30, 2002. d Annualized </FN> Annual Report | 91 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED) ----------------------------------------------------------- YEAR ENDED SEPTEMBER 30, ADVISOR CLASS 2003 2002 2001 2000 1999 ----------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............................. $7.99 $10.05 $10.92 $ 9.61 $11.39 ----------------------------------------------------------- Income from investment operations: Net investment income a ........................................ .42 .47 .48 .44 .51 Net realized and unrealized gains (losses) ..................... .87 (1.60) (.87) 1.69 (1.42) ----------------------------------------------------------- Total from investment operations ................................ 1.29 (1.13) (.39) 2.13 (.91) ----------------------------------------------------------- Less distributions from: Net investment income .......................................... (.44) (.46) (.46) (.46) (.54) Net realized gains ............................................. -- (.47) (.02) (.36) (.33) ----------------------------------------------------------- Total distributions ............................................. (.44) (.93) (.48) (.82) (.87) ----------------------------------------------------------- Net asset value, end of year .................................... $8.84 $ 7.99 $10.05 $10.92 $ 9.61 ----------------------------------------------------------- Total return b .................................................. 16.61% (12.32)% (3.89)% 24.50% (8.48)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................. $47,167 $15,664 $8,829 $9,234 $8,058 Ratios to average net assets: Expenses ....................................................... .69% .66% .65% .69% .66% Net investment income .......................................... 5.14% 5.07% 4.39% 4.87% 4.82% Portfolio turnover rate ......................................... 25.81% 30.60% 34.03% 19.86% 33.99% <FN> a Based on average shares outstanding. b Total return is not annualized for periods less than one year. </FN> 92 |See notes to financial statements. | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN UTILITIES FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 80.5% AGL Resources Inc. ........................................................... 500,000 $ 14,085,000 Allete Inc. .................................................................. 1,200,000 32,856,000 Alliant Energy Corp. ......................................................... 1,000,000 22,000,000 Ameren Corp. ................................................................. 700,000 30,037,000 American Electric Power Co. Inc. ............................................. 1,750,000 52,500,000 a Aquila Inc. .................................................................. 1,000,000 3,380,000 Atmos Energy Corp. ........................................................... 800,000 19,152,000 CenterPoint Energy Inc. ...................................................... 1,500,000 13,755,000 Central Vermont Public Service Corp. ......................................... 414,800 9,200,264 Cinergy Corp. ................................................................ 1,700,000 62,390,000 Constellation Energy Group Inc. .............................................. 600,000 21,468,000 Dominion Resources Inc. ...................................................... 575,000 35,592,500 DTE Energy Co. ............................................................... 1,200,000 44,268,000 Energy East Corp. ............................................................ 1,400,000 31,402,000 Entergy Corp. ................................................................ 1,420,000 76,893,000 Equitable Resources Inc. ..................................................... 425,000 17,467,500 Exelon Corp. ................................................................. 1,300,000 82,550,000 FirstEnergy Corp. ............................................................ 1,700,000 54,230,000 FPL Group Inc. ............................................................... 1,200,000 75,840,000 Great Plains Energy Inc. ..................................................... 450,000 13,644,000 Hawaiian Electric Industries Inc. ............................................ 300,000 13,059,000 KeySpan Corp. ................................................................ 1,100,000 38,588,000 National Grid Transco PLC (United Kingdom) ................................... 3,850,000 24,626,184 Nicor Inc. ................................................................... 550,000 19,327,000 NiSource Inc. ................................................................ 2,100,000 41,958,000 ONEOK Inc. ................................................................... 800,000 16,136,000 Pepco Holdings Inc. .......................................................... 1,888,700 32,636,736 Pinnacle West Capital Corp. .................................................. 575,000 20,412,500 PPL Corp. .................................................................... 122,200 5,004,090 Progress Energy Inc. ......................................................... 1,500,000 66,690,000 Puget Energy Inc. ............................................................ 1,262,600 28,320,118 SBC Communications Inc. ...................................................... 1,300,000 28,925,000 Scottish & Southern Energy PLC (United Kingdom) .............................. 1,640,000 16,566,207 Scottish Power PLC (United Kingdom) .......................................... 6,000,000 35,014,122 Sempra Energy ................................................................ 300,000 8,808,000 a Sierra Pacific Resources Co. ................................................. 1,378,809 6,687,223 Southern Co. ................................................................. 2,100,000 61,572,000 TECO Energy Inc. ............................................................. 375,900 5,194,938 TXU Corp. .................................................................... 1,000,000 23,560,000 UIL Holdings Corp. ........................................................... 274,200 9,594,258 United Utilities PLC (United Kingdom) ........................................ 2,500,007 19,064,682 a United Utilities PLC, A (United Kingdom) ..................................... 1,388,892 6,201,441 Vectren Corp. ................................................................ 900,000 21,258,000 Verizon Communications Inc. .................................................. 600,000 19,464,000 Wisconsin Energy Corp. ....................................................... 300,000 9,171,000 Xcel Energy Inc. ............................................................. 1,200,000 18,564,000 ----------------- TOTAL COMMON STOCKS (COST $1,138,798,095) .................................... 1,309,112,763 ----------------- Annual Report | 93 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN UTILITIES FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS 10.1% Ameren Corp., 9.75%, cvt. pfd. ............................................... 800,600 $ 22,616,950 American Electric Power Co. Inc., 9.25%, cvt. pfd. ........................... 450,000 20,047,500 CMS Energy Trust I, 7.75%, cvt. pfd. ......................................... 260,000 9,455,420 Dominion Resources Inc., 9.50%, cvt. pfd. .................................... 627,000 35,544,630 Duke Energy Corp., 8.00%, cvt. pfd. .......................................... 1,500,000 21,510,000 PPL Capital Fund Trust I, 7.75%, cvt. pfd., E ................................ 1,661,000 34,914,220 Sierra Pacific Resources Co., 9.00%, cvt. pfd., PIES ......................... 200,000 5,872,000 TXU Corp., 8.75%, cvt. pfd. .................................................. 400,000 13,740,000 ----------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $177,922,586) ....................... 163,700,720 ----------------- ------------------ PRINCIPAL AMOUNT ------------------ BONDS 6.8% CalEnergy Co. Inc., senior note, 8.48%, 9/15/28 .............................. $ 25,000,000 31,782,500 CMS Energy Corp., 9.875%, 10/15/07 ........................................... 8,500,000 9,137,500 Firstenergy Corp., senior note, 7.375%, 11/15/31 ............................. 25,000,000 25,684,000 NiSource Finance Corp., 7.50%, 11/15/03 ...................................... 15,000,000 15,094,110 PPL Capital Funding, 8.375%, 6/15/07 ......................................... 15,000,000 17,519,025 Utilicorp United Inc., FRN senior note, 9.95%, 2/01/11 ....................... 6,000,000 6,060,000 Utilicorp United Inc., senior note, 8.27%, 11/15/21 .......................... 6,100,000 5,093,500 ----------------- TOTAL BONDS (COST $99,121,237) ............................................... 110,370,635 ----------------- CONVERTIBLE BONDS (COST $9,000,000) .8% Sierra Pacific Resources Co., cvt., 144A, 7.25%, 2/14/10 ..................... 9,000,000 12,600,000 ----------------- TOTAL LONG TERM INVESTMENTS (COST $1,424,841,918) ............................ 1,595,784,118 ----------------- ------------------ SHARES ------------------ SHORT TERM INVESTMENT (COST $19,385,138) 1.2% b Franklin Institutional Fiduciary Trust Money Market Portfolio ................ 19,385,138 19,385,138 ----------------- TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $1,444,227,056) ......... 1,615,169,256 ----------------- 94 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FRANKLIN UTILITIES FUND PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENTS 1.3% c Barclays Capital Inc., 1.08%, 10/01/03 (Maturity Value $3,448,206) ........... $ 3,448,103 $ 3,448,103 Collateralized by U.S. Government Agency Securities c CS First Boston Corp., 1.15%, 10/01/03 (Maturity Value $4,000,256) ........... 4,000,128 4,000,128 Collateralized by U.S. Government Agency Securities c Deutsche Bank Securities Inc., 1.13%, 10/01/03 (Maturity Value $4,000,252) ... 4,000,126 4,000,126 Collateralized by U.S. Government Agency Securities c Goldman, Sachs & Co., 1.10%, 10/01/03 (Maturity Value $2,741,168) ............ 2,741,084 2,741,084 Collateralized by U.S. Government Agency Securities c JP Morgan Securities, 1.10%, 10/01/03 (Maturity Value $4,000,243) ............ 4,000,121 4,000,121 Collateralized by U.S. Government Agency Securities c Morgan Stanley & Co. Inc., 1.12%, 10/01/03 (Maturity Value $2,942,184) ....... 2,942,092 2,942,092 Collateralized by U.S. Government Agency Securities ----------------- TOTAL REPURCHASE AGREEMENTS (COST $21,131,654) ............................... 21,131,654 ----------------- TOTAL INVESTMENTS (COST $1,465,358,710) 100.7% ............................... 1,636,300,910 OTHER ASSETS, LESS LIABILITIES (.7)% ......................................... (10,754,088) ----------------- NET ASSETS 100.0% ............................................................ $ 1,625,546,822 ----------------- <FN> See glossary of terms on page 96. a Non-income producing b See Note 6 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. c Collateral for loaned securities. See Note 1(f). </FN> Annual Report | See notes to financial statements. | 95 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED) GLOSSARY OF TERMS ACES - Adjustable Convertible Exempt Securities FRN - Floating Rate Notes GP - Graduated Payment PIES - Premium Income Equity Securities PL - Project Loan SF - Single Family 96 | Annual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES September 30, 2003 ------------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------------ Assets: Investments in securities: Cost - Unaffiliated issuers .................................... $ 505,994,520 $ 1,030,448,040 $ 13,596,697,212 Cost - Non-controlled affiliated issuers ....................... -- -- 160,043,709 ------------------------------------------------------ Value - Unaffiliated issuersa .................................. 611,464,637 1,851,530,813 13,970,998,835 Value - Non-controlled affiliated issuers ...................... -- -- 179,589,740 Repurchase agreements, at value and cost ........................ 23,765,898 -- 2,261,181,000 Cash ............................................................ -- 21,523 -- Receivables: Investment securities sold ..................................... -- -- 148,590,293 Capital shares sold ............................................ 1,935,583 3,984,599 125,017,270 Dividends and interest ......................................... 252,624 1,330,899 126,590,383 ------------------------------------------------------ Total assets ............................................... 637,418,742 1,856,867,834 16,811,967,521 ------------------------------------------------------ Liabilities: Payables: Investment securities purchased ................................ -- -- 488,238,877 Capital shares redeemed ........................................ 459,991 1,319,871 16,412,598 Affiliates ..................................................... 701,215 2,161,545 14,916,794 Shareholders ................................................... 97,279 450,241 2,635,134 Unaffiliated transfer agent fees ............................... 85,875 484,188 969,565 Payable upon return of securities loaned [Note 1(f)] ............ -- -- 173,838,326 Other liabilities ............................................... 29,375 71,200 214,809 ------------------------------------------------------ Total liabilities .......................................... 1,373,735 4,487,045 697,226,103 ------------------------------------------------------ Net assets, at value ...................................... $ 636,045,007 $ 1,852,380,789 $ 16,114,741,418 ------------------------------------------------------ Net assets consist of: Undistributed net investment income ............................. $ -- $ 1,248,169 $ 22,817,197 Net unrealized appreciation (depreciation) ...................... 105,470,117 821,082,773 393,908,355 Accumulated net realized gain (loss) ............................ (78,428,746) (252,009,344) 43,180,159 Capital shares .................................................. 609,003,636 1,282,059,191 15,654,835,707 ------------------------------------------------------ Net assets, at value ...................................... $ 636,045,007 $ 1,852,380,789 $ 16,114,741,418 ------------------------------------------------------ <FN> a The Franklin Income Fund includes $169,703,382 of securities loaned. See Note 1(f). </FN> Annual Report | 97 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) September 30, 2003 ----------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ----------------------------------------------------- CLASS A: Net assets, at value .............................................. $ 558,687,457 $ 1,433,741,711 $ 9,640,156,482 ----------------------------------------------------- Shares outstanding ................................................ 27,694,255 53,366,249 4,282,157,064 ----------------------------------------------------- Net asset value per share a ....................................... $20.17 $26.87 $2.25 ----------------------------------------------------- Maximum offering price per share (net asset value per share / 94.25%, 94.25%, and 95.75%, respectively) ................................. $21.40 $28.51 $2.35 ----------------------------------------------------- CLASS B: Net assets, at value .............................................. $ 10,405,932 $ 103,498,851 $ 2,083,782,791 ----------------------------------------------------- Shares outstanding ................................................ 525,720 3,932,339 928,365,601 ----------------------------------------------------- Net asset value and maximum offering price per share a ............ $19.79 $26.32 $2.24 ----------------------------------------------------- CLASS B1: Net assets, at value .............................................. -- -- $ 495,003,553 ----------------------------------------------------- Shares outstanding ................................................ -- -- 219,864,979 ----------------------------------------------------- Net asset value and maximum offering price per share a ............ -- -- $2.25 ----------------------------------------------------- CLASS C: Net assets, at value .............................................. $ 66,951,618 $ 259,169,414 $ 3,764,372,343 ----------------------------------------------------- Shares outstanding ................................................ 3,418,005 9,932,144 1,664,104,933 ----------------------------------------------------- Net asset value per share a ....................................... $19.59 $26.09 $2.26 ----------------------------------------------------- Maximum offering price per share (net asset value per share / 99%) $19.79 $26.35 $2.28 ----------------------------------------------------- CLASS R: Net assets, at value .............................................. -- $ 14,754,743 $ 36,417,183 ----------------------------------------------------- Shares outstanding ................................................ -- 551,864 16,306,219 ----------------------------------------------------- Net asset value and maximum offering price per share a ............ -- $26.74 $2.23 ----------------------------------------------------- ADVISOR CLASS: Net assets, at value .............................................. -- $ 41,216,070 $ 95,009,066 ----------------------------------------------------- Shares outstanding ................................................ -- 1,531,847 42,367,270 ----------------------------------------------------- Net asset value and maximum offering price per share .............. -- $26.91 $2.24 ----------------------------------------------------- <FN> a Redemption price is equal to net asset value less any applicable contingent deferred sales charge. </FN> 98 | Annual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) September 30, 2003 ----------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND ----------------------------------- Assets: Investments in securities: Cost .............................................................................. $ 8,951,107,273 $ 1,444,227,056 ----------------------------------- Value a ........................................................................... 9,173,470,899 1,615,169,256 Repurchase agreements, at value and cost ........................................... 131,310,000 21,131,654 Cash ............................................................................... -- 660,961 Receivables: Investment securities sold ........................................................ 69,927,453 6,622,617 Capital shares sold ............................................................... 7,849,885 3,392,056 Dividends and interest ............................................................ 43,488,813 3,866,628 ----------------------------------- Total assets .................................................................. 9,426,047,050 1,650,843,172 ----------------------------------- Liabilities: Payables: Investment securities purchased ................................................... 251,547,656 599,900 Capital shares redeemed ........................................................... 18,682,774 1,419,704 Affiliates ........................................................................ 6,840,470 1,291,779 Shareholders ...................................................................... 4,839,738 609,765 Unaffiliated transfer agent fees .................................................. 743,523 167,095 Funds advanced by custodian ........................................................ 1,014,987 -- Payable upon return of securities loaned [Note 1(f)] ............................... -- 21,131,654 Other liabilities .................................................................. 158,960 76,453 ----------------------------------- Total liabilities ............................................................. 283,828,108 25,296,350 ----------------------------------- Net assets, at value ......................................................... $ 9,142,218,942 $ 1,625,546,822 ----------------------------------- Net assets consist of: Undistributed net investment income ................................................ $ 24,101,769 $ 774,241 Net unrealized appreciation (depreciation) ......................................... 222,363,626 170,942,200 Accumulated net realized gain (loss) ............................................... (387,706,388) (97,588,658) Capital shares ..................................................................... 9,283,459,935 1,551,419,039 ----------------------------------- Net assets, at value ......................................................... $ 9,142,218,942 $ 1,625,546,822 ----------------------------------- <FN> a The Franklin Utilities Fund includes $20,347,258 of securities loaned. See Note 1(f). </FN> Annual Report | 99 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) September 30, 2003 ----------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND ----------------------------------- CLASS A: Net assets, at value ............................................................... $ 7,286,317,142 $ 1,259,885,786 ----------------------------------- Shares outstanding ................................................................. 1,069,524,083 143,107,441 ----------------------------------- Net asset value per share a ........................................................ $6.81 $8.80 ----------------------------------- Maximum offering price per share (net asset value per share / 95.75%) .............. $7.11 $9.19 ----------------------------------- CLASS B: Net assets, at value ............................................................... $ 678,814,047 $ 95,321,351 ----------------------------------- Shares outstanding ................................................................. 99,774,027 10,833,323 ----------------------------------- Net asset value and maximum offering price per sharea .............................. $6.80 $8.80 ----------------------------------- CLASS C: Net assets, at value ............................................................... $ 814,635,350 $ 222,030,130 ----------------------------------- Shares outstanding ................................................................. 120,082,221 25,277,379 ----------------------------------- Net asset value per share a ........................................................ $6.78 $8.78 ----------------------------------- Maximum offering price per share (net asset value per share / 99%) ................. $6.85 $8.87 ----------------------------------- CLASS R: Net assets, at value ............................................................... $ 54,041,572 $ 1,142,106 ----------------------------------- Shares outstanding ................................................................. 7,936,267 129,874 ----------------------------------- Net asset value and maximum offering price per share a ............................. $6.81 $8.79 ----------------------------------- ADVISOR CLASS: Net assets, at value ............................................................... $ 308,410,831 $ 47,167,449 ----------------------------------- Shares outstanding ................................................................. 45,185,749 5,338,301 ----------------------------------- Net asset value and maximum offering price per share ............................... $6.83 $8.84 ----------------------------------- <FN> a Redemption price is equal to net asset value less any applicable contingent deferred sales charge. </FN> 100 | See notes to financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS STATEMENTS OF OPERATIONS for the year ended September 30, 2003 ------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------- Investment income: Dividends: Unaffiliated issuers ................................................ $ 2,719,303 $ 23,665,630 $ 311,727,419 Non-controlled affiliated issuers (Note 9) .......................... -- -- 3,908,750 Interest ............................................................. 775,460 -- 527,796,509 ------------------------------------------------- Total investment income ......................................... 3,494,763 23,665,630 843,432,678 ------------------------------------------------- Expenses: Management fees (Note 3) ............................................. 2,629,072 7,978,241 52,366,332 Distribution fees (Note 3) Class A ............................................................. 1,190,019 3,354,736 11,094,884 Class B ............................................................. 70,539 888,537 11,552,320 Class B1 ............................................................ -- -- 2,952,918 Class C ............................................................. 579,726 2,475,579 15,629,354 Class R ............................................................. -- 46,602 98,733 Transfer agent fees (Note 3) ......................................... 1,497,994 5,172,921 11,618,767 Custodian fees ....................................................... 4,609 15,396 217,265 Reports to shareholders .............................................. 68,320 557,698 648,329 Registration and filing fees ......................................... 44,812 93,002 764,464 Professional fees .................................................... 34,259 49,779 118,904 Directors' fees and expenses ......................................... 3,564 11,574 71,820 Other ................................................................ 26,236 117,652 632,402 ------------------------------------------------- Total expenses .................................................. 6,149,150 20,761,717 107,766,492 ------------------------------------------------- Net investment income (loss) ................................... (2,654,387) 2,903,913 735,666,186 ------------------------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments: Unaffiliated issuers ............................................... (16,751,832) (76,197,471) 208,900,631 Non-controlled affiliated issuers (Note 9) ......................... -- -- (787,282) Foreign currency transactions ....................................... 3,180 204 (5,927,509) ------------------------------------------------- Net realized gain (loss) ....................................... (16,748,652) (76,197,267) 202,185,840 Net unrealized appreciation (depreciation) on: Investments .......................................................... 163,452,859 408,465,676 1,869,967,307 Translation of assets and liabilities denominated in foreign currencies -- -- 10,002 ------------------------------------------------- Net unrealized appreciation (depreciation) ..................... 163,452,859 408,465,676 1,869,977,309 ------------------------------------------------- Net realized and unrealized gain (loss) ............................... 146,704,207 332,268,409 2,072,163,149 ------------------------------------------------- Net increase (decrease) in net assets resulting from operations ....... $ 144,049,820 $ 335,172,322 $ 2,807,829,335 ------------------------------------------------- Annual Report | 101 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) for the year ended September 30, 2003 ---------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND ---------------------------------- Investment income: Dividends ............................................................................. $ 1,345,046 $ 71,190,807 Interest .............................................................................. 459,014,005 9,477,194 ---------------------------------- Total investment income .......................................................... 460,359,051 80,668,001 ---------------------------------- Expenses: Management fees (Note 3) .............................................................. 42,902,198 6,532,837 Distribution fees (Note 3) Class A .............................................................................. 9,509,881 1,634,873 Class B .............................................................................. 4,344,330 408,371 Class C .............................................................................. 5,756,089 902,243 Class R .............................................................................. 194,929 3,566 Transfer agent fees (Note 3) .......................................................... 10,681,026 2,551,024 Custodian fees ........................................................................ 100,471 59,864 Reports to shareholders ............................................................... 506,781 141,194 Registration and filing fees .......................................................... 360,260 109,538 Professional fees ..................................................................... 175,051 64,646 Directors' fees and expenses .......................................................... 64,652 9,137 Other ................................................................................. 586,534 81,136 ---------------------------------- Total expenses ................................................................... 75,182,202 12,498,429 ---------------------------------- Net investment income ........................................................... 385,176,849 68,169,572 ---------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments .......................................................................... 6,367,829 (63,014,662) Foreign currency transactions ........................................................ -- 81,905 ---------------------------------- Net realized gain (loss) ........................................................ 6,367,829 (62,932,757) Net unrealized appreciation (depreciation) on: Investments ........................................................................... (153,242,028) 202,302,969 Translation of assets and liabilities denominated in foreign currencies ............... -- (76,804) ---------------------------------- Net unrealized appreciation (depreciation) ...................................... (153,242,028) 202,226,165 ---------------------------------- Net realized and unrealized gain (loss) ................................................ (146,874,199) 139,293,408 ---------------------------------- Net increase (decrease) in net assets resulting from operations $ 238,302,650 $ 207,462,980 ---------------------------------- 102 |See notes to financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS for the years ended September 30, 2003 and 2002 ------------------------------------------------------------------------- FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND ------------------------------------------------------------------------- 2003 2002 2003 2002 ------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ................. $ (2,654,387) $ 229,536 $ 2,903,913 $ 2,121,019 Net realized gain (loss) from investments and foreign currency transactions ............... (16,748,652) (52,117,197) (76,197,267) (175,811,873) Net unrealized appreciation (depreciation) on investments ................................. 163,452,859 (46,130,792) 408,465,676 (250,404,911) ------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ............................. 144,049,820 (98,018,453) 335,172,322 (424,095,765) Distributions to shareholders from: Net investment income: Class A ..................................... -- (8,189,726) (2,180,220) (9,216,613) Class B ..................................... -- (49,356) -- -- Class C ..................................... -- (545,192) -- -- Class R ..................................... -- -- (9,229) -- Advisor Class ............................... -- -- (137,491) (277,689) Tax return of capital: Class A ..................................... -- (427,205) -- -- Class B ..................................... -- (2,575) -- -- Class C ..................................... -- (28,439) -- -- Net realized gains: Class A ..................................... -- -- -- (2,687,006) Class B ..................................... -- -- -- (118,205) Class C ..................................... -- -- -- (513,203) Advisor Class ............................... -- -- -- (53,163) ------------------------------------------------------------------------- Total distributions to shareholders ........... -- (9,242,493) (2,326,940) (12,865,879) Capital share transactions: (Note 2) Class A ..................................... 18,073,256 (22,511,903) (78,190,367) (66,776,185) Class B ..................................... 3,561,921 790,980 11,719,589 31,747,529 Class C ..................................... 176,270 (13,585,500) (19,434,571) (12,886,755) Class R ..................................... -- -- 10,272,806 3,425,769 Advisor Class ............................... -- -- 7,755,631 2,232,450 ------------------------------------------------------------------------- Total capital share transactions .............. 21,811,447 (35,306,423) (67,876,912) (42,257,192) Net increase (decrease) in net assets .... 165,861,267 (142,567,369) 264,968,470 (479,218,836) Net assets: Beginning of year ............................. 470,183,740 612,751,109 1,587,412,319 2,066,631,155 ------------------------------------------------------------------------- End of year ................................... $ 636,045,007 $ 470,183,740 $ 1,852,380,789 $ 1,587,412,319 ------------------------------------------------------------------------- Undistributed net investment income included in net assets: End of year .................................. $ -- $ -- $ 1,248,169 $ 656,058 ------------------------------------------------------------------------- Annual Report | 103 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) for the years ended September 30, 2003 and 2002 ------------------------------------------------------------------------------ FRANKLIN FRANKLIN INCOME FUND U.S. GOVERNMENT SECURITIES FUND ------------------------------------------------------------------------------ 2003 2002 2003 2002 ------------------------------------------------------------------------------ Increase (decrease) in net assets: Operations: Net investment income .................... $ 735,666,186 $ 560,451,952 $ 385,176,849 $ 449,643,072 Net realized gain (loss) from investments and foreign currency transactions ....... 