UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-00537 --------- FRANKLIN CUSTODIAN FUNDS, INC. ------------------------------ (Exact name of registrant as specified in charter) ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 (Address of principal executive offices) (Zip code) 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: 09/30 ----- Date of reporting period: 3/31/05 ------- ITEM 1. REPORTS TO STOCKHOLDERS. [GRAPHIC OMITTED] - -------------------------------------------------------------------------------- MARCH 31, 2005 - -------------------------------------------------------------------------------- Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund - -------------------------------------------------------------------------------- SEMIANNUAL REPORT AND SHAREHOLDER LETTER - -------------------------------------------------------------------------------- WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? FRANKLIN Eligible shareholders CUSTODIAN FUNDS, INC. can sign up for eDelivery at franklintempleton.com. See inside for details. - -------------------------------------------------------------------------------- [LOGO] 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. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with research offices in over 25 countries, they offer investors the broadest global reach in the industry. MUTUAL SERIES. Founded 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. TRUE DIVERSIFICATION 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. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable account services that have helped us become one of the most trusted names in financial services. - -------------------------------------------------------------------------------- MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS - -------------------------------------------------------------------------------- [GRAPHIC OMITTED] Not part of the semiannual report Contents SHAREHOLDER LETTER ....................................................... 1 SEMIANNUAL REPORT Franklin DynaTech Fund ................................................... 4 Franklin Growth Fund ..................................................... 12 Franklin Income Fund ..................................................... 20 Franklin U.S. Government Securities Fund ................................. 31 Franklin Utilities Fund .................................................. 41 Financial Highlights and Statements of Investments ....................... 50 Financial Statements ..................................................... 98 Notes to Financial Statements ............................................ 107 Shareholder Information .................................................. 125 - -------------------------------------------------------------------------------- Shareholder Letter Dear Shareholder: During the six-month period ended March 31, 2005, several positive signs suggested the U.S. economy was on course for sustained economic growth as business spending increased, the labor market firmed and productivity remained strong. Although the major stock market indexes edged moderately higher during the period under review, gains were dampened by inflation fears, mostly due to volatile oil prices and the U.S. dollar's declining value relative to other currencies. For example, the Dow Jones Industrial Average gained 5.37%.(1) Despite the Federal Reserve Board's (Fed's) efforts to manage inflation through measured rate increases, speculation remained about the size and timing of rate hikes needed to attain the Fed's desired neutral level -- one that neither spurs nor inhibits growth. However, given the current historically low interest rate environment and continued robust productivity growth, our long-term outlook for the financial markets remains optimistic. Although future economic and market developments are impossible to predict, as an investor, you can follow certain basic principles in planning for future needs. (1) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. - -------------------------------------------------------------------------------- EDELIVERY DETAILS Log in at franklintempleton.com and click on eDelivery. Shareholders who are registered at franklintempleton.com can receive these reports via email. Not all accounts are eligible for eDelivery. ----------------------------------------------------- NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE ----------------------------------------------------- Not part of the semiannual report | 1 First, investing for the long term is important so that you can better weather short-term market ups and downs. Second, by choosing a mutual fund that comprises a range of holdings, you can use diversification to help manage investment risk. Third, it may make sense to follow a regular investment plan, also called dollar-cost averaging. By investing a certain amount of money monthly or quarterly, you can take advantage of market dips without worrying about when they will occur. Your money buys more shares when the price is low and fewer when the price is high, which can mean a lower average cost per share over time. Remember, however, to consider your financial ability to continue purchases through times of low price levels or changing economic conditions before committing to such a strategy. Dollar-cost averaging does not guarantee a profit or eliminate risk, and it will not protect you from a loss if you sell shares at a market low. As always, we encourage you to discuss your goals with your financial advisor who can address concerns about volatility and diversification, periodically review your overall portfolio and help you stay focused on the long term. We firmly believe that most people benefit from professional advice, and that advice is never more valuable than during a volatile market. In the enclosed semiannual report for Franklin Custodian Funds, the portfolio managers discuss market conditions, investment management decisions and Fund performance during the period under review. You will also find performance data and financial information. Please remember that all securities markets fluctuate, as do mutual fund share prices. This report contains new information about the Board of Directors' approval of the Fund's investment advisory contract in the past six months. It is designed to give you an understanding of several factors considered before the Board approved its contract with the Investment Manager. The disclosure is in the "Shareholder Information" section beginning on page 125. If you would like more frequent updates, FRANKLINTEMPLETON.COM provides daily prices, monthly performance figures, portfolio holdings and other information. You can also access your account, buy and sell shares, read timely commentary from portfolio managers, and find helpful financial planning tools. We hope you will take advantage of these online services. 2 | Not part of the semiannual report We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your investment needs in the years ahead. Sincerely, /s/ Charles B. Johnson Charles B. Johnson President and Chief Executive Officer - Investment Management Franklin Custodian Funds, Inc. THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF MARCH 31, 2005. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT HAVE BEEN OBTAINED FROM SOURCES CONSIDERED RELIABLE. Not part of the semiannual report | 3 Semiannual Report Franklin DynaTech Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks capital appreciation by investing mainly in the equity securities of companies emphasizing scientific or technological development or that are in fast-growing industries. - -------------------------------------------------------------------------------- PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- This semiannual report for Franklin DynaTech Fund covers the period ended March 31, 2005. PERFORMANCE OVERVIEW Franklin DynaTech Fund - Class A posted a +3.23% cumulative total return for the six months under review. For the same period, the Fund underperformed its narrow benchmark, the NASDAQ 100 Index, which had a price-only return of 4.94%, and underperformed the broad Standard & Poor's 500 Composite Index (S&P 500), which posted a 6.88% cumulative total return.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 8. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2005, domestic economic expansion showed staying power across most industries, sectors and regions. Gross domestic product (GDP) rose at an annualized 3.8% rate in fourth quarter 2004 and an estimated annualized 3.1% in first quarter 2005, benefiting from greater business investment, sizable inventory buildup and consumer spending. Although booming demand for imported goods and materials fueled the widening trade gap, U.S. dollar depreciation supported manufacturing activity and made U.S. exports more competitive in the global market. (1) Source: Standard & Poor's Micropal. The NASDAQ 100 Index includes 100 of the largest domestic and international nonfinancial companies listed on The NASDAQ Stock Market based on market capitalization. The index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies including investment companies. The NASDAQ 100 Index is calculated under a modified capitalization-weighted methodology. Index returns are price-return only and do not include reinvested dividends. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 includes reinvested dividends and is one of the most widely used benchmarks of U.S. equity performance. The indexes are unmanaged. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 53. 4 | Semiannual Report The labor market firmed as employment increased and the unemployment rate dropped from 5.5% to 5.2% during the reporting period.(2) Hiring rebounded in many industries, bolstered by healthy business spending and solid business confidence. Soaring energy prices cooled consumer sentiment, but core retail sales held strong. The Federal Reserve Board (Fed) raised the federal funds target rate from 1.75% to 2.75% and said it will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. Inflation remained relatively contained for the 12 months ended March 31, 2005, as measured by the 2.3% rise for the core Consumer Price Index, which excludes volatile food and energy costs. Pricing pressures were somewhat eased by continued competition, globalization and offshoring, as companies held back in passing along higher commodity and energy costs to consumers. Despite a generally strong economy and improving corporate fundamentals, investors faced a stock market influenced partly by rising inflation, the fluctuating dollar and interest rate hikes during the period. Corporate profits rebounded and dividend payments surged to a record level, with U.S. companies paying out $181 billion in 2004.(3) The pace of initial public offerings (IPOs) remained strong through much of the reporting period, supporting investor confidence. The blue chip stocks of the Dow Jones Industrial Average gained 5.37% for the period under review, while the broader S&P 500 rose 6.88%, and the technology-heavy NASDAQ Composite Index increased 5.74%.(4) INVESTMENT STRATEGY Based on our independent analysis of individual companies, we search for leading companies that we believe have a sustainable competitive advantage due to state-of-the-art and innovative products, technologies and business models. We consider such factors as a company's competitive positioning, patents, new products, market share, industry growth, recent operational execution and managerial strength. We use a conservative, bottom-up research process to buy and hold what we consider to be undervalued companies. PORTFOLIO BREAKDOWN Franklin DynaTech Fund Based on Total Net Assets as of 3/31/05 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Semiconductors 11.2% Packaged Software 9.7% Biotechnology 9.0% Medical Specialties 9.0% Internet Software & Services 6.3% Managed Health Care 5.4% Electronic Production Equipment 3.7% Electronic Equipment & Instruments 3.6% Major Pharmaceuticals 3.3% Telecommunications Equipment 3.2% Information Technology Services 3.1% Computer Processing Hardware 3.0% Air Freight & Couriers 2.7% Data Processing Services 2.7% Other Consumer Services 2.2% Other 21.5% Short-Term Investments & Other Net Assets 0.4% (2) Source: Bureau of Labor Statistics. (3) Source: Standard & Poor's, "2004 Buybacks Soar to Record Levels, Says S&P," STANDARDANDPOORS.COM, 4/7/05. (4) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all domestic and international common stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes over 3,000 companies. Semiannual Report | 5 TOP 10 HOLDINGS Franklin DynaTech Fund 3/31/05 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- Intel Corp. 3.9% SEMICONDUCTORS - -------------------------------------------------------------------------------- UnitedHealth Group Inc. 3.8% MANAGED HEALTH CARE - -------------------------------------------------------------------------------- Microsoft Corp. 3.3% PACKAGED SOFTWARE - -------------------------------------------------------------------------------- Genentech Inc. 3.1% BIOTECHNOLOGY - -------------------------------------------------------------------------------- Yahoo! Inc. 2.9% INTERNET SOFTWARE & SERVICES - -------------------------------------------------------------------------------- Adobe Systems Inc. 2.5% PACKAGED SOFTWARE - -------------------------------------------------------------------------------- Amgen Inc. 2.5% BIOTECHNOLOGY - -------------------------------------------------------------------------------- Rockwell Automation Inc. 2.3% ELECTRONIC EQUIPMENT & INSTRUMENTS - -------------------------------------------------------------------------------- Linear Technology Corp. 2.2% SEMICONDUCTORS - -------------------------------------------------------------------------------- eBay Inc. 2.2% OTHER CONSUMER SERVICES - -------------------------------------------------------------------------------- MANAGER'S DISCUSSION Following our strategy during the six months under review, we continued to emphasize opportunities in established industry leaders we believed had a sustainable competitive advantage in their respective industries. Packaged software, semiconductors, biotechnology, medical specialties, and Internet-related companies represented some of the Fund's largest weightings at period-end. We held several positions that performed well this reporting period, substantially aiding the Fund's overall results. For example, Rockwell Automation, a provider of industrial control and power system solutions that helps customers meet and improve their productivity goals, appreciated about 50%. Insurer UnitedHealth Group, an owner and manager of a variety of health care plans and services, was also one of our largest contributors to Fund performance in absolute terms as the company's stock appreciated more than 29% due to strong revenue and earnings-per-share (EPS) growth during the period. Our shares of Cognizant Technology Solutions, which utilizes an onsite/offshore business model to provide software development solutions primarily to medium and large businesses, rose more than 51%. Despite the Fund's positive absolute return during the reporting period, there were some detractors from performance. For example, casino game system manufacturer International Game Technology's stock lost 25% in value during the period. Similarly, poor results from eBay, the largest online auction site, detracted from Fund performance as that stock lost 19% of its value. Finally, investor concerns over pharmaceutical giant Pfizer's products put a damper on the company's stock results, contributing to its share price depreciation of 13%. We continued to position the Fund's portfolio with higher quality companies that we believe should perform well over the next several years. Consistent with our strategy, we search for companies offering new products and sound business models, and whose underlying stock prices we believed did not fully reflect their future growth prospects. 