202,185,840 87,316,907 6,367,829 10,846,618 Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies .............................. 1,869,977,309 (1,116,443,579) (153,242,028) 109,857,655 ------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations ........... 2,807,829,335 (468,674,720) 238,302,650 570,347,345 Distributions to shareholders from: Net investment income: Class A ................................. (550,726,670) (496,910,091) (401,413,321) (433,519,935) Class B ................................. (73,650,217) (18,682,412) (31,260,885) (19,163,615) Class B1 ................................ (32,370,788) (36,257,920) -- -- Class C ................................. (160,832,793) (100,240,819) (41,821,072) (29,680,378) Class R ................................. (1,320,431) (108,411) (1,798,291) (153,411) Advisor Class ........................... (3,320,435) (2,301,814) (16,202,012) (3,469,800) Net realized gains: Class A ................................. (16,155,200) (42,405,430) -- -- Class B ................................. (1,716,893) (389,987) -- -- Class B1 ................................ (1,110,777) (3,471,522) -- -- Class C ................................. (4,321,592) (8,157,764) -- -- Class R ................................. (24,873) -- -- -- Advisor Class ........................... (84,254) (170,087) -- -- ------------------------------------------------------------------------------ Total distributions to shareholders ....... (845,634,923) (709,096,257) (492,495,581) (485,987,139) Capital share transactions: (Note 2) Class A ................................. 2,373,919,438 872,446,979 (238,733,117) 462,309,921 Class B ................................. 1,325,085,686 629,193,788 137,202,182 328,065,399 Class B1 ................................ (12,337,854) 45,887,505 -- -- Class C ................................. 1,810,160,408 672,956,080 36,448,805 372,809,338 Class R ................................. 26,634,343 6,992,200 41,088,097 13,855,685 Advisor Class ........................... 56,697,121 12,396,021 117,998,378 176,082,110 ------------------------------------------------------------------------------ Total capital share transactions .......... 5,580,159,142 2,239,872,573 94,004,345 1,353,122,453 Net increase (decrease) in net assets 7,542,353,554 1,062,101,596 (160,188,586) 1,437,482,659 Net assets: Beginning of year ......................... 8,572,387,864 7,510,286,268 9,302,407,528 7,864,924,869 ------------------------------------------------------------------------------ End of year ............................... $ 16,114,741,418 $ 8,572,387,864 $ 9,142,218,942 $ 9,302,407,528 Undistributed net investment income included in net assets: End of year .............................. $ 22,817,197 $ (34,125,473) $ 24,101,769 $ (108,213) ------------------------------------------------------------------------------ 104 | Annual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) for the years ended September 30, 2003 and 2002 --------------------------------- FRANKLIN UTILITIES FUND 2003 2002 --------------------------------- Increase (decrease) in net assets: Operations: Net investment income ............................................................. $ 68,169,572 $ 67,070,608 Net realized gain (loss) from investments and foreign currency transactions ....... (62,932,757) (32,548,364) Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ................................ 202,226,165 (208,393,294) --------------------------------- Net increase (decrease) in net assets resulting from operations ............... 207,462,980 (173,871,050) Distributions to shareholders from: Net investment income: Class A .......................................................................... (59,182,929) (61,060,060) Class B .......................................................................... (3,015,514) (1,085,790) Class C .......................................................................... (6,581,692) (2,503,014) Class R .......................................................................... (38,182) (2,324) Advisor Class .................................................................... (1,485,977) (696,994) Net realized gains: Class A .......................................................................... -- (62,032,234) Class B .......................................................................... -- (754,745) Class C .......................................................................... -- (2,139,071) Advisor Class .................................................................... -- (404,012) --------------------------------- Total distributions to shareholders ................................................ (70,304,294) (130,678,244) Capital share transactions: (Note 2) Class A .......................................................................... 55,030,287 21,814,599 Class B .......................................................................... 56,154,888 24,057,068 Class C .......................................................................... 141,064,759 36,339,807 Class R .......................................................................... 924,022 162,442 Advisor Class .................................................................... 28,963,358 10,372,642 --------------------------------- Total capital share transactions ................................................... 282,137,314 92,746,558 Net increase (decrease) in net assets ......................................... 419,296,000 (211,802,736) Net assets: Beginning of year .................................................................. 1,206,250,822 1,418,053,558 --------------------------------- End of year ........................................................................ $1,625,546,822 $1,206,250,822 --------------------------------- Undistributed net investment income included in net assets: End of year ........................................................................ $ 774,241 $ 2,937,161 --------------------------------- Annual Report | See notes to financial statements. | 105 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Custodian Funds, Inc. (the Company) is registered under the Investment Company Act of 1940 as a diversified, open-end investment company, consisting of five series (the Funds). The Funds and their investment objectives are: - -------------------------------------------------------------------------------------------------------- CAPITAL GROWTH GROWTH AND INCOME CURRENT INCOME - -------------------------------------------------------------------------------------------------------- Franklin DynaTech Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Growth Fund Franklin Utilities Fund The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Securities listed or traded on a recognized national exchange or NASDAQ are valued at the last reported sales price. Over-the-counter securities and listed securities for which no sale is reported are valued within the range of the latest quoted bid and asked prices. Restricted securities and securities for which market quotations are not readily available are valued at fair value as determined by management in accordance with procedures established by the Board of Directors. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities and income items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. 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. 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. 106 | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. REPURCHASE AGREEMENTS Certain Funds may enter into a joint repurchase agreement whereby their uninvested cash balance is deposited into a joint cash account to be 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. Certain Funds may enter into repurchase agreements which are accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund's custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the Funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. At September 30, 2003, all repurchase agreements held by the Funds had been entered into on that date. D. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, OR TBA BASIS The Funds may purchase securities on a when-issued, delayed delivery, or to-be-announced (TBA) basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Funds will generally purchase these securities with the intention of holding the securities, they may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. E. RESERVE FOR PAYDOWN GAINS/LOSSES The Franklin U.S. Government Securities Fund provides estimates, based on historical experience, for anticipated paydown gains and losses. The reserve is recorded as a reduction or increase to net assets as noted on the Statement of Investments and is included in the unrealized appreciation/depreciation shown on the accompanying financial statements. F. SECURITIES LENDING The Franklin Income Fund and the Franklin Utilities Fund loan securities to certain brokers for which they received cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. The collateral is invested in short-term instruments as noted in the Statement of Investments. These funds received interest income of $1,448,615 and $70,488, respectively, from the investment of cash collateral, adjusted by lender fees and broker rebates. The funds bear the risk of loss with respect to the investment of the collateral. The securities lending agent has agreed to indemnify the funds in the case of default of any securities borrower. G. INCOME TAXES No provision has been made for income taxes because each Fund's policy is to qualify as a regulated investment company under the Internal Revenue Code and to distribute substantially all of its taxable income. Annual Report | 107 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Discounts and premiums on securities purchased are amortized over the lives of the respective securities. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Common expenses incurred by the Company are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets. Other expenses are charged to each Fund on a specific identification basis. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. I. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. J. GUARANTEES AND INDEMNIFICATIONS Under the Funds' organizational documents, its officers and trustees are indemnified against certain liability arising out of the performance of their duties to the Funds. Additionally, in the normal course of business, the Funds enter into contracts with service providers that contain general indemnification clauses. The Funds' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds that have not yet occurred. However, based on experience, the Funds expect the risk of loss to be remote. 2. CAPITAL STOCK The classes of shares offered within each of the Funds are indicated below. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege. - -------------------------------------------------------------------------------------------------------- CLASS A, CLASS B CLASS A, CLASS B, CLASS C, CLASS A, CLASS B, CLASS B1, & CLASS C CLASS R & ADVISOR CLASS CLASS C, CLASS R & ADVISOR CLASS - -------------------------------------------------------------------------------------------------------- Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund 108 | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK (CONTINUED) At September 30, 2003, there were 32 billion shares authorized ($.01 par value), allocated to the Funds as follows (in millions): ---------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND ---------------------------------------------------------- Class A .................... 250 250 7,600 2,500 400 Class B .................... 500 750 2,000 1,000 750 Class B1 ................... -- -- 1,000 -- -- Class C .................... 250 250 3,600 2,500 400 Class R .................... -- 1,000 1,000 1,000 1,000 Advisor Class .............. -- 1,000 1,000 1,000 1,000 Transactions in the Funds' shares were as follows: ---------------------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------- CLASS A SHARES: Year ended September 30, 2003 Shares sold ...................... 5,979,321 $ 110,050,574 7,379,824 $ 183,219,424 Shares issued in reinvestment of distributions ................... -- -- 79,146 1,984,183 Shares redeemed .................. (5,174,158) (91,977,318) (10,859,570) (263,393,974) ---------------------------------------------------------------- Net increase (decrease) .......... 805,163 $ 18,073,256 (3,400,600) $ (78,190,367) ---------------------------------------------------------------- Year ended September 30, 2002 Shares sold ...................... 5,550,267 $ 106,054,120 8,953,204 $ 261,053,690 Shares issued in reinvestment of distributions ................... 323,435 6,598,020 348,327 10,818,933 Shares redeemed .................. (7,234,225) (135,164,043) (12,138,018) (338,648,808) ---------------------------------------------------------------- Net increase (decrease) .......... (1,360,523) $ (22,511,903) (2,836,487) $ (66,776,185) ---------------------------------------------------------------- CLASS B SHARES: Year ended September 30, 2003 Shares sold ...................... 299,381 $ 5,444,460 1,190,166 $ 28,759,271 Shares redeemed .................. (107,026) (1,882,539) (721,310) (17,039,682) ---------------------------------------------------------------- Net increase (decrease) .......... 192,355 $ 3,561,921 468,856 $ 11,719,589 ---------------------------------------------------------------- Year ended September 30, 2002 Shares sold ...................... 99,271 $ 1,869,582 1,632,576 $ 47,156,309 Shares issued in reinvestment of distributions ................... 2,467 50,091 3,622 111,554 Shares redeemed .................. (63,080) (1,128,693) (579,378) (15,520,334) ---------------------------------------------------------------- Net increase (decrease) .......... 38,658 $ 790,980 1,056,820 $ 31,747,529 ---------------------------------------------------------------- Annual Report | 109 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK (CONTINUED) ---------------------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------- CLASS C SHARES: Year ended September 30, 2003 Shares sold ...................... 775,065 $ 13,737,768 1,813,481 $ 43,685,324 Shares redeemed .................. (802,705) (13,561,498) (2,679,771) (63,119,895) ---------------------------------------------------------------- Net increase (decrease) .......... (27,640) $ 176,270 (866,290) $ (19,434,571) ---------------------------------------------------------------- Year ended September 30, 2002 Shares sold ...................... 441,036 $ 8,305,028 2,341,188 $ 67,032,199 Shares issued in reinvestment of distributions ................... 26,309 528,291 15,738 480,633 Shares redeemed .................. (1,230,305) (22,418,819) (2,963,679) (80,399,587) ---------------------------------------------------------------- Net increase (decrease) .......... (762,960) $ (13,585,500) (606,753) $ (12,886,755) ---------------------------------------------------------------- CLASS R SHARES: Year ended September 30, 2003 Shares sold ...................... 502,954 $ 12,216,083 Shares issued in reinvestment of distributions ................... 365 9,135 Shares redeemed .................. (78,318) (1,952,412) -------------------------- Net increase (decrease) .......... 425,001 $ 10,272,806 -------------------------- Year ended September 30, 2002 a Shares sold ...................... 146,795 $ 3,985,062 Shares redeemed .................. (19,932) (559,293) -------------------------- Net increase (decrease) .......... 126,863 $ 3,425,769 -------------------------- ADVISOR CLASS SHARES: Year ended September 30, 2003 Shares sold ...................... 580,561 $ 14,712,785 Shares issued in reinvestment of distributions ................... 5,208 130,503 Shares redeemed .................. (297,671) (7,087,657) -------------------------- Net increase (decrease) .......... 288,098 $ 7,755,631 -------------------------- Year ended September 30, 2002 Shares sold ...................... 233,419 $ 6,920,264 Shares issued in reinvestment of distributions ................... 10,474 325,342 Shares redeemed .................. (166,496) (5,013,156) -------------------------- Net increase (decrease) .......... 77,397 $ 2,232,450 -------------------------- <FN> a For the period January 1, 2002 (effective date) to September 30, 2002. </FN> 110 | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK (CONTINUED) ------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND ------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------- CLASS A SHARES: Year ended September 30, 2003 Shares sold ................... 1,420,460,711 $ 2,978,192,401 178,073,164 $ 1,232,868,939 Shares issued in reinvestment of distributions ............. 166,636,905 340,980,517 35,293,588 243,128,476 Shares redeemed ............... (462,636,792) (945,253,480) (248,820,975) (1,714,730,532) ------------------------------------------------------------------- Net increase (decrease) ....... 1,124,460,824 $ 2,373,919,438 (35,454,223) $ (238,733,117) ------------------------------------------------------------------- Year ended September 30, 2002 Shares sold ................... 694,153,524 $ 1,478,573,971 210,759,573 $ 1,451,877,583 Shares issued in reinvestment of distributions ............. 146,862,863 312,435,854 35,269,132 242,076,771 Shares redeemed ............... (436,991,609) (918,562,846) (179,198,072) (1,231,644,433) ------------------------------------------------------------------- Net increase (decrease) ....... 404,024,778 $ 872,446,979 66,830,633 $ 462,309,921 ------------------------------------------------------------------- CLASS B SHARES: Year ended September 30, 2003 Shares sold ................... 663,029,400 $ 1,384,557,403 41,548,785 $ 287,642,126 Shares issued in reinvestment of distributions ............. 21,203,582 43,812,599 3,141,416 21,609,158 Shares redeemed ............... (50,454,482) (103,284,316) (25,090,330) (172,049,102) ------------------------------------------------------------------- Net increase (decrease) ....... 633,778,500 $ 1,325,085,686 19,599,871 $ 137,202,182 ------------------------------------------------------------------- Year ended September 30, 2002b Shares sold ................... 310,395,948 $ 660,909,583 53,145,903 $ 366,091,581 Shares issued in reinvestment of distributions ............. 5,099,354 10,620,920 1,861,552 12,776,200 Shares redeemed ............... (20,908,201) (42,336,715) (7,396,751) (50,802,382) ------------------------------------------------------------------- Net increase (decrease) ....... 294,587,101 $ 629,193,788 47,610,704 $ 328,065,399 ------------------------------------------------------------------- CLASS B1 SHARES: Year ended September 30, 2003 Shares sold ................... 12,538,502 $ 25,859,856 Shares issued in reinvestment of distributions ............. 8,955,929 18,230,536 Shares redeemed ............... (27,953,932) (56,428,246) ------------------------------- Net increase (decrease) ....... (6,459,501) $ (12,337,854) ------------------------------- Year ended September 30, 2002 Shares sold ................... 41,081,481 $ 88,810,144 Shares issued in reinvestment of distributions ............. 10,155,094 21,645,102 Shares redeemed ............... (31,027,810) (64,567,741) ------------------------------- Net increase (decrease) ....... 20,208,765 $ 45,887,505 ------------------------------- <FN> b For the period November 1, 2001 (effective date) to September 30, 2002 for the Franklin Income Fund. </FN> Annual Report | 111 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK (CONTINUED) ------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------- CLASS C SHARES: Year ended September 30, 2003 Shares sold .................... 951,930,027 $ 2,009,359,415 57,357,026 $ 396,061,501 Shares issued in reinvestment of distributions .............. 50,130,794 103,732,412 4,055,220 27,836,743 Shares redeemed ................ (147,253,703) (302,931,419) (56,619,048) (387,449,439) ------------------------------------------------------------------- Net increase (decrease) ........ 854,807,118 $ 1,810,160,408 4,793,198 $ 36,448,805 ------------------------------------------------------------------- Year ended September 30, 2002 Shares sold .................... 385,174,266 $ 823,907,725 76,997,060 $ 529,065,309 Shares issued in reinvestment of distributions .............. 30,438,475 64,855,000 2,813,177 19,255,671 Shares redeemed ................ (103,269,316) (215,806,645) (25,632,581) (175,511,642) ------------------------------------------------------------------- Net increase (decrease) ........ 312,343,425 $ 672,956,080 54,177,656 $ 372,809,338 ------------------------------------------------------------------- CLASS R SHARES: Year ended September 30, 2003 Shares sold .................... 14,633,211 $ 30,251,574 8,174,860 $ 56,511,590 Shares issued in reinvestment of distributions .............. 632,563 1,303,713 261,116 1,791,684 Shares redeemed ................ (2,327,993) (4,920,944) (2,508,245) (17,215,177) ------------------------------------------------------------------- Net increase (decrease) ........ 12,937,781 $ 26,634,343 5,927,731 $ 41,088,097 ------------------------------------------------------------------- Year ended September 30, 2002c Shares sold .................... 3,653,701 $ 7,553,477 2,082,175 $ 14,364,295 Shares issued in reinvestment of distributions .............. 51,478 103,793 22,194 153,033 Shares redeemed ................ (336,741) (665,070) (95,833) (661,643) ------------------------------------------------------------------- Net increase (decrease) ........ 3,368,438 $ 6,992,200 2,008,536 $ 13,855,685 ------------------------------------------------------------------- ADVISOR CLASS SHARES: Year ended September 30, 2003 Shares sold .................... 29,225,067 $ 63,085,044 21,146,530 $ 147,068,753 Shares issued in reinvestment of distributions .............. 