6 | Semiannual Report Thank you for your continued participation in Franklin DynaTech Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ Rupert H. Johnson, Jr. Rupert H. Johnson, Jr. [PHOTO OMITTED] /s/ Matthew J. Moberg Matthew J. Moberg, CPA [PHOTO OMITTED] /s/ Robert R. Dean Robert R. Dean, CFA Portfolio Management Team Franklin DynaTech Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Semiannual Report | 7 Performance Summary as of 3/31/05 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 does 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 reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION - -------------------------------------------------------------------------------- CLASS A (SYMBOL: FKDNX) CHANGE 3/31/05 9/30/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.71 $22.72 $22.01 - -------------------------------------------------------------------------------- CLASS B (SYMBOL: FDNBX) CHANGE 3/31/05 9/30/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.61 $22.04 $21.43 - -------------------------------------------------------------------------------- CLASS C (SYMBOL: FDYNX) CHANGE 3/31/05 9/30/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.60 $21.81 $21.21 - -------------------------------------------------------------------------------- PERFORMANCE CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. - -------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------------------------------------------------- Cumulative Total Return(1) +3.23% -0.13% -23.43% +160.99% - -------------------------------------------------------------------------------- Average Annual Total Return(2) -2.70% -5.88% -6.31% +9.42% - -------------------------------------------------------------------------------- Value of $10,000 Investment(3) $ 9,730 $9,412 $7,217 $24,599 - -------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (2/1/00) - -------------------------------------------------------------------------------- Cumulative Total Return(1) +2.85% -0.90% -26.27% -19.09% - -------------------------------------------------------------------------------- Average Annual Total Return(2) -1.15% -4.86% -6.28% -4.20% - -------------------------------------------------------------------------------- Value of $10,000 Investment(3) $ 9,885 $9,514 $7,230 $8,012 - -------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (9/16/96) - -------------------------------------------------------------------------------- Cumulative Total Return(1) +2.83% -0.91% -26.24% +82.18% - -------------------------------------------------------------------------------- Average Annual Total Return(2) +1.83% -1.90% -5.90% +7.28% - -------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,183 $9,810 $7,376 $18,218 - -------------------------------------------------------------------------------- PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 8 | Semiannual Report Performance Summary (CONTINUED) ENDNOTES INVESTING IN A NONDIVERSIFIED FUND CONCENTRATING IN THE SCIENTIFIC AND TECHNOLOGY 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: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. (1) Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. (2) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. (3) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. Semiannual Report | 9 Your Fund's Expenses FRANKLIN DYNATECH FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 10 | Semiannual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses. - ------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 9/30/04 VALUE 3/31/05 PERIOD* 9/30/04-3/31/05 - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,032.30 $4.91 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.09 $4.89 - ------------------------------------------------------------------------------------------------------- CLASS B - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,028.50 $8.65 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.40 $8.60 - ------------------------------------------------------------------------------------------------------- CLASS C - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,028.30 $8.70 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.36 $8.65 - ------------------------------------------------------------------------------------------------------- * Expenses are equal to the annualized expense ratio for each class (A: 0.97%; B: 1.71%; and C: 1.72%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. Semiannual Report | 11 Franklin Growth Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Fund seeks capital appreciation by investing mainly in equity securities of companies that are leaders in their industries. - -------------------------------------------------------------------------------- PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- We are pleased to bring you Franklin Growth Fund's semiannual report for the period ended March 31, 2005. PERFORMANCE OVERVIEW For the six months under review, Franklin Growth Fund - Class A posted a +8.73% cumulative total return. The Fund outperformed its benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which returned 6.88% for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 15. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2005, domestic economic expansion showed staying power across most industries, sectors and regions. Gross domestic product (GDP) rose at an annualized 3.8% rate in fourth quarter 2004 and an estimated annualized 3.1% in first quarter 2005, benefiting from greater business investment, sizable inventory buildup and consumer spending. Although booming demand for imported goods and materials fueled the widening trade gap, U.S. dollar depreciation supported manufacturing activity and made U.S. exports more competitive in the global market. The labor market firmed as employment increased and the unemployment rate dropped from 5.5% to 5.2% during the reporting period.(2) Hiring rebounded in many industries, bolstered by healthy business spending and solid business confidence. Soaring energy prices cooled consumer sentiment, but core retail sales held strong. (1) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (2) Source: Bureau of Labor Statistics. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 62. 12 | Semiannual Report The Federal Reserve Board (Fed) raised the federal funds target rate from 1.75% to 2.75% and said it will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. Inflation remained relatively contained for the 12 months ended March 31, 2005, as measured by the 2.3% rise for the core Consumer Price Index, which excludes volatile food and energy costs. Pricing pressures were somewhat eased by continued competition, globalization and offshoring, as companies held back in passing along higher commodity and energy costs to consumers. Despite a generally strong economy and improving corporate fundamentals, investors faced a stock market influenced partly by rising inflation, the fluctuating dollar and interest rate hikes during the period. Corporate profits rebounded and dividend payments surged to a record level, with U.S. companies paying out $181 billion in 2004.(3) The pace of initial public offerings (IPOs) remained strong through much of the reporting period, supporting investor confidence. The blue chip stocks of the Dow Jones Industrial Average gained 5.37% for the period under review, while the broader S&P 500 rose 6.88%, and the technology-heavy NASDAQ Composite Index increased 5.74%.(4) INVESTMENT STRATEGY We seek to invest in companies that have strong management teams, financials and industry leadership. The Fund looks for opportunities in new and rapidly growing businesses and in mature businesses selling at depressed prices but offering favorable recovery possibilities. We analyze securities individually and buy stocks of large and small companies in our effort to maintain a solid and diversified portfolio. MANAGER'S DISCUSSION The Fund was almost fully invested and broadly diversified, with holdings in 106 companies at period-end. Fund holdings that generated notable returns included Apple Computer, EnCana, British Airways and Walt Disney during the six months under review. Apple Computer, riding on a successful gift-buying holiday season with its popular iPod digital music player, appreciated 115% and PORTFOLIO BREAKDOWN Franklin Growth Fund Based on Total Net Assets as of 3/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Health Technology 20.6% Producer Manufacturing 20.6% Electronic Technology 19.2% Technology Services 11.1% Consumer Services 5.0% Transportation 4.4% Consumer Non-Durables 3.6% Distribution Services 3.0% Commercial Services 3.0% Energy Minerals 2.7% Process Industries 2.0% Industrial Services 1.5% Consumer Durables 1.3% Other 2.0% (3) Source: Standard & Poor's, "2004 Buybacks Soar to Record Levels, Says S&P," STANDARDANDPOORS.COM, 4/7/05. (4) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all domestic and international common stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes over 3,000 companies. Semiannual Report | 13 TOP 10 HOLDINGS Franklin Growth Fund 3/31/05 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- 3M Co. 3.1% PRODUCER MANUFACTURING - -------------------------------------------------------------------------------- Johnson & Johnson 3.1% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- Boeing Co. 2.7% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Genentech Inc. 2.6% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- Amgen Inc. 2.5% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- Yahoo! Inc. 2.5% TECHNOLOGY SERVICES - -------------------------------------------------------------------------------- Northrop Grumman Corp. 2.5% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- General Dynamics Corp. 2.5% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Pfizer Inc. 2.4% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- Tyco International Ltd. 2.4% PRODUCER MANUFACTURING - -------------------------------------------------------------------------------- was one of the biggest contributors to Fund performance. EnCana, a leading North American independent crude oil and natural gas exploration and production company, delivered robust sales growth and higher cash flow, which pushed the stock up 53%. In addition, British Airways rose 33% partly based on reported growth in the lucrative premium first and business class market. Walt Disney named a new CEO and the move was favored by analysts as right for the company and shareholder value. Meanwhile, the stock went up 29% and contributed to positive Fund performance. Several stocks had negative returns and held the Fund back during the reporting period. Waters, an analytical instrument company with exports accounting for nearly two-thirds of its sales, was the most significant underperformer. Its stock dropped 19% largely due to weak pharmaceutical capital spending in Europe and lack of strength in other markets. Pfizer, under pressure of approaching patent expirations, generic competition and product safety concerns, fell 13% and detracted from Fund performance during the period. Diversified manufacturer Illinois Tool Works saw sales and operating revenue increases, but suffered from a weaker-than-expected profit outlook and declined 3%. The Fund had little buy and sell activity during the six months under review. Consistent with our strategy, we purchased shares of Biogen Idec for recovery possibilities. We welcome your comments and questions and look forward to serving your investment needs in the years ahead. [PHOTO OMITTED] /s/ V. Jerry Palmieri V. Jerry Palmieri Portfolio Manager Franklin Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON SUCH FACTORS AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 14 | Semiannual Report Performance Summary as of 3/31/05 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 does 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 reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION - ---------------------------------------------------------------------- CLASS A (SYMBOL: FKGRX) CHANGE 3/31/05 9/30/04 - ---------------------------------------------------------------------- Net Asset Value (NAV) +$2.59 $33.17 $30.58 - ---------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - ---------------------------------------------------------------------- Dividend Income $0.0787 - ---------------------------------------------------------------------- CLASS B (SYMBOL: FKGBX) CHANGE 3/31/05 9/30/04 - ---------------------------------------------------------------------- Net Asset Value (NAV) +$2.48 $32.25 $29.77 - ---------------------------------------------------------------------- CLASS C (SYMBOL: FRGSX) CHANGE 3/31/05 9/30/04 - ---------------------------------------------------------------------- Net Asset Value (NAV) +$2.46 $31.97 $29.51 - ---------------------------------------------------------------------- CLASS R (SYMBOL: FGSRX) CHANGE 3/31/05 9/30/04 - ---------------------------------------------------------------------- Net Asset Value (NAV) +$2.60 $32.99 $30.39 - ---------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - ---------------------------------------------------------------------- Dividend Income $0.0149 - ---------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 3/31/05 9/30/04 - ---------------------------------------------------------------------- Net Asset Value (NAV) +$2.56 $33.19 $30.63 - ---------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - ---------------------------------------------------------------------- Dividend Income $0.1585 - ---------------------------------------------------------------------- Semiannual Report | 15 Performance Summary (CONTINUED) PERFORMANCE CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. - ----------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------- Cumulative Total Return(1) +8.73% +9.66% -2.18% +139.74% - ----------------------------------------------------------------------------------------- Average Annual Total Return(2) +2.46% +3.35% -1.61% +8.49% - ----------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,246 $10,335 $ 9,220 $ 22,597 - ----------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - ----------------------------------------------------------------------------------------- Cumulative Total Return(1) +8.33% +8.88% -5.69% +10.32% - ----------------------------------------------------------------------------------------- Average Annual Total Return(2) +4.33% +4.88% -1.54% +1.58% - ----------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,433 $10,488 $ 9,252 $ 11,032 - ----------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/95) - ----------------------------------------------------------------------------------------- Cumulative Total Return(1) +8.34% +8.85% -5.75% +116.81% - ----------------------------------------------------------------------------------------- Average Annual Total Return(2) +7.34% +7.85% -1.18% +8.11% - ----------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,734 $10,785 $ 9,425 $ 21,681 - ----------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02) - ----------------------------------------------------------------------------------------- Cumulative Total Return(1) +8.57% +9.36% +3.66% +4.67% - ----------------------------------------------------------------------------------------- Average Annual Total Return(2) +7.57% +8.36% +1.20% +1.42% - ----------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,757 $10,836 $10,366 $ 10,467 - ----------------------------------------------------------------------------------------- ADVISOR CLASS(4) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------- Cumulative Total Return(1) +8.87% +9.95% -0.95% +146.53% - ----------------------------------------------------------------------------------------- Average Annual Total Return(2) +8.87% +9.95% -0.19% +9.44% - ----------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,887 $10,995 $ 9,905 $ 24,653 - ----------------------------------------------------------------------------------------- PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 16 | Semiannual Report Performance Summary (CONTINUED) ENDNOTES HISTORICALLY, THE FUND HAS FOCUSED ON LARGER COMPANIES. THE FUND MAY ALSO INVEST IN SMALL, RELATIVELY NEW AND/OR UNSEASONED COMPANIES, WHICH INVOLVES ADDITIONAL RISKS, AS THE PRICE OF THESE SECURITIES CAN BE VOLATILE, PARTICULARLY OVER THE SHORT TERM. 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: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1) Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. (2) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. (3) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. (4) 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 +67.00% and +6.42%. Semiannual Report | 17 Your Fund's Expenses FRANKLIN GROWTH FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600/$1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 18 | Semiannual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses. - ------------------------------------------------------------------------------------------------------ BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 9/30/04 VALUE 3/31/05 PERIOD 9/30/04-3/31/05 - ------------------------------------------------------------------------------------------------------ Actual $1,000 $1,087.30 $4.84 - ------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,020.29 $4.68 - ------------------------------------------------------------------------------------------------------ CLASS B - ------------------------------------------------------------------------------------------------------ Actual $1,000 $1,083.30 $8.73 - ------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,016.55 $8.45 - ------------------------------------------------------------------------------------------------------ CLASS C - ------------------------------------------------------------------------------------------------------ Actual $1,000 $1,083.40 $8.73 - ------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,016.55 $8.45 - ------------------------------------------------------------------------------------------------------ CLASS R - ------------------------------------------------------------------------------------------------------ Actual $1,000 $1,085.70 $6.14 - ------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,019.05 $5.94 - ------------------------------------------------------------------------------------------------------ ADVISOR CLASS - ------------------------------------------------------------------------------------------------------ Actual $1,000 $1,088.70 $3.54 - ------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,021.54 $3.43 - ------------------------------------------------------------------------------------------------------ * Expenses are equal to the annualized expense ratio for each class (A: 0.93%; B: 1.68%; C: 1.68%; R: 1.18%; and Advisor: 0.68%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. Semiannual Report | 19 Franklin Income Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Income Fund seeks to maximize income while maintaining prospects for capital appreciation through a diversified portfolio of securities. - -------------------------------------------------------------------------------- PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- This semiannual report for Franklin Income Fund covers the period ended March 31, 2005. PERFORMANCE OVERVIEW Franklin Income Fund - Class A posted a +5.00% cumulative total return for the six months under review. The Fund underperformed its benchmark, the Standard & Poor's 500 (S&P 500) Composite Index, which returned 6.88%; outperformed the Lehman Brothers U.S. Aggregate Index, which returned 0.47%; and outperformed its peers as measured by the Lipper Income Funds Objective Average, which returned 3.91%, for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 26. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2005, domestic economic expansion showed staying power across most industries, sectors and regions. Gross domestic product (GDP) rose at an annualized 3.8% rate in fourth quarter 2004 and an estimated annualized 3.1% in first quarter 2005, benefiting from greater business investment, sizable inventory buildup and consumer spending. Although booming demand for imported goods and materials fueled the widening trade gap, U.S. dollar depreciation supported manufacturing activity and made U.S. exports more competitive in the global market. (1) Sources: Standard & Poor's Micropal; Lehman Brothers Inc.; Lipper Inc. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The LB U.S. Aggregate Index 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. For the six months ended 3/31/05, the Lipper Income Funds Objective Average consisted of 226 funds. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. Fund performance relative to the average may have differed if these or other factors had been considered. Indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 72. 