1,253,004 2,564,820 1,903,612 13,126,237 Shares redeemed ................ (4,343,162) (8,952,743) (6,189,973) (42,196,612) ------------------------------------------------------------------- Net increase (decrease) ........ 26,134,909 $ 56,697,121 16,860,169 $ 117,998,378 ------------------------------------------------------------------- Year ended September 30, 2002 Shares sold .................... 8,683,964 $ 18,350,663 25,694,106 $ 177,748,711 Shares issued in reinvestment of distributions .............. 932,885 1,971,056 416,646 2,873,117 Shares redeemed ................ (3,922,883) (7,925,698) (659,856) (4,539,718) ------------------------------------------------------------------- Net increase (decrease) ........ 5,693,966 $ 12,396,021 25,450,896 $ 176,082,110 ------------------------------------------------------------------- <FN> c For the period January 1, 2002 (effective date) to September 30, 2002. </FN> 112 | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK (CONTINUED) -------------------------- FRANKLIN UTILITIES FUND -------------------------- SHARES AMOUNT -------------------------- CLASS A SHARES: Year ended September 30, 2003 Shares sold ....................................................... 25,175,427 $ 211,667,227 Shares issued in reinvestment of distributions .................... 5,384,148 44,381,490 Shares redeemed ................................................... (24,337,215) (201,018,430) -------------------------- Net increase (decrease) ........................................... 6,222,360 $ 55,030,287 -------------------------- Year ended September 30, 2002 Shares sold ....................................................... 14,035,953 $ 131,501,118 Shares issued in reinvestment of distributions .................... 10,405,962 96,339,850 Shares redeemed ................................................... (22,214,088) (206,026,369) -------------------------- Net increase (decrease) ........................................... 2,227,827 $ 21,814,599 -------------------------- CLASS B SHARES: Year ended September 30, 2003 Shares sold ....................................................... 7,731,921 $ 64,628,039 Shares issued in reinvestment of distributions .................... 177,803 1,479,606 Shares redeemed ................................................... (1,194,549) (9,952,757) -------------------------- Net increase (decrease) ........................................... 6,715,175 $ 56,154,888 -------------------------- Year ended September 30, 2002 Shares sold ....................................................... 2,896,810 $ 26,711,865 Shares issued in reinvestment of distributions .................... 132,490 1,220,320 Shares redeemed ................................................... (428,594) (3,875,117) -------------------------- Net increase (decrease) ........................................... 2,600,706 $ 24,057,068 -------------------------- CLASS C SHARES: Year ended September 30, 2003 Shares sold ....................................................... 19,436,624 $ 163,113,516 Shares issued in reinvestment of distributions .................... 415,191 3,452,384 Shares redeemed ................................................... (3,052,249) (25,501,141) -------------------------- Net increase (decrease) ........................................... 16,799,566 $ 141,064,759 -------------------------- Year ended September 30, 2002 Shares sold ....................................................... 5,194,601 $ 47,292,632 Shares issued in reinvestment of distributions .................... 330,751 3,053,533 Shares redeemed ................................................... (1,542,245) (14,006,358) -------------------------- Net increase (decrease) ........................................... 3,983,107 $ 36,339,807 -------------------------- CLASS R SHARES: Year ended September 30, 2003 Shares sold ....................................................... 125,002 $ 1,034,190 Shares issued in reinvestment of distributions .................... 4,296 35,809 Shares redeemed ................................................... (17,198) (145,977) -------------------------- Net increase (decrease) ........................................... 112,100 $ 924,022 -------------------------- Year ended September 30, 2002d Shares sold ....................................................... 18,051 $ 164,683 Shares issued in reinvestment of distributions .................... 229 2,002 Shares redeemed ................................................... (506) (4,243) -------------------------- Net increase (decrease) ........................................... 17,774 $ 162,442 -------------------------- <FN> d For the period January 1, 2002 (effective date) to September 30, 2002. </FN> Annual Report | 113 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK (CONTINUED) ------------------------- FRANKLIN UTILITIES FUND ------------------------- SHARES AMOUNT ------------------------- ADVISOR CLASS SHARES: Year ended September 30, 2003 Shares sold ........................................................ 3,596,924 $ 30,787,970 Shares issued in reinvestment of distributions ..................... 162,041 1,358,329 Shares redeemed .................................................... (380,448) (3,182,941) ------------------------- Net increase (decrease) ............................................ 3,378,517 $ 28,963,358 ------------------------- Year ended September 30, 2002 Shares sold ........................................................ 2,584,255 $ 22,986,278 Shares issued in reinvestment of distributions ..................... 101,297 917,654 Shares redeemed .................................................... (1,604,468) (13,531,290) ------------------------- Net increase (decrease) ............................................ 1,081,084 $ 10,372,642 ------------------------- 3. TRANSACTIONS WITH AFFILIATES Certain officers and directors of the Funds are also officers or directors of the following entities: - --------------------------------------------------------------------------------------- ENTITY AFFILIATION - --------------------------------------------------------------------------------------- Franklin Advisers Inc. (Advisers) Investment manager Franklin Investment Advisory Services Inc. Investment manager (Investment Advisory) Franklin Templeton Services LLC (FT Services) Administrative manager Franklin/Templeton Distributors Inc. (Distributors) Principal underwriter Franklin/Templeton Investor Services LLC (Investor Services) Transfer Agent The Funds, except the Franklin Growth Fund, pay an investment management fee to Advisers, and the Franklin Growth Fund pays an investment management fee to Investment Advisory, based on the net assets of the Funds as follows: - ---------------------------------------------------------------------------- ANNUALIZED FEE RATE MONTH-END NET ASSETS - ---------------------------------------------------------------------------- .625% First $100 million .500% Over $100 million, up to and including $250 million .450% Over $250 million, up to and including $10 billion .440% Over $10 billion, up to and including $12.5 billion .420% Over $12.5 billion, up to and including $15 billion .400% Over $15 billion, up to and including $17.5 billion Fees are further reduced on net assets over $17.5 billion. Under an agreement with Advisers and Investment Advisory, FT Services provides administrative services to the Funds. The fee is paid by Advisers and Investment Advisory based on average daily net assets, and is not an additional expense of the Funds. 114 | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) The Funds reimburse Distributors for costs incurred in marketing the Funds' shares up to a certain percentage per year of their average daily net assets of each class as follows: ----------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND ----------------------------------------------------------- Class A ................... .25% .25% .15% .15% .15% Class B ................... 1.00% 1.00% 1.00% .65% .65% Class B1 .................. -- -- .65% -- -- Class C ................... 1.00% 1.00% .65% .65% .65% Class R ................... -- .50% .50% .50% .50% Distributors paid net commissions on sales of the Funds' shares, and received contingent deferred sales charges for the year as follows: ------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ------------------------------------- Net commissions paid ........................................ $154,494 $1,135,335 $65,012,361 Contingent deferred sales charges ........................... $ 25,113 $ 297,726 $ 3,530,938 ----------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ----------------------------- Net commissions paid ........................................ $10,513,530 $3,221,637 Contingent deferred sales charges ........................... $ 2,568,474 $ 196,464 The Funds paid transfer agent fees as noted in the Statement of Operations of which the following amounts were paid to Investor Services: -------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND -------------------------------------- Transfer agent fees ......................................... $1,168,610 $3,797,348 $7,748,957 ----------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ----------------------------- Transfer agent fees ......................................... $7,329,487 $1,814,622 Included in professional fees are legal fees of $89,500 that were paid to a law firm in which a partner is an officer of the Funds. Annual Report | 115 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INCOME TAXES At September 30, 2003, the Funds had tax basis capital losses which may be carried over to offset future capital gains. Such losses expire as follows: ------------------------------ FRANKLIN FRANKLIN DYNATECH GROWTH FUND FUND ------------------------------ Capital loss carryovers expiring in: 2007 ................................................................ $ 677,592 $ -- 2008 ................................................................ 394,928 -- 2009 ................................................................ 1,170,048 -- 2010 ................................................................ 6,843,771 -- 2011 ................................................................ 47,180,600 206,696,356 ------------------------------ $ 56,266,939 $ 206,696,356 ------------------------------ ------------------------------ FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------------------------ Capital loss carryovers expiring in: 2004 ................................................................ $ 57,539,178 $ -- 2005 ................................................................ 50,054,906 -- 2006 ................................................................ 28,279,472 -- 2007 ................................................................ 18,954,412 -- 2008 ................................................................ 21,105,846 -- 2009 ................................................................ 46,256,951 -- 2010 ................................................................ 11,768,551 -- 2011 ................................................................ 