20 | Semiannual Report The labor market firmed as employment increased and the unemployment rate dropped from 5.5% to 5.2% during the reporting period.(2) Hiring rebounded in many industries, bolstered by healthy business spending and solid business confidence. Soaring energy prices cooled consumer sentiment, but core retail sales held strong. The Federal Reserve Board (Fed) raised the federal funds target rate from 1.75% to 2.75% and said it will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. Inflation remained relatively contained for the 12 months ended March 31, 2005, as measured by the 2.3% rise for the core Consumer Price Index, which excludes volatile food and energy costs. Pricing pressures were somewhat eased by continued competition, globalization and offshoring, as companies held back in passing along higher commodity and energy costs to consumers. Despite a generally strong economy and improving corporate fundamentals, investors faced a stock market influenced partly by rising inflation, the fluctuating dollar and interest rate hikes during the period. Corporate profits rebounded and dividend payments surged to a record level, with U.S. companies paying out $181 billion in 2004.(3) The pace of initial public offerings (IPOs) remained strong through much of the reporting period, supporting investor confidence. The blue chip stocks of the Dow Jones Industrial Average gained 5.37% for the period under review, while the broader S&P 500 rose 6.88%, and the technology-heavy NASDAQ Composite Index increased 5.74%.(4) 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: Bureau of Labor Statistics. (3) Source: Standard & Poor's, "2004 Buybacks Soar to Record Levels, Says S&P," STANDARDANDPOORS.COM, 4/7/05. (4) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all domestic and international common stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes over 3,000 companies. Semiannual Report | 21 TOP 5 STOCK HOLDINGS Franklin Income Fund 3/31/05 - ------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - ------------------------------------------------- Merck & Co. Inc. 3.3% HEALTH TECHNOLOGY - ------------------------------------------------- Pfizer Inc. 2.4% HEALTH TECHNOLOGY - ------------------------------------------------- Ford Motor Co. Capital Trust II 2.1% CONSUMER DURABLES - ------------------------------------------------- Fannie Mae 1.7% FINANCE - ------------------------------------------------- FirstEnergy Corp. 1.6% ELECTRIC UTILITIES - ------------------------------------------------- TOP 5 BOND HOLDINGS Franklin Income Fund 3/31/05 - ------------------------------------------------ % OF TOTAL NET ASSETS - ------------------------------------------------ Calpine Corp. 2.6% - ------------------------------------------------ Charter Communications Holdings LLC 2.3% - ------------------------------------------------ General Motors Acceptance Corp. 2.2% - ------------------------------------------------ Tenet Healthcare Corp. 2.0% - ------------------------------------------------ Dynegy Holdings Inc. 1.9% - ------------------------------------------------ DIVIDEND DISTRIBUTIONS* Franklin Income Fund 10/1/04-3/31/05 - ----------------------------------------------------------------------------------------- DIVIDEND PER SHARE ------------------------------------------------------------------------------ MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS - ----------------------------------------------------------------------------------------- October 1.30 cents 1.14 cents 1.20 cents 1.20 cents 1.23 cents 1.33 cents - ----------------------------------------------------------------------------------------- November 1.30 cents 1.14 cents 1.20 cents 1.20 cents 1.23 cents 1.33 cents - ----------------------------------------------------------------------------------------- December 1.30 cents 1.12 cents 1.19 cents 1.19 cents 1.23 cents 1.33 cents - ----------------------------------------------------------------------------------------- January 1.30 cents 1.12 cents 1.19 cents 1.19 cents 1.23 cents 1.33 cents - ----------------------------------------------------------------------------------------- February 1.25 cents 1.07 cents 1.14 cents 1.14 cents 1.18 cents 1.28 cents - ----------------------------------------------------------------------------------------- March 1.25 cents 1.07 cents 1.15 cents 1.15 cents 1.17 cents 1.28 cents - ----------------------------------------------------------------------------------------- TOTAL 7.70 CENTS 6.66 CENTS 7.07 CENTS 7.07 CENTS 7.27 CENTS 7.88 CENTS - ----------------------------------------------------------------------------------------- * All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. ** On November 1, 2001, the Fund closed Class B to new investors and changed the name to Class B1; a new Class B became available to investors. MANAGER'S DISCUSSION During the past six months, the Fund continued to benefit from the utility sector's strong performance, which rose 18.27% as measured by the S&P 500 Utilities Index.(5) Nevertheless, in recent months utility companies felt the pressure of rising interest rates. Additionally, U.S. Treasury yields rose significantly over the reporting period, hurting typically higher-yielding utility stocks. However, high oil and natural gas prices created some favorable investment opportunities in those utilities involved in oil and gas exploration and production, and those with large coal and nuclear power generation assets. We sought to take advantage of relatively higher natural gas prices and general market conditions which enabled us to capture strong returns from portfolio holdings such as Dominion Resources and TXU, just two examples that benefited from the recent utilities commodity cycle. In addition, we continued to realize value from the nation's leading nuclear generation companies, Southern Company and Exelon, who were well positioned given market conditions and fuel prices during the six months under review. (5) Source: Standard & Poor's Micropal. The S&P 500 Utilities Index is a market capitalization-weighted index that includes utility stocks in the S&P 500. 22 | Semiannual Report At period-end, we continued to find value in Dominion Resources, which represented one of the Fund's larger investments in the utility sector and whose share price increased more than 16% in the six months ended March 31, 2005. With its strong ties to the commodity cycle, Dominion benefited the Fund with a strong dividend yield and solid growth potential. At the other end of the country, an improved regulatory situation and market stabilization following the California energy crisis of 2000-2001 unlocked value in three of our California utilities positions: PG&E, Edison International (sold by period-end) and Sempra Energy. PG&E recently reinstated its regular dividend, and its underlying stock price rose 13% this reporting period. Our investment in Edison International and Sempra Energy generated impressive returns of 21% and 11%, and Sempra recently raised its dividend by 16%. Our position in Exelon reflected our belief that nuclear power generators could continue to outperform their peers in an era characterized by high-priced fossil fuels and environmental legislation. In December 2004, the Fund also benefited from Exelon's bid to acquire Public Service Enterprise Group, greatly enhancing the combined entities' market position while achieving business synergies across their portfolio of valuable assets. Our major oil and gas company holdings within the energy minerals sector also enhanced the Fund's performance, as crude oil and domestic natural gas prices remained relatively high throughout the reporting period. The recent commodity pricing environment was attributable to robust demand fueled by global economic growth as well as renewed concerns regarding the potential for supply to meet that demand over the long term. Higher oil and gas prices over the period allowed related companies to increase earnings, cash flows and dividends per share. Significant Fund holdings that benefited from this environment included BP (+10% for the six months under review), Royal Dutch Petroleum (+19%) and ChevronTexaco (+10%). In addition, the Fund realized strong returns from one of the sector's investment trusts, Canadian Oil Sands Trust. Among our fixed income investments, we decreased the Fund's overall bond position from 39.4% of total net assets on September 30, 2004, to 37.7% at period-end. Concerns over the impact of rising overall interest rates as well as our view of fairly valued corporate credit markets led us to be more focused when selecting bond investments. Our objective has been to focus on investment opportunities we believe provide attractive current income and good long-term appreciation potential. To that end, our in-house research analysts seek to uncover investment opportunities in companies offering the potential to experience improving credit fundamentals, including improving liquidity and ultimately the potential to reduce debt going forward. Additionally, within our higher yielding, non-investment grade corporate bond investments we paid particular attention to the ultimate value of a company's given assets and the PORTFOLIO BREAKDOWN Franklin Income Fund Based on Total Net Assets as of 3/31/05 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Corporate Bonds 26.9% Utilities Stocks 18.8% Health Technology Stocks 9.2% Finance Stocks 8.1% Energy Minerals Stocks 3.9% Communications Stocks 3.8% U.S. Government & Agency Securities 3.4% Corporate Convertible Bonds 3.3% Zero Coupon & Step-Up Bonds 2.8% Consumer Durables Stocks 2.5% Consumer Non-Durables Stocks 2.0% Real Estate Investment Trust Stocks 1.8% Electronic Technology Stocks 1.4% Municipal Bonds 1.3% Other Stocks 3.1% Short-Term Investments & Other Net Assets 7.7% Semiannual Report | 23 level of our claim relative to that asset value. Although the Fund's overall bond stake declined, we actually increased our holdings in several companies including Calpine, Charter Communications, Tenet HealthCare and Allied Waste Industries, and initiated a new position in General Motors Acceptance Corporation. The Fund had some detractors to performance among its health technology sector investments, which struggled to keep pace with the overall market and over the short term failed to meet our expectations for attractive current income and capital appreciation. Two pharmaceutical companies in particular, Pfizer and Merck & Co., vastly underperformed the overall stock market due to widely reported health complications related to their prescription drug products. These companies faced near-term fundamental challenges including lower profit growth, generic competition, drug pricing pressures and rising biotechnology competition. However, following our strategy, we believe a compelling longer term case can be made given their attractive dividend yields, strong corporate balance sheets, and ongoing long-range focus on new product development. In addition, securities of General Motors (GM) and Ford struggled due to historically high oil prices and disappointing company earnings. Increased global competition and the rising cost of legacy benefits for former employees, along with the need to continually refresh product offerings, hurt financial performance for companies like GM and Ford. Longer term, we believe actions taken to improve product quality and competitiveness, along with continued focus on cost reduction, should benefit these companies and could lead to improved valuations for their underlying securities. 24 | Semiannual Report Thank you for your continued participation in Franklin Income Fund. We look forward to serving your future investment needs. [PHOTO OMMITTED] /s/ Edward Perks, Edward Perks, CFA [PHOTO OMMITTED] /s/ Charles B. Johnson Charles B. Johnson Portfolio Management Team Franklin Income Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Semiannual Report | 25 Performance Summary as of 3/31/05 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 does 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 reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION - ---------------------------------------------------------------------- CLASS A (SYMBOL: FKINX) CHANGE 3/31/05 9/30/04 - ---------------------------------------------------------------------- Net Asset Value (NAV) +$0.03 $2.45 $2.42 - ---------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - ---------------------------------------------------------------------- Dividend Income $0.0770 - ---------------------------------------------------------------------- CLASS B (SYMBOL: FBICX) CHANGE 3/31/05 9/30/04 - ---------------------------------------------------------------------- Net Asset Value (NAV) +$0.03 $2.44 $2.41 - ---------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - ---------------------------------------------------------------------- Dividend Income $0.0666 - ---------------------------------------------------------------------- CLASS B1 (SYMBOL: FICBX) CHANGE 3/31/05 9/30/04 - ---------------------------------------------------------------------- Net Asset Value (NAV) +$0.03 $2.45 $2.42 - ---------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - ---------------------------------------------------------------------- Dividend Income $0.0707 - ---------------------------------------------------------------------- CLASS C (SYMBOL: FCISX) CHANGE 3/31/05 9/30/04 - ---------------------------------------------------------------------- Net Asset Value (NAV) +$0.03 $2.46 $2.43 - ---------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - ---------------------------------------------------------------------- Dividend Income $0.0707 - ---------------------------------------------------------------------- CLASS R (SYMBOL: FISRX) CHANGE 3/31/05 9/30/04 - ---------------------------------------------------------------------- Net Asset Value (NAV) +$0.03 $2.43 $2.40 - ---------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - ---------------------------------------------------------------------- Dividend Income $0.0727 - ---------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 3/31/05 9/30/04 - ---------------------------------------------------------------------- Net Asset Value (NAV) +$0.03 $2.44 $2.41 - ---------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - ---------------------------------------------------------------------- Dividend Income $0.0788 - ---------------------------------------------------------------------- 26 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS B1: CDSC DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. - ----------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------- Cumulative Total Return(1) +5.00% +8.97% +72.90% +162.39% - ----------------------------------------------------------------------------------------- Average Annual Total Return(2) +0.44% +4.21% +10.65% +9.67% - ----------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,044 $10,421 $16,586 $25,180 - ----------------------------------------------------------------------------------------- Distribution Rate(4) 5.86% - ----------------------------------------------------------------------------------------- 30-Day Standardized Yield(5) 4.78% - ----------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 3-YEAR INCEPTION(11/1/01) - ----------------------------------------------------------------------------------------- Cumulative Total Return(1) +4.58% +8.09% +34.13% +43.14% - ----------------------------------------------------------------------------------------- Average Annual Total Return(2) +0.58% +4.09% +9.45% +10.40% - ----------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,058 $10,409 $13,113 $14,014 - ----------------------------------------------------------------------------------------- Distribution Rate(4) 5.26% - ----------------------------------------------------------------------------------------- 30-Day Standardized Yield(5) 4.14% - ----------------------------------------------------------------------------------------- CLASS B1 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - ----------------------------------------------------------------------------------------- Cumulative Total Return(1) +4.73% +8.42% +68.64% +67.63% - ----------------------------------------------------------------------------------------- Average Annual Total Return(2) +0.73% +4.42% +10.75% +8.62% - ----------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,073 $10,442 $16,664 $16,763 - ----------------------------------------------------------------------------------------- Distribution Rate(4) 5.63% - ----------------------------------------------------------------------------------------- 30-Day Standardized Yield(5) 4.49% - ----------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/95) - ----------------------------------------------------------------------------------------- Cumulative Total Return(1) +4.71% +8.38% +68.26% +142.77% - ----------------------------------------------------------------------------------------- Average Annual Total Return(2) +3.71% +7.38% +10.97% +9.35% - ----------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,371 $10,738 $16,826 $24,277 - ----------------------------------------------------------------------------------------- Distribution Rate(4) 5.61% - ----------------------------------------------------------------------------------------- 30-Day Standardized Yield(5) 4.50% - ----------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION(1/1/02) - ----------------------------------------------------------------------------------------- Cumulative Total Return(1) +4.86% +8.66% +35.73% +41.03% - ----------------------------------------------------------------------------------------- Average Annual Total Return(2) +3.86% +7.66% +10.72% +11.19% - ----------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,386 $10,766 $13,573 $14,103 - ----------------------------------------------------------------------------------------- Distribution Rate(4) 5.78% - ----------------------------------------------------------------------------------------- 30-Day Standardized Yield(5) 4.65% - ----------------------------------------------------------------------------------------- ADVISOR CLASS(6) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------- Cumulative Total Return(1) +5.10% +9.17% +73.79% +167.41% - ----------------------------------------------------------------------------------------- Average Annual Total Return(2) +5.10% +9.17% +11.69% +10.34% - ----------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,510 $10,917 $17,379 $26,741 - ----------------------------------------------------------------------------------------- Distribution Rate(4) 6.30% - ----------------------------------------------------------------------------------------- 30-Day Standardized Yield(5) 5.16% - ----------------------------------------------------------------------------------------- PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Semiannual Report | 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. THE FUND'S SHARE PRICE AND YIELD MAY BE AFFECTED BY INTEREST RATE MOVEMENTS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE OPPOSITE DIRECTION FROM INTEREST RATES. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS B1 (formerly Class B): These shares have higher annual fees and expenses than Class A shares. Effective 11/1/01, closed to new investors. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1) Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. (2) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. (3) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. (4) Distribution rate is based on an annualization of the respective class's March dividend and the maximum offering price (NAV for Classes B, B1, C, R and Advisor) per share on 3/31/05. (5) Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/05. (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 +107.82% and +9.28%. 28 | Semiannual Report Your Fund's Expenses FRANKLIN INCOME FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600/$1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 29 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses. - ------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 9/30/04 VALUE 3/31/05 PERIOD* 9/30/04-3/31/05 - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,050.00 $3.32 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.69 $3.28 - ------------------------------------------------------------------------------------------------------- CLASS B - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,045.80 $7.65 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,017.45 $7.54 - ------------------------------------------------------------------------------------------------------- CLASS B1 - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,047.30 $5.87 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.20 $5.79 - ------------------------------------------------------------------------------------------------------- CLASS C - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,047.10 $5.87 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.20 $5.79 - ------------------------------------------------------------------------------------------------------- CLASS R - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,048.60 $5.11 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.95 $5.04 - ------------------------------------------------------------------------------------------------------- ADVISOR CLASS - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,051.00 $2.56 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.44 $2.52 - ------------------------------------------------------------------------------------------------------- * Expenses are equal to the annualized expense for each class (A: 0.65%; B: 1.50%; B1: 1.15%; C: 1.15%; R: 1.00%; and Advisor: 0.50%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. 30 | Semiannual Report Franklin U.S. Government Securities Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Government Securities Fund seeks high, current income from a portfolio of U.S. government securities. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PORTFOLIO BREAKDOWN Franklin U.S. Government Securities Fund Based on Total Net Assets as of 3/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] GNMA ...................... 97.7% Short-Term Investments & Other Net Assets .......... 2.3% - -------------------------------------------------------------------------------- We are pleased to bring you Franklin U.S. Government Securities Fund's semiannual report for the period ended March 31, 2005. PERFORMANCE OVERVIEW Franklin U.S. Government Securities Fund - Class A posted a +1.01% cumulative total return for the six months under review. The Fund outperformed the Lehman Brothers Intermediate U.S. Government Bond Index, which returned (1) U.S. government securities owned by the Fund, but not shares of the Fund, are guaranteed by the U.S. government, its agency or instrumentalities, as to timely payment of principal and interest. The Fund's yield and share price are not guaranteed and will vary with market conditions. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 87. Semiannual Report | 31 FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS A VS. COMPARABLE INVESTMENTS* Risk vs. Return (4/00-3/05) [THE FOLLOWING TABLE WAS REPRESENTED BY A PLOT CHART IN THE PRINTED MATERIAL.] Risk Return ------------------------- Franklin US Government Securities Fund - Class A 2.73% 6.06% Payden & Rygel 1-Year Treasury Bill 1.03% 3.36% Payden & Rygel 10-Year Treasury Note 8.14% 7.11% Payden & Rygel 30-Year Treasury Bond 12.45% 8.70% THE CHART DOES NOT INCLUDE THE FUND'S CURRENT, MAXIMUM 4.25% INITIAL SALES CHARGE. IF SALES CHARGES WERE INCLUDED, THE RETURNS WOULD HAVE BEEN LOWER. * Source: Standard & Poor's Micropal (Payden & Rygel). Indexes are unmanaged. Investors cannot invest directly in an index. Average annual total return represents the average annual change in value of an investment over the period indicated. These figures assume reinvestment of distributions and do not include sales charges. Risk is measured by the annualized standard deviation of monthly total returns. In general, the higher the standard deviation, the greater the volatility. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; interest payments and principal are guaranteed. The Fund's investment return and share price will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. The figures do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares. Past performance does not guarantee future results. - -0.46%.(2) In comparison, the Lipper GNMA Funds Objective Average returned 0.70% for the same period.(2) The Fund's return reflects the effect of management fees and expenses, while the index does not have such costs. You can find the Fund's long-term performance data in the Performance Summary beginning on page 36. (2) Sources: Lehman Brothers Inc.; 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. The Lipper GNMA Funds Objective Average is calculated by averaging the total return for all funds within the Lipper GNMA Funds classification in the Lipper Open-End underlying funds universe for the period indicated. Lipper GNMA Funds are defined as funds that invest primarily in Government National Mortgage Association securities. For the 6-month period ended 3/31/05, there were 64 funds in this category. Lipper calculations do not include sales charges. The Fund's performance relative to the average may have differed if these or other factors had been considered. Past performance does not guarantee future results. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 32 | Semiannual Report ECONOMIC AND MARKET OVERVIEW Overall domestic economic growth remained healthy during the reporting period. Approximately two-thirds of U.S. gross domestic product (GDP) is generated by consumer spending, and almost one-fifth by business spending. Since consumer spending relies on consumers' ability to remain gainfully employed, many analysts study the employment picture for indications of consumer spending. Over the past six months, nonfarm payroll data, as well as other indexes, showed growing employment. This along with other factors helped consumer spending increase 6.1% (not adjusted for inflation) in March 2005 compared with the same month a year earlier, which supported U.S. economic growth.(3) Business spending also rose during the reporting period, contributing to economic growth. For example, nonresidential investment spending increased 14.5% in the fourth quarter of 2004, although it slowed to 4.7% in the first quarter of 2005.(4) Historically low interest rates continued to allow many companies easy access to capital, and ample cash helped some companies to boost their balance sheets. Many corporate debt investments also benefited from this improvement early in the period. Productivity continued to grow, which helped businesses generate more goods and services without substantially raising inflation. Energy prices rose significantly, as oil prices neared $57 a barrel.(5) The Federal Reserve Board (Fed) raised the federal funds target rate to 2.75% from 1.75% during the reporting period. Inflation remained relatively contained, as measured by the 2.3% rise for the core Consumer Price Index (CPI), which excludes food and energy costs, for the 12 months ended March 31, 2005. Although higher than in the past two calendar years, this matched the core CPI's 10-year average of 2.3%.(3) The Fed funds futures contracts priced in the potential for further rate increases. During the period, the yield curve flattened somewhat, as the 10-year U.S. Treasury yield also increased, but not as much as the shorter end of the curve. At period-end, the 10-year Treasury yielded 4.50%. (3) Source: Bureau of Labor Statistics. (4) Source: Bureau of Economic Analysis. (5) Source: Bloomberg Energy/Commodity Service. Semiannual Report | 33 YIELD COMPARISON 3/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY BAR CHART IN THE PRINTED MATERIAL.] Franklin U.S. Government Securities Fund - Class A* 4.25% 10-Year Treasury Note* 4.50% Lipper GNMA Funds Average* 3.32% Money Market Funds Average* 1.87% * Sources: Standard & Poor's Micropal; Lipper Inc. Franklin U.S. Government Securities Fund - Class A shares' yield, calculated as required by SEC, is based on earnings of the Fund's portfolio for the 30 days ended 3/31/05. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; interest payments and principal are guaranteed. Money funds attempt to maintain a stable net asset value of $1.00 per share, while shares of Franklin U.S. Government Securities Fund will fluctuate with market conditions. The Lipper GNMA Funds Average is an average of the monthly SEC yields of 64 funds in the Lipper GNMA Funds classification for the 30 days ended 3/31/05. The Lipper Money Market Funds Average is an average of the monthly SEC yields of 391 funds in the Lipper Money Market Funds classification for the 30 days ended 3/31/05. Lipper averages do not include sales charges. DIVIDEND DISTRIBUTIONS* Franklin U.S. Government Securities Fund 10/1/04-3/31/05 - -------------------------------------------------------------------------------- DIVIDEND PER SHARE --------------------------------------------------------------------- MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS - -------------------------------------------------------------------------------- October 2.78 cents 2.50 cents 2.49 cents 2.58 cents 2.85 cents - -------------------------------------------------------------------------------- November 2.78 cents 2.50 cents 2.49 cents 2.58 cents 2.85 cents - -------------------------------------------------------------------------------- December 2.78 cents 2.48 cents 2.48 cents 2.56 cents 2.85 cents - -------------------------------------------------------------------------------- January 2.78 cents 2.48 cents 2.48 cents 2.56 cents 2.85 cents - -------------------------------------------------------------------------------- February 2.78 cents 2.48 cents 2.48 cents 2.56 cents 2.85 cents - -------------------------------------------------------------------------------- March 2.78 cents 2.49 cents 2.49 cents 2.58 cents 2.84 cents - -------------------------------------------------------------------------------- TOTAL 16.68 CENTS 14.93 CENTS 14.91 CENTS 15.42 CENTS 17.09 CENTS - -------------------------------------------------------------------------------- * All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. INVESTMENT STRATEGY We seek to invest predominantly in GNMA (Ginnie Mae) obligations. We analyze securities using proprietary models to help us identify attractive investment opportunities. The Fund's short-term investments include short-term government securities and cash or cash equivalents. MANAGER'S DISCUSSION Our research shows that over the past 5-, 10- and 15-year time periods, GNMAs have offered attractive risk-adjusted returns when compared with a variety of asset classes including U.S. Treasuries, Agency debentures, investment grade and high yield corporate bonds, and large- and small-capitalization stocks. These time periods include various credit, prepayment, economic and interest rate cycles. In the GNMA sector, we continued to uncover areas of the market where our research found relative value opportunities across the coupon spectrum. Despite the increase in intermediate-term interest rates during the reporting period, our holdings provided positive total returns for the Fund. When constructing our portfolios, we managed our allocations relative to our benchmark. As the yield curve flattened, we preferred 30-year GNMAs over 15-year GNMAs. Within the 30-year sector we invested in lower-coupon securities instead of higher-coupon securities. We also invested in more securities associated with the GNMA II program than the GNMA I program, and tended to focus more on specified pool purchasing rather than the To Be Announced (TBA) marketplace.(6) (6) A TBA security consists of generic mortgage pools to be determined at the settlement date. 34 | Semiannual Report Thank you for your continued participation in Franklin U.S. Government Securities Fund. We welcome your comments and questions and look forward to serving your investment needs in the years to come. [PHOTO OMITTED] /s/ Jack Lemein Jack Lemein [PHOTO OMITTED] /s/ Roger A. Bayston Roger A. Bayston, CFA Portfolio Management Team Franklin U.S. Government Securities Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Semiannual Report | 35 Performance Summary as of 3/31/05 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 does 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 reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION - -------------------------------------------------------------------------------- CLASS A (SYMBOL: FKUSX) CHANGE 3/31/05 9/30/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.10 $6.58 $6.68 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - -------------------------------------------------------------------------------- Dividend Income $0.1668 - -------------------------------------------------------------------------------- CLASS B (SYMBOL: FUGBX) CHANGE 3/31/05 9/30/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.10 $6.57 $6.67 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - -------------------------------------------------------------------------------- Dividend Income $0.1493 - -------------------------------------------------------------------------------- CLASS C (SYMBOL: FRUGX) CHANGE 3/31/05 9/30/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.10 $6.55 $6.65 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - -------------------------------------------------------------------------------- Dividend Income $0.1491 - -------------------------------------------------------------------------------- CLASS R (SYMBOL: FUSRX) CHANGE 3/31/05 9/30/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.11 $6.57 $6.68 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - -------------------------------------------------------------------------------- Dividend Income $0.1542 - -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 3/31/05 9/30/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.10 $6.59 $6.69 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - -------------------------------------------------------------------------------- Dividend Income $0.1709 - -------------------------------------------------------------------------------- 36 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. - --------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------- Cumulative Total Return(1) +1.01% +2.33% +34.22% +86.84% - --------------------------------------------------------------------------------------- Average Annual Total Return(2) -3.34% -2.02% +5.15% +5.99% - --------------------------------------------------------------------------------------- Distribution Rate(3) 4.86% - --------------------------------------------------------------------------------------- 30-Day Standardized Yield(4) 4.25% - --------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - --------------------------------------------------------------------------------------- Cumulative Total Return(1) +0.74% +1.79% +30.80% +33.23% - --------------------------------------------------------------------------------------- Average Annual Total Return(2) -3.20% -2.10% +5.19% +4.70% - --------------------------------------------------------------------------------------- Distribution Rate(3) 4.55% - --------------------------------------------------------------------------------------- 30-Day Standardized Yield(4) 3.92% - --------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/95) - --------------------------------------------------------------------------------------- Cumulative Total Return(1) +0.74% +1.79% +30.65% +74.28% - --------------------------------------------------------------------------------------- Average Annual Total Return(2) -0.24% +0.81% +5.49% +5.76% - --------------------------------------------------------------------------------------- Distribution Rate(3) 4.56% - --------------------------------------------------------------------------------------- 30-Day Standardized Yield(4) 3.92% - --------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02) - --------------------------------------------------------------------------------------- Cumulative Total Return(1) +0.66% +1.80% +12.50% +13.61% - --------------------------------------------------------------------------------------- Average Annual Total Return(2) -0.32% +0.83% +4.01% +4.02% - --------------------------------------------------------------------------------------- Distribution Rate(3) 4.71% - --------------------------------------------------------------------------------------- 30-Day Standardized Yield(4) 4.09% - --------------------------------------------------------------------------------------- ADVISOR CLASS(5) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------- Cumulative Total Return(1) +1.07% +2.45% +35.15% +89.28% - --------------------------------------------------------------------------------------- Average Annual Total Return(2) +1.07% +2.45% +6.21% +6.59% - --------------------------------------------------------------------------------------- Distribution Rate(3) 5.17% - --------------------------------------------------------------------------------------- 30-Day Standardized Yield(4) 4.57% - --------------------------------------------------------------------------------------- PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Semiannual Report | 37 Performance Summary (CONTINUED) ENDNOTES THE FUND'S SHARE PRICE AND YIELD MAY BE AFFECTED BY INTEREST RATE MOVEMENTS AND MORTGAGE PREPAYMENTS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION FROM INTEREST RATES. SECURITIES OWNED BY THE FUND, BUT NOT SHARES OF THE FUND, ARE GUARANTEED BY THE U.S. GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES, AS TO TIMELY PAYMENT OF PRINCIPAL AND INTEREST. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1) Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. (2) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. (3) Distribution rate is based on an annualization of the respective class's March dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 3/31/05. (4) Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/05. (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 +62.83% and +6.09%. 38 | Semiannual Report Your Fund's Expenses FRANKLIN U.S. GOVERNMENT SECURITIES FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 39 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses. - ------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 9/30/04 VALUE 3/31/05 PERIOD* 9/30/04-3/31/05 - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,010.10 $3.61 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.34 $3.63 - ------------------------------------------------------------------------------------------------------- CLASS B - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,007.40 $6.21 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.75 $6.24 - ------------------------------------------------------------------------------------------------------- CLASS C - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,007.40 $6.21 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.75 $6.24 - ------------------------------------------------------------------------------------------------------- CLASS R - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,006.60 $5.45 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.50 $5.49 - ------------------------------------------------------------------------------------------------------- ADVISOR CLASS - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,010.70 $2.96 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.99 $2.97 - ------------------------------------------------------------------------------------------------------- * Expenses are equal to the annualized expense ratio for each class (A: 0.72%; B: 1.24%; C: 1.24%; R: 1.09%; and Advisor: 0.59%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. 40 | Semiannual Report Franklin Utilities Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Utilities Fund seeks both capital appreciation and current income from a portfolio of public utility industry securities. - -------------------------------------------------------------------------------- PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- We are pleased to bring you Franklin Utilities Fund's semiannual report for the period ended March 31, 2005. PERFORMANCE OVERVIEW For the six months under review, Franklin Utilities Fund - Class A posted a +12.79% cumulative total return. The Fund outperformed its benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which returned 6.88% for the same period.(1) Given that the Fund invests in only a few sectors within the S&P 500, the Fund's results are not directly comparable to the index's. You can find the Fund's long-term performance data in the Performance Summary beginning on page 45. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2005, domestic economic expansion showed staying power across most industries, sectors and regions. Gross domestic product (GDP) rose at an annualized 3.8% rate in fourth quarter 2004 and an estimated annualized 3.1% in first quarter 2005, benefiting from greater business investment, sizable inventory buildup and consumer spending. Although booming demand for imported goods and materials fueled the widening trade gap, U.S. dollar depreciation supported manufacturing activity and made U.S. exports more competitive in the global market. The labor market firmed as employment increased and the unemployment rate dropped from 5.5% to 5.2% during the reporting period.(2) Hiring rebounded in many industries, bolstered by healthy business spending and solid business confidence. Soaring energy prices cooled consumer sentiment, but core retail sales held strong. (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 for U.S. equity performance. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (2) Source: Bureau of Labor Statistics. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 94. Semiannual Report | 41 - -------------------------------------------------------------------------------- PORTFOLIO BREAKDOWN Franklin Utilities Fund Based on Total Net Assets as of 3/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Electric Utilities .................................. 73.0% Multi-Utilities & Unregulated Power ................. 11.7% Gas Utilities ....................................... 11.2% Integrated Telecommunication Services ............... 2.6% Oil & Gas Refining Marketing & Transportation ....... 1.0% Short-Term Investments & Other Net Assets ........... 0.5% - -------------------------------------------------------------------------------- The Federal Reserve Board (Fed) raised the federal funds target rate from 1.75% to 2.75% and said it will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. Inflation remained relatively contained for the 12 months ended March 31, 2005, as measured by the 2.3% rise for the core Consumer Price Index, which excludes volatile food and energy costs. Pricing pressures were somewhat eased by continued competition, globalization and offshoring, as companies held back in passing along higher commodity and energy costs to consumers. Despite a generally strong economy and improving corporate fundamentals, investors faced a stock market influenced partly by rising inflation, the fluctuating dollar and interest rate hikes during the period. Corporate profits rebounded and dividend payments surged to a record level, with U.S. companies paying out $181 billion in 2004.(3) The pace of initial public offerings (IPOs) remained strong through much of the reporting period, supporting investor confidence. The blue chip stocks of the Dow Jones Industrial Average gained 5.37% for the period under review, while the broader S&P 500 rose 6.88%, and the technology-heavy NASDAQ Composite Index increased 5.74%.(4) 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 During the past six months, the Fund outperformed the general market, as measured by the S&P 500. Positive industry fundamentals including strong balance sheets and continued cash flow generation contributed to the outperformance. Rising oil and natural gas prices created some favorable investment opportunities in those utilities involved in oil and gas exploration and production, (3) Source: Standard & Poor's, "2004 Buybacks Soar to Record Levels, Says S&P," STANDARDANDPOORS.COM, 4/7/05. (4) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all domestic and international common stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes over 3,000 companies. 42 | Semiannual Report and those with large coal and nuclear power generation assets. Some Fund investments realized higher returns in their energy supply businesses due to high natural gas prices. TXU, for example, captured higher operating margins from the peaking natural gas commodity cycle during the reporting period. In addition, we continued to realize value from the nation's leading nuclear generation companies, Entergy, Southern Company and Exelon, which were relatively well-positioned given recent market conditions and fuel prices. We continued to see value in Dominion Resources, the Fund's largest holding at period-end. As an integrated utility with a direct exposure to the commodity cycle, Dominion contributed to Fund performance with a strong dividend yield and solid growth potential. At the other end of the country, an improved regulatory situation and market stabilization following the California energy crisis of 2000-2001 unlocked value in three of our California utility holdings: PG&E, Edison International and Sempra Energy. PG&E recently reinstated its regular dividend and performed well in the past six months. Edison International and Sempra Energy generated impressive returns of 20% and 11%, and both companies recently raised their dividends by 25% and 16% respectively. Our large holdings in Exelon and Entergy reflected our belief that nuclear power generators will continue to outperform their peers in an era characterized by high-priced fossil fuels and environmental legislation. In December 2004, the Fund also benefited from Exelon's bid to acquire Public Service Enterprise Group, greatly enhancing the combined entities' market position while achieving business synergies across their portfolio of valuable assets. Furthermore, the Fund continued to realize sound returns from our international holdings. United Utilities and Scottish & Southern Energy delivered strong price appreciation and solid dividend yields. These holdings, along with our other U.K.-based investments, benefited from currency exchange rates between the British pound and the U.S. dollar. In general, the Fund's holdings recorded positive performance during the period under review. However, Nicor and Puget Energy posted lackluster returns in recent months. Nicor, an Illinois-based gas distributor, faced a regulatory investigation regarding allegations of revenue-sharing fraud, as well as turnover at the senior management level. Shares of Puget Energy, a Washington-based utility, struggled due to regulatory uncertainty and lower than expected earnings forecasts. Based upon our long-term investment strategy, we continued to hold positions in these companies, as we believe that their future prospects remained positive. TOP 10 EQUITY HOLDINGS Franklin Utilities Fund 3/31/05 - -------------------------------------------------------------------------------- % OF TOTAL COMPANY NET ASSETS - -------------------------------------------------------------------------------- Dominion Resources Inc. 4.8% - -------------------------------------------------------------------------------- Entergy Corp. 4.7% - -------------------------------------------------------------------------------- Exelon Corp. 4.7% - -------------------------------------------------------------------------------- FPL Group Inc. 4.0% - -------------------------------------------------------------------------------- FirstEnergy Corp. 3.4% - -------------------------------------------------------------------------------- PPL Corp. 3.3% - -------------------------------------------------------------------------------- Southern Co. 3.3% - -------------------------------------------------------------------------------- United Utilities PLC, ord. & A (U.K.) 3.1% - -------------------------------------------------------------------------------- Cinergy Corp. 3.1% - -------------------------------------------------------------------------------- American Electric Power Co. Inc., ord. & 9.25% cvt. pfd. 3.0% - -------------------------------------------------------------------------------- Semiannual Report | 43 Thank you for your continued participation in Franklin Utilities Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ John C. Kohli John C. Kohli, CFA Portfolio Manager Franklin Utilities Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON SUCH FACTORS AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 44 | Semiannual Report Performance Summary as of 3/31/05 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 does 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 reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION - -------------------------------------------------------------------------------- CLASS A (SYMBOL: FKUTX) CHANGE 3/31/05 9/30/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.05 $11.21 $10.16 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - -------------------------------------------------------------------------------- Dividend Income $0.2422 - -------------------------------------------------------------------------------- CLASS B (SYMBOL: FRUBX) CHANGE 3/31/05 9/30/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.06 $11.21 $10.15 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - -------------------------------------------------------------------------------- Dividend Income $0.2109 - -------------------------------------------------------------------------------- CLASS C (SYMBOL: FRUSX) CHANGE 3/31/05 9/30/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.06 $11.19 $10.13 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - -------------------------------------------------------------------------------- Dividend Income $0.2106 - -------------------------------------------------------------------------------- CLASS R (SYMBOL: FRURX) CHANGE 3/31/05 9/30/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.05 $11.20 $10.15 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - -------------------------------------------------------------------------------- Dividend Income $0.2231 - -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 3/31/05 9/30/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.05 $11.25 $10.20 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-3/31/05) - -------------------------------------------------------------------------------- Dividend Income $0.2538 - -------------------------------------------------------------------------------- Semiannual Report | 45 Performance Summary (CONTINUED) PERFORMANCE CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. - ---------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------------------------------------------------------------------------------------- Cumulative Total Return(1) +12.79% +19.49% +72.46% +154.97% - ---------------------------------------------------------------------------------------- Average Annual Total Return(2) +8.01% +14.46% +10.55% +9.33% - ---------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,801 $11,446 $16,515 $24,404 - ---------------------------------------------------------------------------------------- Distribution Rate(4) 3.45% - ---------------------------------------------------------------------------------------- 30-Day Standardized Yield(5) 3.30% - ---------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - ---------------------------------------------------------------------------------------- Cumulative Total Return(1) +12.58% +18.86% +68.06% +44.05% - ---------------------------------------------------------------------------------------- Average Annual Total Return(2) +8.58% +14.86% +10.68% +6.02% - ---------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,858 $11,486 $16,606 $14,405 - ---------------------------------------------------------------------------------------- Distribution Rate(4) 3.41% - ---------------------------------------------------------------------------------------- 30-Day Standardized Yield(5) 2.94% - ---------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/95) - ---------------------------------------------------------------------------------------- Cumulative Total Return(1) +12.60% +18.89% +68.18% +138.41% - ---------------------------------------------------------------------------------------- Average Annual Total Return(2) +11.60% +17.89% +10.96% +9.15% - ---------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $11,160 $11,789 $16,818 $23,841 - ---------------------------------------------------------------------------------------- Distribution Rate(4) 3.41% - ---------------------------------------------------------------------------------------- 30-Day Standardized Yield(5) 2.94% - ---------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02) - ---------------------------------------------------------------------------------------- Cumulative Total Return(1) +12.61% +19.10% +27.76% +31.63% - ---------------------------------------------------------------------------------------- Average Annual Total Return(2) +11.61% +18.10% +8.51% +8.85% - ---------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $11,161 $11,810 $12,776 $13,163 - ---------------------------------------------------------------------------------------- Distribution Rate(4) 3.47% - ---------------------------------------------------------------------------------------- 30-Day Standardized Yield(5) 3.09% - ---------------------------------------------------------------------------------------- ADVISOR CLASS(6) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------------------------------------------------------------------------------------- Cumulative Total Return(1) +12.86% +19.62% +73.59% +160.78% - ---------------------------------------------------------------------------------------- Average Annual Total Return(2) +12.86% +19.62% +11.66% +10.06% - ---------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $11,286 $11,962 $17,359 $26,078 - ---------------------------------------------------------------------------------------- Distribution Rate(4) 3.73% - ---------------------------------------------------------------------------------------- 30-Day Standardized Yield(5) 3.59% - ---------------------------------------------------------------------------------------- PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 46 | Semiannual Report Performance Summary (CONTINUED) ENDNOTES IN ADDITION TO OTHER FACTORS, 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 B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1) Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. (2) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. (3) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. (4) Distribution rate is based on an annualization of the respective class's current quarterly dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 3/31/05. (5) Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/05. (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 +103.92% and +9.02%. Semiannual Report | 47 Your Fund's Expenses FRANKLIN UTILITIES FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 48 | Semiannual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses. - ------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 9/30/04 VALUE 3/31/05 PERIOD* 9/30/04-3/31/05 - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,127.90 $4.14 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.04 $3.93 - ------------------------------------------------------------------------------------------------------- CLASS B - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,125.80 $6.78 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.55 $6.44 - ------------------------------------------------------------------------------------------------------- CLASS C - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,126.00 $6.78 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.55 $6.44 - ------------------------------------------------------------------------------------------------------- CLASS R - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,126.10 $5.99 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.30 $5.69 - ------------------------------------------------------------------------------------------------------- ADVISOR CLASS - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,128.60 $3.34 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.79 $3.18 - ------------------------------------------------------------------------------------------------------- * Expenses are equal to the annualized expense ratio for each class (A: 0.78%; B: 1.28%; C: 1.28%; R: 1.13%; and Advisor: 0.63%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. Semiannual Report | 49 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN DYNATECH FUND --------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2004 2003 2002 2001 2000 --------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 22.01 $ 20.17 $ 15.37 $ 18.76 $ 28.60 $ 23.11 --------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ............. 0.04 (0.09) (0.06) 0.03 0.44 0.56 Net realized and unrealized gains (losses) .. 0.67 1.93 4.86 (3.11) (9.70) 5.30 --------------------------------------------------------------------------- Total from investment operations ............... 0.71 1.84 4.80 (3.08) (9.26) 5.86 --------------------------------------------------------------------------- Less distributions from: Net investment income ....................... -- -- -- (0.29) (0.58) (0.37) Tax return of capital ....................... -- -- -- (0.02) -- -- --------------------------------------------------------------------------- Total distributions ............................ -- -- -- (0.31) (0.58) (0.37) --------------------------------------------------------------------------- Redemption fees ................................ --(c) --(c) -- -- -- -- --------------------------------------------------------------------------- Net asset value, end of period ................. $ 22.72 $ 22.01 $ 20.17 $ 15.37 $ 18.76 $ 28.60 =========================================================================== Total return(b) ................................ 3.23% 9.12% 31.23% (16.83)% (32.86)% 25.57% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $600,802 $640,120 $558,687 $413,309 $530,074 $809,140 Ratios to average net assets: Expenses .................................... 0.97%(d) 0.97% 1.04% 1.00% 0.95% 0.94% Net investment income (loss) ................ 0.33%(d) (0.41)% (0.40)% 0.13% 1.93% 1.98% Portfolio turnover rate ........................ 11.40% 14.93% 13.68% 8.11% 4.07% 5.45% (a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 50 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND (CONTINUED) -------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2004 2003 2002 2001 2000(e) -------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 21.43 $ 19.79 $ 15.20 $ 18.57 $ 28.45 $28.05 -------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ............. (0.05) (0.25) (0.25) (0.12) 0.25 0.28 Net realized and unrealized gains (losses) .. 0.66 1.89 4.84 (3.08) (9.62) 0.12 -------------------------------------------------------------------------- Total from investment operations ............... 0.61 1.64 4.59 (3.20) (9.37) 0.40 -------------------------------------------------------------------------- Less distributions from: Net investment income ....................... -- -- -- (0.16) (0.51) -- Tax return of capital ....................... -- -- -- (0.01) -- -- -------------------------------------------------------------------------- Total distributions ............................ -- -- -- (0.17) (0.51) -- -------------------------------------------------------------------------- Redemption fees ................................ --(c) --(c) -- -- -- -- -------------------------------------------------------------------------- Net asset value, end of period ................. $ 22.04 $ 21.43 $ 19.79 $ 15.20 $ 18.57 $28.45 ========================================================================== Total return(b) ................................ 2.85% 8.29% 30.20% (17.51)% (33.37)% 1.43% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $18,822 $18,824 $10,406 $ 5,066 $ 5,473 $4,749 Ratios to average net assets: Expenses .................................... 1.71%(d) 1.72% 1.79% 1.75% 1.70% 1.73%(d) Net investment income (loss) ................ (0.41)%(d) (1.16)% (1.15)% (.62)% 1.13% 1.43%(d) Portfolio turnover rate ........................ 11.40% 14.93% 13.68% 8.11% 4.07% 5.45% (a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the period February 1, 2000 (effective date) to September 30, 2000. Semiannual Report | See notes to financial statements. | 51 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND (CONTINUED) ------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2004 2003 2002 2001 2000 ------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 21.21 $ 19.59 $ 15.04 $ 18.34 $ 27.95 $ 22.64 ------------------------------------------------------------------------ Income from investment operations: Net investment income (loss)(a) ............. (0.05) (0.25) (0.25) (0.11) 0.27 0.34 Net realized and unrealized gains (losses) .. 0.65 1.87 4.80 (3.05) (9.50) 5.21 ------------------------------------------------------------------------ Total from investment operations ............... 0.60 1.62 4.55 (3.16) (9.23) 5.55 ------------------------------------------------------------------------ Less distributions from: Net investment income ....................... -- -- -- (0.13) (0.38) (0.24) Tax return of capital ....................... -- -- -- (0.01) -- -- ------------------------------------------------------------------------ Total distributions ............................ -- -- -- (0.14) (0.38) (0.24) ------------------------------------------------------------------------ Redemption fees ................................ --(c) --(c) -- -- -- -- ------------------------------------------------------------------------ Net asset value, end of period ................. $ 21.81 $ 21.21 $ 19.59 $ 15.04 $ 18.34 $ 27.95 ======================================================================== Total return(b) ................................ 2.83% 8.27% 30.25% (17.48)% (33.36)% 24.65% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $72,352 $75,642 $66,952 $51,809 $77,204 $126,313 Ratios to average net assets: Expenses .................................... 1.72%(d) 1.72% 1.79% 1.74% 1.70% 1.69% Net investment income (loss) ................... (0.42)%(d) (1.16)% (1.15)% (0.61)% 1.19% 1.23% Portfolio turnover rate ........................ 11.40% 14.93% 13.68% 8.11% 4.07% 5.45% (a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 52 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) - --------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - --------------------------------------------------------------------------------------------- COMMON STOCKS 99.6% AEROSPACE & DEFENSE 0.5% Rockwell Collins Inc. ........................... United States 75,000 $ 3,569,250 ----------- AIR FREIGHT/COURIERS 2.7% C.H. Robinson Worldwide Inc. .................... United States 150,000 7,729,500 Expeditors International of Washington Inc. ..... United States 20,000 1,071,000 United Parcel Service Inc., B ................... United States 140,000 10,183,600 ----------- 18,984,100 ----------- BIOTECHNOLOGY 9.0% (a) Amgen Inc. ...................................... United States 300,000 17,463,000 (a) Biogen Idec Inc. ................................ United States 100,000 3,451,000 (a) Charles River Laboratories International Inc. ... United States 100,000 4,704,000 (a) Genentech Inc. .................................. United States 375,000 21,228,750 (a) Gilead Sciences Inc. ............................ United States 150,000 5,370,000 (a) Invitrogen Corp. ................................ United States 150,000 10,380,000 ----------- 62,596,750 ----------- CABLE/SATELLITE TELEVISION 1.4% (a) Comcast Corp., A ................................ United States 175,000 5,845,000 (a) Liberty Media Corp., A .......................... United States 300,000 3,111,000 (a) Liberty Media International Inc., A ............. United States 15,000 656,100 ----------- 9,612,100 ----------- CASINOS/GAMING 0.8% International Game Technology ................... United States 200,000 5,332,000 ----------- CHEMICALS: SPECIALTY 1.1% Sigma-Aldrich Corp. ............................. United States 125,000 7,656,250 ----------- COMPUTER COMMUNICATIONS 1.6% (a) Cisco Systems Inc. .............................. United States 600,000 10,734,000 ----------- COMPUTER PERIPHERALS 0.4% (a) Storage Technology Corp. ........................ United States 95,000 2,926,000 ----------- COMPUTER PROCESSING HARDWARE 3.0% (a) Apple Computer Inc. ............................. United States 50,000 2,083,500 (a) Dell Inc. ....................................... United States 250,000 9,605,000 Hewlett-Packard Co. ............................. United States 400,000 8,776,000 ----------- 20,464,500 ----------- DATA PROCESSING SERVICES 2.7% First Data Corp. ................................ United States 225,000 8,844,750 Paychex Inc. .................................... United States 300,000 9,846,000 ----------- 18,690,750 ----------- Semiannual Report | 53 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - --------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - --------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) ELECTRONIC EQUIPMENT/INSTRUMENTS 3.6% (a) Agilent Technologies Inc. ....................... United States 300,000 $ 6,660,000 (a) Dolby Laboratories Inc., A ...................... United States 100,000 2,350,000 Rockwell Automation Inc. ........................ United States 277,500 15,717,600 ----------- 24,727,600 ----------- ELECTRONIC PRODUCTION EQUIPMENT 3.7% (a) Applied Materials Inc. .......................... United States 500,000 8,125,000 (a) KLA-Tencor Corp. ................................ United States 200,000 9,202,000 (a) Lam Research Corp. .............................. United States 150,000 4,329,000 (a) Varian Semiconductor Equipment Associates Inc. .. United States 100,000 3,801,000 ----------- 25,457,000 ----------- ELECTRONICS/APPLIANCE STORES 1.0% Best Buy Co. Inc. ............................... United States 125,000 6,751,250 ----------- ELECTRONICS/APPLIANCES 0.1% Eastman Kodak Co. ............................... United States 30,000 976,500 ----------- FINANCIAL CONGLOMERATES 0.6% Citigroup Inc. .................................. United States 100,000 4,494,000 ----------- FINANCIAL PUBLISHING/SERVICES 1.4% Moody's Corp. ................................... United States 120,000 9,703,200 ----------- HOSPITAL/NURSING MANAGEMENT 0.2% (a) United Surgical Partners International Inc. ..... United States 30,000 1,373,100 ----------- HOUSEHOLD/PERSONAL CARE 0.6% Estee Lauder Cos. Inc., A ....................... United States 100,000 4,498,000 ----------- INDUSTRIAL CONGLOMERATES 1.0% Tyco International Ltd. ......................... United States 200,000 6,760,000 ----------- INFORMATION TECHNOLOGY SERVICES 3.1% (a) Cognizant Technology Solutions Corp., A ......... United States 220,000 10,164,000 International Business Machines Corp. ........... United States 120,000 10,965,600 ----------- 21,129,600 ----------- INSURANCE BROKERS/SERVICES 0.7% (a) ChoicePoint Inc. ................................ United States 120,000 4,813,200 ----------- INTERNET SOFTWARE/SERVICES 6.3% (a) Google Inc., A .................................. United States 75,000 13,538,250 (a) InfoSpace Inc. .................................. United States 120,000 4,899,600 (a) Marchex Inc., B ................................. United States 122,300 2,279,672 (a) VeriSign Inc. ................................... United States 100,000 2,870,000 (a) Yahoo! Inc. ..................................... United States 600,000 20,340,000 ----------- 43,927,522 ----------- 54 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - --------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - --------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) MAJOR PHARMACEUTICALS 3.3% Bristol-Myers Squibb Co. .................. United States 100,000 $ 2,546,000 Johnson & Johnson ......................... United States 150,000 10,074,000 Pfizer Inc. ............................... United States 400,000 10,508,000 ----------- 23,128,000 ----------- MANAGED HEALTH CARE 5.4% (a) Caremark Rx Inc. .......................... United States 200,000 7,956,000 (a) Centene Corp. ............................. United States 100,000 2,999,000 UnitedHealth Group Inc. ................... United States 275,000 26,229,500 ----------- 37,184,500 ----------- MEDIA CONGLOMERATES 1.3% News Corp. Ltd., B ........................ United States 300,000 5,283,000 (a) Time Warner Inc. .......................... United States 200,000 3,510,000 ----------- 8,793,000 ----------- MEDICAL SPECIALTIES 9.0% Alcon Inc. ................................ Switzerland 150,000 13,393,500 Medtronic Inc. ............................ United States 275,000 14,011,250 Stryker Corp. ............................. United States 280,000 12,490,800 (a) Varian Medical Systems Inc. ............... United States 125,000 4,285,000 (a) Waters Corp. .............................. United States 200,000 7,158,000 (a) Zimmer Holdings Inc. ...................... United States 140,000 10,893,400 ----------- 62,231,950 ----------- MEDICAL/NURSING SERVICES 0.9% (a) VCA Antech Inc. ........................... United States 300,000 6,069,000 ----------- MOVIES/ENTERTAINMENT 1.4% (a) Pixar ..................................... United States 100,000 9,755,000 ----------- OILFIELD SERVICES/EQUIPMENT 1.5% Schlumberger Ltd. ......................... United States 150,000 10,572,000 ----------- OTHER CONSUMER SERVICES 2.2% (a) eBay Inc. ................................. United States 400,000 14,904,000 ----------- OTHER PHARMACEUTICALS 1.3% Teva Pharmaceutical Industries Ltd., ADR .. Israel 300,000 9,300,000 ----------- PACKAGED SOFTWARE 9.7% Adobe Systems Inc. ........................ United States 260,000 17,464,200 Autodesk Inc. ............................. United States 300,000 8,928,000 (a) Cognos Inc. ............................... Canada 150,000 6,291,000 Microsoft Corp. ........................... United States 950,000 22,961,500 (a) NAVTEQ Corp. .............................. United States 160,000 6,936,000 (a) Symantec Corp. ............................ United States 200,000 4,266,000 ----------- 66,846,700 ----------- Semiannual Report | 55 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - ----------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - ----------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) RECREATIONAL PRODUCTS 1.9% (a) Electronic Arts Inc. ........................... United States 250,000 $ 12,945,000 ------------ SAVINGSBANKS 0.9% Golden West Financial Corp. .................... United States 100,000 6,050,000 ------------ SEMICONDUCTORS 11.2% Analog Devices Inc. ............................ United States 310,000 11,203,400 Intel Corp. .................................... United States 1,150,000 26,714,500 (a) International Rectifier Corp. .................. United States 180,000 8,190,000 Linear Technology Corp. ........................ United States 400,000 15,324,000 (a) Marvell Technology Group Ltd. .................. Bermuda 75,000 2,875,500 Microchip Technology Inc. ...................... United States 150,000 3,901,500 Xilinx Inc. .................................... United States 320,000 9,353,600 ------------ 77,562,500 ------------ SERVICES TO THE HEALTH INDUSTRY 0.9% (a) Pharmaceutical Product Development Inc. ........ United States 125,000 6,056,250 ------------ TELECOMMUNICATIONS EQUIPMENT 3.2% Motorola Inc. .................................. United States 680,750 10,190,827 (a) Nokia Corp., ADR ............................... Finland 315,000 4,860,450 QUALCOMM Inc. .................................. United States 200,000 7,330,000 ------------ 22,381,277 ------------ TOTAL COMMON STOCKS (COST $479,823,807) ........ 688,955,849 ------------ SHORT TERM INVESTMENT (COST $4,093,487) 0.6% MONEY FUND 0.6% (b) Franklin Institutional Fiduciary Trust Money Market Portfolio ......................... United States 4,093,487 4,093,487 ------------ TOTAL INVESTMENTS (COST $483,917,294) 100.2% ... 693,049,336 OTHER ASSETS, LESS LIABILITIES (0.2)% .......... (1,074,687) ------------ NET ASSETS 100.0% .............................. $691,974,649 ============ See Selected Portfolio Abbreviations on page 97. (a) Non-income producing. (b) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust Money Market Portfolio. 56 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN GROWTH FUND ---------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2004 2003 2002 2001 2000 ---------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ... $ 30.58 $ 26.87 $ 22.02 $ 27.81 $ 36.91 $ 33.21 ---------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ............ 0.09 0.06 0.08 0.07 0.23 0.45 Net realized and unrealized gains (losses) ......................... 2.58 3.68 4.81 (5.65) (7.26) 3.96 ---------------------------------------------------------------------------------- Total from investment operations ....... 