33,566,845 54,600,730 ------------------------------ $ 267,516,161 $ 54,600,730 ------------------------------ On September 30, 2003, the Franklin U.S. Government Securities Fund had expired capital loss carryovers of $3,698,366, which were reclassified to paid-in-capital. At September 30, 2003, the following funds had deferred capital losses occurring subsequent to October 31, 2002. For tax purposes, such losses will be reflected in the year ending September 30, 2004. ------------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH U.S. GOVERNMENT UTILITIES FUND FUND SECURITIES FUND FUND ------------------------------------------------------------- $16,459,129 $45,312,989 $120,190,227 $21,478,885 At September 30, 2003, the Franklin Income Fund had deferred currency losses occurring subsequent to October 31, 2002 of $5,927,510. For tax purposes, such losses will be reflected in the year ending September 30, 2004. 116 | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INCOME TAXES (CONTINUED) The tax character of distributions paid during the years ended September 30, 2003 and 2002, was as follows: ----------------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ----------------------------------------------------------- 2003 2002 2003 2002 ----------------------------------------------------------- Distributions paid from: Ordinary income .............. $ -- $ 9,242,493 $ 2,326,940 $ 9,495,518 Long term capital gain ....... -- -- -- 3,370,361 ----------------------------------------------------------- $ -- $ 9,242,493 $ 2,326,940 $ 12,865,879 ----------------------------------------------------------- ------------------------------------------------------------------- FRANKLIN FRANKLIN U.S. GOVERNMENT INCOME FUND SECURITIES FUND ------------------------------------------------------------------- 2003 2002 2003 2002 ------------------------------------------------------------------- Distributions paid from: Ordinary income .............. $ 822,221,334 $ 654,501,467 $492,495,581 $ 485,987,139 Long term capital gain ....... 23,413,589 54,594,790 -- -- ------------------------------------------------------------------- $ 845,634,923 $709,096,257 $492,495,581 $ 485,987,139 ------------------------------------------------------------------- ------------------------------ FRANKLIN UTILITIES FUND ------------------------------ 2003 2002 ------------------------------ Distributions paid from: Ordinary income .............. $ 70,304,294 $ 72,292,208 Long term capital gain ....... -- 58,386,036 ------------------------------ $ 70,304,294 $ 130,678,244 ------------------------------ Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, paydown losses, foreign currency transactions, and bond premiums and discounts. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, paydown losses, foreign currency transactions, and bond premiums and discounts. Annual Report | 117 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INCOME TAXES (CONTINUED) At September 30, 2003, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes was as follows: ---------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ---------------------------------------------------- Cost of investments .......................... $ 535,463,096 $ 1,030,448,040 $ 16,058,290,073 ---------------------------------------------------- Unrealized appreciation ...................... 158,533,633 867,541,129 1,660,438,322 Unrealized depreciation ...................... (58,766,194) (46,458,356) (1,306,958,820) ---------------------------------------------------- Net unrealized appreciation (depreciation) ... $ 99,767,439 $ 821,082,773 $ 353,479,502 ---------------------------------------------------- Undistributed ordinary income ................ $ -- $ 1,248,169 $ 62,702,123 Undistributed long term capital gains ........ -- -- 77,517,170 ---------------------------------------------------- Distributable earnings ....................... $ -- $ 1,248,169 $ 140,219,293 ---------------------------------------------------- ----------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ----------------------------------- Cost of investments .......................... $ 9,082,417,273 $ 1,487,010,539 ----------------------------------- Unrealized appreciation ...................... 250,397,068 254,449,208 Unrealized depreciation ...................... (14,227,595) (105,158,837) ----------------------------------- Net unrealized appreciation (depreciation) ... $ 222,363,626 $ 149,290,371 ----------------------------------- Undistributed ordinary income ................ $ 24,101,770 $ 917,026 Undistributed long term capital gains ........ -- -- ----------------------------------- Distributable earnings ....................... $ 24,101,770 $ 917,026 ----------------------------------- 5. INVESTMENT TRANSACTIONS Purchases and sales of investments and securities sold short (excluding short-term securities) for the year ended September 30, 2003 were as follows: ------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ------------------------------------------------- Purchases ............... $ 221,539,152 $ 87,257,151 $ 8,752,730,238 Sales ................... $ 63,002,750 $ 167,044,742 $ 5,124,221,603 118 | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INVESTMENT TRANSACTIONS (CONTINUED) ------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------------------------- Purchases ................................... $ 6,541,593,275 $ 612,593,395 Sales ....................................... $ 6,417,703,908 $ 353,897,737 6. INVESTMENTS IN THE FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management fees paid by the Sweep Money Fund. The Funds earned dividend income from investment in the Sweep Money Fund for the year ended September 30, 2003, as follows: ----------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ----------------------------------- Dividend income .......................... $244,497 $88,935 $1,560,654 ---------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ---------------------------- Dividend income .......................... $1,345,046 $128,437 7. CREDIT RISK AND DEFAULTED SECURITIES The Franklin Income Fund has 36.2% of its portfolio invested in below investment grade and comparable quality unrated high yield securities, which tend to be more sensitive to economic conditions than higher rated securities. The risk of loss due to default by the issuer may be significantly greater for the holders of high yielding securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. The Franklin Income Fund held defaulted and/or other securities for which the income has been deemed uncollectible. The Fund discontinues accruing income on these securities and provides an estimate for losses on interest receivable. At September 30, 2003, the value of these securities was $229,543,250 representing 1.42% of the Fund's net assets. For information as to specific securities, see the accompanying Statement of Investments. Annual Report | 119 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. RESTRICTED SECURITIES At September 30, 2003, investments in securities included issues that are restricted or illiquid. Restricted securities are often purchased in private placement transactions, are not registered under the Securities Act of 1933, may have contractual restrictions on resale, and are valued under methods approved by the Board of Directors as reflecting fair value. A security may also be considered illiquid if it lacks a readily available market or if its valuation has not changed for a certain period of time. At September 30, 2003, the Franklin Income Fund held investments in restricted and illiquid securities that were valued under approved methods by the Directors, as follows: - ------------------------------------------------------------------------------------------------------- PRINCIPAL ACQUISITION AMOUNT ISSUER DATE COST VALUE - ------------------------------------------------------------------------------------------------------- $23,732,503 Lone Cypress, sub. note, 11.50%, 8/01/09 (.16% of net assets) ................... 12/02/99 $23,732,503 $25,008,125 9. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The Investment Company Act of 1940 defines "affiliated companies" to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" for the Franklin Income Fund at September 30, 2003 were as shown below. - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF NUMBER OF SHARES HELD SHARES HELD AT BEGINNING GROSS GROSS AT END VALUE AT DIVIDEND REALIZED NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR END OF YEAR INCOME GAIN (LOSS) - ------------------------------------------------------------------------------------------------------------------------------------ TECO Energy Inc. ....................... 250,000 11,750,000 120,500 11,879,500 $164,174,690 $ 1,652,500 $ 501,833 TECO Energy Inc., ACES, 9.50%, cvt. pfd. 1,000,000 -- 169,000 831,000 15,415,050 2,256,250 (1,289,115) ------------------------------------------- TOTAL NON-CONTROLLED AFFILIATED ISSUERS $179,589,740 $ 3,908,750 $(787,282) ------------------------------------------- 10. OTHER CONSIDERATIONS Advisers, as the Franklin Income Fund's Manager, may serve as a member of various bondholders' steering committees, on credit committees, or may represent the Fund in certain corporate restructuring negotiations. Currently the Manager serves in one or more of these capacities for Adelphia Communications Corp. As a result of this involvement, Advisers may be in possession of certain material non-public information. If the Fund's Manager, while in possession of such information, seeks to sell any of its holdings in these securities it will comply with all applicable federal securities laws. 120 | Annual Report Franklin Custodian Funds, Inc. INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF FRANKLIN CUSTODIAN FUNDS, INC. In our opinion, the accompanying statements of assets and liabilities, including the statements of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of each of the funds included in this report constituting the Franklin Custodian Funds, Inc. (hereafter referred to as the "Funds") at September 30, 2003, 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 auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at September 30, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California November 4, 2003 Annual Report | 121 Franklin Custodian Funds, Inc. TAX DESIGNATION (UNAUDITED) Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Franklin Income Fund hereby designates $79,120,955 as a capital gain dividend for the fiscal year ended September 30, 2003. Under Section 854(b)(2) of the Code, the Funds hereby designate the following maximum amounts as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended September 30, 2003. ------------------------------------------ FRANKLIN FRANKLIN FRANKLIN GROWTH INCOME UTILITIES FUND FUND FUND ------------------------------------------ $16,831,170 $249,508,484 $54,279,946 In January 2004, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2003. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 854(b)(2) of the Code, the Funds hereby designate the following percentage amounts of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended September 30, 2003. ------------------------------ FRANKLIN FRANKLIN FRANKLIN GROWTH INCOME UTILITIES FUND FUND FUND ------------------------------ 100.00% 20.04% 69.01% 122 | Annual Report Board Members and Officers The name, age and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (71) Director Since 1976 142 Director, Bar-S Foods (meat packing One Franklin Parkway company). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ------------------------------------------------------------------------------------------------------------------------------------ S. JOSEPH FORTUNATO (71) Director Since 1982 143 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch. - ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (51) Director Since 1998 92 Director, Amerada Hess Corporation One Franklin Parkway (exploration and refining of oil and San Mateo, CA 94403-1906 gas); Beverly Enterprises, Inc. (health care); H.J. Heinz Company (processed foods and allied products); RTI International Metals, Inc. (manufacture and distribution of titanium); and Canadian National Railway (railroad). 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 | 123 - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ GORDON S. MACKLIN (75) Director Since 1992 142 Director, White Mountains Insurance One Franklin Parkway Group, Ltd. (holding company); Martek San Mateo, CA 94403-1906 Biosciences Corporation; MedImmune, Inc. (biotechnology); Overstock.com (Internet services); and Spacehab, Inc. (aerospace services); and FORMERLY, Director, MCI Communication Corporation (subsequently known as MCI WorldCom, Inc. and WorldCom, Inc.) (communications services) (1988-2002). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and FORMERLY, Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association of Securities Dealers, Inc. (1970-1987). - ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED BOARD MEMBERS AND OFFICERS - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (70) Director, Director since 142 None One Franklin Parkway President and 1969, President San Mateo, CA 94403-1906 Chief since 1984 and Executive Chief Executive Officer- Officer-Investment Investment Management Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Chief Executive Officer, Member-Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ **RUPERT H. JOHNSON, JR. (63) Director and Since 1983 125 None One Franklin Parkway Vice President San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member-Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, 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 49 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ 124 | Annual Report - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ HARMON E. BURNS (58) Vice President Since 1987 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member-Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services, 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 49 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ MARTIN L. FLANAGAN (43) Vice President Since 1995 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton 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 49 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JIMMY D. GAMBILL (56) Senior Vice Since 2002 Not Applicable None 500 East Broward Blvd. President and Suite 2100 Chief Fort Lauderdale, FL Executive 33394-3091 Officer- Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (56) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources, Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). - ------------------------------------------------------------------------------------------------------------------------------------ BARBARA J. GREEN (55) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, Inc., Franklin Mutual Advisers, LLC, Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division on Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - ------------------------------------------------------------------------------------------------------------------------------------ Annual Report | 125 - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ MICHAEL O. MAGDOL (66) Vice President Since 2002 Not Applicable Director, FTI Banque, Arch 600 Fifth Avenue - AML Chemicals, Inc. and Lingnan Rockefeller Center Compliance Foundation New York, NY 10048-0772 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 47 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ KIMBERLEY H. MONASTERIO (39) Treasurer and Treasurer since Not Applicable None One Franklin Parkway Chief 2000 and Chief San Mateo, CA 94403-1906 Financial Financial Officer Officer since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; and officer of 51 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ MURRAY L. SIMPSON (66) Vice President Since 2000 Not Applicable None One Franklin Parkway and Secretary San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999). - ------------------------------------------------------------------------------------------------------------------------------------ *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 adviser or affiliated investment advisers. **Charles B. Johnson and Rupert H. Johnson are considered interested persons of the Funds 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 Funds' adviser and distributor. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF EDITH E. HOLIDAY AND HARRIS J. ASHTON AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MS. HOLIDAY AND MR. ASHTON QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR BUSINESS BACKGROUND AND EXPERIENCE. MS. HOLIDAY, WHO CURRENTLY SERVES AS A DIRECTOR AND TRUSTEE OF VARIOUS COMPANIES AND TRUSTS, INCLUDING H.J. HEINZ COMPANY WHERE SHE IS AUDIT COMMITTEE CHAIRPERSON, IS CHAIRPERSON OF THE FUND'S AUDIT COMMITTEE, AND FORMERLY SERVED AS ASSISTANT TO THE PRESIDENT OF THE UNITED STATES AND SECRETARY OF THE CABINET (1990-1993); GENERAL COUNSEL TO THE UNITED STATES TREASURY DEPARTMENT (1989-1999); AND ASSISTANT SECRETARY FOR PUBLIC AFFAIRS AND PUBLIC LIAISON-UNITED STATES TREASURY DEPARTMENT (1988-1989). MR. ASHTON, WHO IS CURRENTLY A DIRECTOR OF BUSINESS AND NON-PROFIT ORGANIZATIONS, SERVED AS CHIEF EXECUTIVE OFFICER OF GENERAL HOST CORPORATION, A NEW YORK STOCK EXCHANGE LISTED COMPANY FROM 1967 TO 1998, AND WAS A DIRECTOR OF RBC HOLDINGS, INC., A BANK HOLDING COMPANY UNTIL 2002. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVES THAT MS. HOLIDAY AND MR. ASHTON HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MS. HOLIDAY AND MR. ASHTON ARE INDEPENDENT DIRECTORS AS THAT TERM IS DEFINED UNDER THE APPLICABLE SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI. 126 | Annual Report Franklin Custodian Funds, Inc. PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Annual Report | 127 This page intentionally left blank. Literature Request For a brochure and prospectus, which contains more complete information, including charges and expenses, call Franklin Templeton Investments at 1-800/DIAL BEN[R] (1-800/342-5236). Please read the prospectus carefully before investing or sending money. 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. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund GLOBAL Franklin Global Aggressive Growth Fund Franklin Global Growth Fund Mutual Discovery Fund Templeton Capital Accumulator Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II1 VALUE Franklin Balance Sheet Investment Fund2 Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund3 Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Shares Fund BLEND Franklin Blue Chip Fund Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund4 SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Franklin Technology Fund Mutual Financial Services Fund ASSET ALLOCATION Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund INCOME Franklin Adjustable U.S. Government Securities Fund5 Franklin's AGE High Income Fund Franklin Federal Money Fund5, 6 Franklin Floating Rate Daily Access Fund Franklin Floating Rate Trust7 Franklin Income Fund Franklin Money Fund5, 6 Franklin Short-Intermediate U.S. Government Securities Fund5 Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund5 Templeton Global Bond Fund TAX-FREE INCOME8 Double Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund9 Tax-Exempt Money Fund5,6 STATE-SPECIFIC TAX-FREE INCOME8 Alabama Arizona California10 Colorado Connecticut Florida10 Georgia Kentucky Louisiana Maryland Massachusetts9 Michigan9 Minnesota9 Missouri New Jersey New York10 North Carolina Ohio9 Oregon Pennsylvania Tennessee Virginia VARIABLE INSURANCE PRODUCTS FUNDS Franklin Templeton Variable Insurance Products Trust11 1. The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 2. The fund is only open to existing shareholders as well as select retirement plans. 3. Effective June 30, 2003, the fund reopened to all new investors. 4. Upon reaching approximately $350 million in assets, the fund will close to all investors. 5. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 6. No assurance exists that the fund's $1.00 per share price will be maintained. It is possible to lose money by investing in the fund. 7. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. 8. For investors subject to the alternative minimum tax, a small portion of these dividends may be taxable. Distributions of capital gains are generally taxable. 9. Portfolio of insured municipal securities. 10. These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and limited-term, intermediate-term and money market portfolios (CA and NY). 11. The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 09/03 Not part of the annual report [LOGO OMITTED] FRANKLIN(R) TEMPLETON(R) 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 CUSTODIAN FUNDS, INC. INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. 1-800/DIAL BEN[R] franklintempleton.com SHAREHOLDER SERVICES 1-800/632-2301 This report must be preceded or accompanied by the current Franklin Custodian Funds, Inc., prospectus, which contains more complete information including charges, expenses and risks. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FCF A2003 11/03 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 10(A), THE REGISTRANT IS ATTACHING AS AN EXHIBIT A COPY OF ITS CODE OF ETHICS THAT APPLIES TO ITS PRINCIPAL EXECUTIVE OFFICERS FINANCIAL AND ACCOUNTING OFFICER. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (A)(1) THE REGISTRANT HAS AN AUDIT COMMITTEE FINANCIAL EXPERT SERVING ON ITS AUDIT COMMITTEE. (2) THE AUDIT COMMITTEE FINANCIAL EXPERTS ARE EDITH E. HOLIDAY AND HARRIS J. ASHTON AND THEY ARE "INDEPENDENT" AS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. 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 10. EXHIBITS. (A) CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS. (B)(1) CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 OF JIMMY D. GAMBILL, CHIEF EXECUTIVE OFFICER - FINANCE AND ADMINISTRATION, AND KIMBERLEY H. MONASTERIO, CHIEF FINANCIAL OFFICER (B(2) CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 OF JIMMY D. GAMBILL, CHIEF EXECUTIVE OFFICER - FINANCE AND ADMINISTRATION, AND KIMBERLEY H. MONASTERIO, CHIEF FINANCIAL OFFICER SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN CUSTODIAN FUNDS, INC. By /s/Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date December 3, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date December 3, 2003 By /s/Kimberley H. Monasterio Chief Financial Officer Date December 3, 2003