2.67 3.74 4.89 (5.58) (7.03) 4.41 ---------------------------------------------------------------------------------- Less distributions from: Net investment income ............... (0.08) (0.03) (0.04) (0.16) (0.40) (0.45) Net realized gains .................. -- -- -- (0.05) (1.67) (0.26) ---------------------------------------------------------------------------------- Total distributions .................... (0.08) (0.03) (0.04) (0.21) (2.07) (0.71) ---------------------------------------------------------------------------------- Redemption fees ........................ --(c) --(c) -- -- -- -- ---------------------------------------------------------------------------------- Net asset value, end of period ......... $ 33.17 $ 30.58 $ 26.87 $ 22.02 $ 27.81 $ 36.91 ================================================================================== Total return(b) ........................ 8.73% 13.92% 22.27% (20.35)% (20.12)% 13.53% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ...... $1,563,357 $1,531,871 $1,433,742 $1,249,745 $1,657,387 $2,149,928 Ratios to average net assets: Expenses ............................ 0.93%(d) 0.98% 1.06% 0.96% 0.91% 0.93% Net investment income ............... 0.58%(d) 0.20% 0.31% 0.24% 0.69% 1.27% Portfolio turnover rate ................ 0.58% 1.56% 5.12% 2.16% 0.29% 8.12% (a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 57 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED) ------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2004 2003 2002 2001 2000 ------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 29.77 $ 26.32 $ 21.70 $ 27.46 $ 36.54 $ 33.03 ------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) .............. (0.03) (0.16) (0.11) (0.14) (0.03) 0.16 Net realized and unrealized gains (losses) ... 2.51 3.61 4.73 (5.57) (7.18) 3.96 ------------------------------------------------------------------------- Total from investment operations ................ 2.48 3.45 4.62 (5.71) (7.21) 4.12 ------------------------------------------------------------------------- Less distributions from: Net investment income ........................ -- -- -- -- (0.20) (0.35) Net realized gains ........................... -- -- -- (0.05) (1.67) (0.26) ------------------------------------------------------------------------- Total distributions ............................. -- -- -- (0.05) (1.87) (0.61) ------------------------------------------------------------------------- Redemption fees ................................. --(c) --(c) -- -- -- -- ------------------------------------------------------------------------- Net asset value, end of period .................. $ 32.25 $ 29.77 $ 26.32 $ 21.70 $ 27.46 $ 36.54 ========================================================================= Total return(b) ................................. 8.33% 13.11% 21.29% (20.90)% (20.74)% 12.68% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $126,078 $121,986 $103,499 $75,141 $66,095 $38,353 Ratios to average net assets: Expenses ..................................... 1.68%(d) 1.73% 1.81% 1.71% 1.66% 1.68% Net investment income (loss) ................. (0.17)%(d) (0.55)% (0.44)% (0.51)% (0.10)% 0.45% Portfolio turnover rate ......................... 0.58% 1.56% 5.12% 2.16% 0.29% 8.12% (a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 58 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED) - ----------------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2004 2003 2002 2001 2000 ------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period............. $ 29.51 $ 26.09 $ 21.51 $ 27.24 $ 36.19 $ 32.58 ------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a)............... (0.03) (0.16) (0.11) (0.14) (0.02) 0.18 Net realized and unrealized gains (losses).... 2.49 3.58 4.69 (5.54) (7.13) 3.91 ------------------------------------------------------------------------------- Total from investment operations................. 2.46 3.42 4.58 (5.68) (7.15) 4.09 ------------------------------------------------------------------------------- Less distributions from: Net investment income......................... -- -- -- -- (0.13) (0.22) Net realized gains............................ -- -- -- (0.05) (1.67) (0.26) ------------------------------------------------------------------------------- Total distributions.............................. -- -- -- (0.05) (1.80) (0.48) ------------------------------------------------------------------------------- Redemption fees.................................. --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------- Net asset value, end of period................... $ 31.97 $ 29.51 $ 26.09 $ 21.51 $ 27.24 $ 36.19 =============================================================================== Total return(b).................................. 8.34% 13.11% 21.29% (20.92)% (20.72)% 12.71% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's)................ $272,895 $270,131 $259,169 $232,307 $310,650 $374,483 Ratios to average net assets: Expenses...................................... 1.68%(d) 1.73% 1.82% 1.70% 1.66% 1.68% Net investment income (loss).................. (0.17)%(d) (0.55)% (0.45) (0.51)% (0.06)% 0.52% Portfolio turnover rate.......................... 0.58% 1.56% 5.12% 2.16% 0.29% 8.12% (a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 59 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED) ---------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS R (UNAUDITED) 2004 2003 2002(e) ---------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period.............. $ 30.39 $ 26.74 $ 21.98 $ 31.59 ---------------------------------------------------- Income from investment operations: Net investment income (loss)(a)................ 0.05 (0.02) -- -- Net realized and unrealized gains (losses)..... 2.56 3.67 4.81 (9.61) ---------------------------------------------------- Total from investment operations.................. 2.61 3.65 4.81 (9.61) ---------------------------------------------------- Less distributions from net investment income..... (0.01) -- (0.05) -- ---------------------------------------------------- Redemption fees................................... --(c) --(c) -- -- ---------------------------------------------------- Net asset value, end of period.................... $ 32.99 $ 30.39 $ 26.74 $ 21.98 ==================================================== Total return(b)................................... 8.57% 13.65% 21.92% (30.42)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's)................. $23,080 $20,060 $14,755 $ 2,788 Ratios to average net assets: Expenses 1.18%(d) 1.23% 1.31% 1.21%(d) Net investment income (loss) 0.33%(d) (0.05)% 0.06% 0.02%(d) Portfolio turnover rate........................... 0.58% 1.56% 5.12% 2.16% (a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the period January 1, 2002 (effective date) to September 30, 2002. 60 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED) ------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, ADVISOR CLASS (UNAUDITED) 2004 2003 2002 2001 2000 ------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period.............. $ 30.63 $ 26.91 $ 22.06 $ 27.86 $ 36.99 $ 33.27 ------------------------------------------------------------------------ Income from investment operations: Net investment income(a)....................... 0.13 0.14 0.14 0.14 0.31 0.54 Net realized and unrealized gains (losses)..... 2.59 3.67 4.82 (5.65) (7.28) 3.97 ------------------------------------------------------------------------ Total from investment operations.................. 2.72 3.81 4.96 (5.51) (6.97) 4.51 ------------------------------------------------------------------------ Less distributions from: Net investment income.......................... (0.16) (0.09) (0.11) (0.24) (0.49) (0.53) Net realized gains............................. -- -- -- (0.05) (1.67) (0.26) ------------------------------------------------------------------------ Total distributions............................... -- (0.09) (0.11) (0.29) (2.16) (0.79) ------------------------------------------------------------------------ Redemption fees................................... --(c) --(c) -- -- -- -- ------------------------------------------------------------------------ Net asset value, end of period.................... $ 33.19 $ 30.63 $ 26.91 $ 22.06 $ 27.86 $ 36.99 ======================================================================== Total return(b)................................... 8.87% 14.19% 22.58% (20.14)% (19.94)% 13.84% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's)................. $196,029 $133,332 $41,216 $27,431 $32,498 $39,442 Ratios to average net assets: Expenses....................................... 0.68%(d) 0.73% 0.81% 0.71% 0.66% 0.68% Net investment income.......................... 0.83%(d) 0.45% 0.56% 0.49% 0.94% 1.51% Portfolio turnover rate........................... 0.58% 1.56% 5.12% 2.16% 0.29% 8.12% (a) Based on average daily shares outstanding. (b) Total return is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 61 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) - --------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE - --------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS 99.7% COMMERCIAL SERVICES 3.0% (a) Dun & Bradstreet Corp. ....................... United States 122,000 $ 7,496,900 Equifax Inc. ................................. United States 400,000 12,276,000 Moody's Corp. ................................ United States 244,000 19,729,840 Robert Half International Inc. ............... United States 300,000 8,088,000 Sabre Holdings Corp., A ...................... United States 800,000 17,504,000 ------------ 65,094,740 ------------ CONSUMER DURABLES 1.3% Eastman Kodak Co. ............................ United States 500,000 16,275,000 Harley-Davidson Inc. ......................... United States 200,000 11,552,000 ------------ 27,827,000 ------------ CONSUMER NON-DURABLES 3.6% Hershey Foods Corp. .......................... United States 516,400 31,221,544 International Flavors & Fragrances Inc. ...... United States 409,300 16,167,350 Tootsie Roll Industries Inc. ................. United States 22,488 674,640 V.F. Corp. ................................... United States 500,000 29,570,000 ------------ 77,633,534 ------------ CONSUMER SERVICES 5.0% Carnival Corp. ............................... United States 500,000 25,905,000 Clear Channel Communications Inc. ............ United States 500,000 17,235,000 Fairmont Hotels & Resorts Inc. ............... Canada 125,000 4,142,500 (a) Time Warner Inc. ............................. United States 1,350,000 23,692,500 Viacom Inc., A ............................... United States 200,000 7,008,000 Viacom Inc., B ............................... United States 100,000 3,483,000 The Walt Disney Co. .......................... United States 1,000,000 28,730,000 ------------ 110,196,000 ------------ DISTRIBUTION SERVICES 3.0% Cardinal Health Inc. ......................... United States 300,000 16,740,000 Genuine Parts Co. ............................ United States 400,000 17,396,000 W.W. Grainger Inc. ........................... United States 500,000 31,135,000 ------------ 65,271,000 ------------ ELECTRONIC TECHNOLOGY 19.2% (a) Agilent Technologies Inc. .................... United States 400,000 8,880,000 (a) Apple Computer Inc. .......................... United States 1,000,000 41,670,000 Boeing Co. ................................... United States 1,000,000 58,460,000 (a) Cisco Systems Inc. ........................... United States 1,350,000 24,151,500 (a) Conexant Systems Inc. ........................ United States 300,000 450,000 (a) Dell Inc. .................................... United States 500,000 19,210,000 (a) Dionex Corp. ................................. United States 250,000 13,625,000 (a) EMC Corp. .................................... United States 1,000,000 12,320,000 (a) Gateway Inc. ................................. United States 500,000 2,015,000 General Dynamics Corp. ....................... United States 500,000 53,525,000 Hewlett-Packard Co. .......................... United States 1,116,250 24,490,525 62 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - ---------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE - ---------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONT.) ELECTRONIC TECHNOLOGY (CONT.) Intel Corp. .................................. United States 800,000 $ 18,584,000 Lockheed Martin Corp. ........................ United States 500,000 30,530,000 (a) Micrel Inc. .................................. United States 25,000 230,500 (a) Mindspeed Technologies Inc. .................. United States 100,000 223,000 (a) Mykrolis Corp. ............................... United States 270,725 3,871,368 Northrop Grumman Corp. ....................... United States 1,000,000 53,980,000 Raytheon Co. ................................. United States 600,000 23,220,000 Rockwell Automation Inc. ..................... United States 100,000 5,664,000 Rockwell Collins Inc. ........................ United States 100,000 4,759,000 (a) Sun Microsystems Inc. ........................ United States 1,600,000 6,464,000 Texas Instruments Inc. ....................... United States 515,000 13,127,350 ------------ 419,450,243 ------------ ENERGY MINERALS 2.7% BP PLC, ADR .................................. United Kingdom 295,200 18,420,480 EnCana Corp. ................................. Canada 342,000 24,083,640 Royal Dutch Petroleum Co., N.Y. shs. ......... Netherlands 280,000 16,811,200 ------------ 59,315,320 ------------ FINANCE 0.3% (a) ChoicePoint Inc. ............................. United States 160,000 6,417,597 ------------ HEALTH SERVICES 0.8% (a) Caremark Rx Inc. ............................. United States 75,625 3,008,362 IMS Health Inc. .............................. United States 500,000 12,195,000 (a) Medco Health Solutions Inc. .................. United States 48,240 2,391,257 ------------ 17,594,619 ------------ HEALTH TECHNOLOGY 20.6% Abbott Laboratories .......................... United States 400,000 18,648,000 (a) Advanced Medical Optics Inc. ................. United States 88,888 3,218,634 Allergan Inc. ................................ United States 400,000 27,788,000 (a) Amgen Inc. ................................... United States 932,000 54,251,720 Baxter International Inc. .................... United States 400,000 13,592,000 (a) Biogen Idec Inc. ............................. United States 325,000 11,215,750 Bristol-Myers Squibb Co. ..................... United States 640,000 16,294,400 (a) Edwards Lifesciences Corp. ................... United States 50,000 2,161,000 Eli Lilly & Co. .............................. United States 400,000 20,840,000 (a) Genentech Inc. ............................... United States 1,000,000 56,610,000 (a) Hospira Inc. ................................. United States 40,000 1,290,800 Johnson & Johnson ............................ United States 996,000 66,891,360 Merck & Co. Inc. ............................. United States 500,000 16,185,000 (a) Millipore Corp. .............................. United States 400,000 17,360,000 Pall Corp. ................................... United States 500,000 13,560,000 Pfizer Inc. .................................. United States 2,000,000 52,540,000 Schering-Plough Corp. ........................ United States 500,000 9,075,000 (a) Waters Corp. ................................. United States 500,000 17,895,000 Semiannual Report | 63 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - ----------------------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE - ----------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONT.) HEALTH TECHNOLOGY (CONT.) Wyeth ........................................................... United States 600,000 $ 25,308,000 (a) Zimmer Holdings Inc. ............................................ United States 64,000 4,979,840 ------------ 449,704,504 ------------ INDUSTRIAL SERVICES 1.5% Schlumberger Ltd. ............................................... United States 400,000 28,192,000 (a) Transocean Inc. ................................................. United States 77,440 3,985,062 ------------ 32,177,062 ------------ PROCESS INDUSTRIES 2.0% Air Products & Chemicals Inc. ................................... United States 500,000 31,645,000 Sigma-Aldrich Corp. ............................................. United States 200,000 12,250,000 ------------ 43,895,000 ------------ PRODUCER MANUFACTURING 20.6% 3M Co. .......................................................... United States 800,000 68,552,000 American Power Conversion Corp. ................................. United States 500,000 13,055,000 Avery Dennison Corp. ............................................ United States 462,000 28,611,660 (a) CUNO Inc. ....................................................... United States 86,200 4,429,818 Deere & Co. ..................................................... United States 200,000 13,426,000 Emerson Electric Co. ............................................ United States 500,000 32,465,000 Illinois Tool Works Inc. ........................................ United States 500,000 44,765,000 Ingersoll Rand Co., A ........................................... United States 501,000 39,904,650 Johnson Controls Inc. ........................................... United States 400,000 22,304,000 Molex Inc. ...................................................... United States 146,483 3,861,292 Molex Inc., A ................................................... United States 146,483 3,456,999 Teleflex Inc. ................................................... United States 500,000 25,590,000 Textron Inc. .................................................... United States 525,000 39,175,500 (a) Thomas & Betts Corp. ............................................ United States 500,000 16,150,000 Tyco International Ltd. ......................................... United States 1,550,053 52,391,757 United Technologies Corp. ....................................... United States 400,000 40,664,000 ------------ 448,802,676 ------------ RETAIL TRADE 0.6% (a) IAC/InterActiveCorp ............................................. United States 600,200 13,366,454 ------------ TECHNOLOGY SERVICES 11.1% Automatic Data Processing Inc. .................................. United States 800,000 35,960,000 Certegy Inc. .................................................... United States 200,000 6,924,000 (a) Computer Sciences Corp. ......................................... United States 1,000,000 45,850,000 International Business Machines Corp. .. ... . ... .. ..... ..... United States 560,000 51,172,800 Microsoft Corp. ................................................. United States 1,000,000 24,170,000 (a) Oracle Corp. .................................................... United States 500,000 6,240,000 (a) Sungard Data Systems Inc. ....................................... United States 500,000 17,250,000 (a) Yahoo! Inc. ..................................................... United States 1,600,000 54,240,000 ------------ 241,806,800 ------------ 64 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONT.) TRANSPORTATION 4.4% Air France-KLM, ADR ............................................. France 550,000 $ 9,889,000 (a) Air France-KLM, ADR, wts., 5/05/05 .............................. France 500,000 440,000 (a) Alaska Air Group Inc. ........................................... United States 500,000 14,720,000 (a) AMR Corp. ....................................................... United States 1,080,000 11,556,000 (a) British Airways PLC, ADR ........................................ United Kingdom 500,000 25,115,000 (a) Continental Airlines Inc., B .................................... United States 500,000 6,020,000 (a) Delta Air Lines Inc. ............................................ United States 1,000,000 4,050,000 (a) Northwest Airlines Corp. ........................................ United States 500,000 3,345,000 Southwest Airlines Co. .......................................... United States 65,200 928,448 Union Pacific Corp. ............................................. United States 300,000 20,910,001 -------------- 96,973,449 -------------- TOTAL COMMON STOCKS AND WARRANTS (COST $970,831,491) ............ 2,175,525,998 -------------- SHORT TERM INVESTMENT (COST $4,408,451) 0.2% MONEY FUND 0.2% (b) Franklin Institutional Fiduciary Trust Money Market Portfolio ... United States 4,408,451 4,408,451 -------------- TOTAL INVESTMENTS (COST $975,239,942) 99.9% ..................... 2,179,934,449 OTHER ASSETS, LESS LIABILITIES 0.1% ............................. 1,503,509 -------------- NET ASSETS 100.0% ............................................... $2,181,437,958 ============== See Selected Portfolio Abbreviations on page 97. (a) Non-income producing. (b) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust Money Market Portfolio. Semiannual Report | See notes to financial statements. | 65 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN INCOME FUND -------------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2004 2003 2002 2001 2000 -------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .... $ 2.42 $ 2.25 $ 1.90 $ 2.16 $ 2.35 $ 2.23 -------------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ............. 0.06 0.12 0.14 0.14 0.17 0.18 Net realized and unrealized gains (losses) .......................... 0.06 0.22 0.38 (0.21) (0.15) 0.13 -------------------------------------------------------------------------------------- Total from investment operations ........ 0.12 0.34 0.52 (0.07) 0.02 0.31 -------------------------------------------------------------------------------------- Less distributions from: Net investment income ................ (0.08) (0.16) (0.16) (0.17) (0.18) (0.18) Net realized gains ................... (0.01) (0.01) (0.01) (0.02) (0.03) (0.01) -------------------------------------------------------------------------------------- Total distributions ..................... (0.09) (0.17) (0.17) (0.19) (0.21) (0.19) -------------------------------------------------------------------------------------- Redemption fees ......................... --(c) --(c) -- -- -- -- -------------------------------------------------------------------------------------- Net asset value, end of period .......... $ 2.45 $ 2.42 $ 2.25 $ 1.90 $ 2.16 $ 2.35 ====================================================================================== Total return(b) ......................... 5.00% 15.50% 28.12% (4.18)% 0.58% 14.68% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ....... $18,107,259 $14,743,190 $9,640,156 $6,001,117 $5,960,990 $6,083,135 Ratios to average net assets: Expenses ................................ 0.65%(d) 0.68% 0.73% 0.72% 0.73% 0.76% Net investment income ................... 5.25%(d) 5.11% 6.63% 6.67% 7.54% 8.01% Portfolio turnover rate ................. 15.60% 31.90% 48.36% 51.16% 28.13% 24.41% (a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 66 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED) ----------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2004 2003 2002(e) ----------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 2.41 $ 2.24 $ 1.90 $ 2.15 ----------------------------------------------------------- Income from investment operations: Net investment income(a) ...................... 0.05 0.10 0.12 0.11 Net realized and unrealized gains (losses) .... 0.06 0.22 0.37 (0.21) ----------------------------------------------------------- Total from investment operations ................. 0.11 0.32 0.49 (0.10) ----------------------------------------------------------- Less distributions from: Net investment income ......................... (0.07) (0.14) (0.14) (0.13) Net realized gains ............................ (0.01) (0.01) (0.01) (0.02) ----------------------------------------------------------- Total distributions .............................. (0.08) (0.15) (0.15) (0.15) ----------------------------------------------------------- Redemption fees .................................. --(c) --(c) -- -- ----------------------------------------------------------- Net asset value, end of period ................... $ 2.44 $ 2.41 $ 2.24 $ 1.90 =========================================================== Total return(b) .................................. 4.58% 14.59% 26.58% (5.63)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $3,935,777 $3,486,880 $2,083,783 $558,580 Ratios to average net assets: Expenses ...................................... 1.50%(d) 1.53% 1.58% 1.57%(d) Net investment income ......................... 4.40%(d) 4.26% 5.78% 6.01%(d) Portfolio turnover rate .......................... 15.60% 31.90% 48.36% 51.16% (a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the period November 1, 2001 (effective date) to September 30, 2002. Semiannual Report |See notes to financial statements. | 67 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED) --------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS B1 (UNAUDITED) 2004 2003 2002 2001 2000 --------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 2.42 $ 2.25 $ 1.90 $ 2.17 $ 2.35 $ 2.24 --------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ...................... 0.06 0.11 0.13 0.13 0.16 0.17 Net realized and unrealized gains (losses) .... 0.05 0.21 0.38 (0.22) (0.14) 0.12 --------------------------------------------------------------------------- Total from investment operations ................. 0.11 0.32 0.51 (0.09) 0.02 0.29 --------------------------------------------------------------------------- Less distributions from: Net investment income ......................... (0.07) (0.14) (0.15) (0.16) (0.17) (0.17) Net realized gains ............................ (0.01) (0.01) (0.01) (0.02) (0.03) (0.01) --------------------------------------------------------------------------- Total distributions .............................. (0.08) (0.15) (0.16) (0.18) (0.20) (0.18) --------------------------------------------------------------------------- Redemption fees .................................. --(c) --(c) -- -- -- -- --------------------------------------------------------------------------- Net asset value, end of period ................... $ 2.45 $ 2.42 $ 2.25 $ 1.90 $ 2.17 $ 2.35 =========================================================================== Total return(b) .................................. 4.73% 14.90% 27.51% (4.66)% 0.10% 14.09% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $504,139 $511,471 $495,004 $430,226 $446,245 $140,711 Ratios to average net assets: Expenses ...................................... 1.15%(d) 1.18% 1.23% 1.22% 1.23% 1.26% Net investment income ......................... 4.75%(d) 4.61% 6.13% 6.15% 7.02% 7.49% Portfolio turnover rate .......................... 15.60% 31.90% 48.36% 51.16% 28.13% 24.41% (a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 68 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED) ----------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2004 2003 2002 2001 2000 ----------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ......... $ 2.43 $ 2.26 $ 1.91 $ 2.17 $ 2.36 $ 2.24 ----------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) .................. 0.06 0.11 0.13 0.13 0.16 0.17 Net realized and unrealized gains (losses) ............................... 0.05 0.21 0.38 (0.21) (0.15) 0.13 ----------------------------------------------------------------------------------- Total from investment operations ............. 0.11 0.32 0.51 (0.08) 0.01 0.30 ----------------------------------------------------------------------------------- Less distributions from: Net investment income ..................... (0.07) (0.14) (0.15) (0.16) (0.17) (0.17) Net realized gains ........................ (0.01) (0.01) (0.01) (0.02) (0.03) (0.01) ----------------------------------------------------------------------------------- Total distributions .......................... (0.08) (0.15) (0.16) (0.18) (0.20) (0.18) ----------------------------------------------------------------------------------- Redemption fees .............................. --(c) --(c) -- -- -- -- ----------------------------------------------------------------------------------- Net asset value, end of period ............... $ 2.46 $ 2.43 $ 2.26 $ 1.91 $ 2.17 $ 2.36 =================================================================================== Total return(b) .............................. 4.71% 14.85% 27.37% (4.64)% 0.09% 14.54% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............ $8,299,236 $6,616,891 $3,764,372 $1,545,377 $1,080,315 $872,662 Ratios to average net assets: Expenses .................................. 1.15%(d) 1.18% 1.24% 1.21% 1.23% 1.26% Net investment income ..................... 4.75%(d) 4.61% 6.12% 6.21% 7.04% 7.51% Portfolio turnover rate ...................... 15.60% 31.90% 48.36% 51.16% 28.13% 24.41% (a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 69 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED) --------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS R (UNAUDITED) 2004 2003 2002(e) --------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 2.40 $ 2.23 $ 1.89 $ 2.18 --------------------------------------------------- Income from investment operations: Net investment income(a) ...................... 0.06 0.11 0.13 0.10 Net realized and unrealized gains (losses) .... 0.05 0.22 0.37 (0.27) --------------------------------------------------- Total from investment operations ................. 0.11 0.33 0.50 (0.17) --------------------------------------------------- Less distributions from: Net investment income ......................... (0.07) (0.15) (0.15) (0.12) Net realized gains ............................ (0.01) (0.01) (0.01) -- --------------------------------------------------- Total distributions .............................. (0.08) (0.16) (0.16) (0.12) --------------------------------------------------- Redemption fees .................................. --(c) --(c) -- -- --------------------------------------------------- Net asset value, end of period ................... $2.43 $2.40 $ 2.23 $ 1.89 =================================================== Total return(b) .................................. 4.86% 15.25% 27.31% (8.34)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $98,998 $73,165 $36,417 $6,350 Ratios to average net assets: Expenses ...................................... 1.00%(d) 1.03% 1.08% 1.07%(d) Net investment income ......................... 4.90%(d) 4.76% 6.28% 6.77%(d) Portfolio turnover rate .......................... 15.60% 31.90% 48.36% 51.16% (a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the period January 1, 2002 (effective date) to September 30, 2002. 70 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED) ---------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, ADVISOR CLASS (UNAUDITED) 2004 2003 2002 2001 2000 ---------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 2.41 $ 2.24 $ 1.89 $ 2.16 $ 2.34 $ 2.23 ----------------------------------------------------------------------- Income from investment operations: Net investment income(a)....................... 0.07 0.12 0.14 0.14 0.18 0.18 Net realized and unrealized gains (losses) .... 0.05 0.22 0.38 (0.22) (0.15) 0.12 ----------------------------------------------------------------------- Total from investment operations ................. 0.12 0.34 0.52 (0.08) 0.03 0.30 ----------------------------------------------------------------------- Less distributions from: Net investment income ......................... (0.08) (0.16) (0.16) (0.17) (0.18) (0.18) Net realized gains ............................ (0.01) (0.01) (0.01) (0.02) (0.03) (0.01) ----------------------------------------------------------------------- Total distributions .............................. (0.09) (0.17) (0.17) (0.19) (0.21) (0.19) ----------------------------------------------------------------------- Redemption fees .................................. --(c) --(c) -- -- -- -- ----------------------------------------------------------------------- Net asset value, end of period ................... $ 2.44 $ 2.41 $ 2.24 $ 1.89 $2.16 $2.34 ======================================================================= Total return(b) .................................. 5.10% 15.74% 28.47% (4.50)% 1.21% 14.90% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $1,553,512 $901,149 $95,009 $30,737 $22,737 $21,220 Ratios to average net assets: Expenses ...................................... 0.50%(d) 0.53% 0.58% 0.57% 0.58% 0.61% Net investment income ......................... 5.40%(d) 5.26% 6.78% 6.85% 7.69% 8.16% Portfolio turnover rate .......................... 15.60% 31.90% 48.36% 51.16% 28.13% 24.41% (a) Based on average daily shares outstanding. (b) Total return is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 71 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) - ---------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - ---------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS 44.9% COMMERCIAL SERVICES 0.4% Dex Media Inc. ......................................... United States 5,400,000 $ 111,510,000 -------------- COMMUNICATIONS 3.4% AT&T Corp. ............................................. United States 5,000,000 93,750,000 BellSouth Corp. ........................................ United States 17,309,600 455,069,384 MCI Inc. ............................................... United States 1,716,723 42,780,737 (a) NII Holdings Inc., B ................................... United States 320,232 18,413,340 (a) NTL Inc. ............................................... United Kingdom 379,020 24,132,204 SBC Communications Inc. ................................ United States 9,000,000 213,210,000 (a) Telecom Argentina SA, B, ADR ........................... Argentina 1,700,000 20,842,000 Telus Corp. ............................................ Canada 1,377,600 42,444,062 Verizon Communications Inc. ............................ United States 5,500,000 195,250,000 -------------- 1,105,891,727 -------------- CONSUMER DURABLES 0.4% General Motors Corp. ................................... United States 4,500,000 132,255,000 -------------- CONSUMER NON-DURABLES 1.6% Altria Group Inc. ...................................... United States 2,750,000 179,822,500 General Mills Inc. ..................................... United States 5,000,000 245,750,000 Loews Corp. - Carolina Group ........................... United States 2,717,500 89,949,250 -------------- 515,521,750 -------------- ELECTRIC UTILITIES 16.1% Alliant Energy Corp. ................................... United States 5,000,000 133,900,000 Ameren Corp. ........................................... United States 8,750,000 428,837,500 American Electric Power Co. Inc. ....................... United States 8,000,000 272,480,000 CenterPoint Energy Inc. ................................ United States 3,500,000 42,105,000 Cinergy Corp. .......................................... United States 8,000,000 324,160,000 Consolidated Edison Inc. ............................... United States 3,500,000 147,630,000 Dominion Resources Inc. ................................ United States 6,000,000 446,580,000 DPL Inc. ............................................... United States 2,100,000 52,500,000 DTE Energy Co. ......................................... United States 5,250,000 238,770,000 Duke Energy Corp. ...................................... United States 5,000,000 140,050,000 Energy East Corp. ...................................... United States 4,500,000 117,990,000 Exelon Corp. ........................................... United States 4,500,000 206,505,000 FirstEnergy Corp. ...................................... United States 12,500,000 524,375,000 FPL Group Inc. ......................................... United States 4,000,000 160,600,000 Hawaiian Electric Industries Inc. ...................... United States 1,720,000 43,894,400 Pepco Holdings Inc. .................................... United States 5,500,000 115,445,000 PG&E Corp. ............................................. United States 8,500,000 289,850,000 Pinnacle West Capital Corp. ............................ United States 3,880,000 164,938,800 PPL Corp. .............................................. United States 2,138,500 115,457,615 Progress Energy Inc. ................................... United States 5,000,000 209,750,000 Public Service Enterprise Group Inc. ................... United States 6,000,000 326,340,000 Puget Energy Inc. ...................................... United States 4,100,000 90,364,000 Southern Co. ........................................... United States 11,810,500 375,928,215 TECO Energy Inc. ....................................... United States 9,000,000 141,120,000 72 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - ---------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - ---------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONT.) ELECTRIC UTILITIES (CONT.) TXU Corp. .............................................. United States 633,000 $ 50,405,790 Xcel Energy Inc. ....................................... United States 4,332,500 74,432,350 -------------- 5,234,408,670 -------------- ENERGY MINERALS 3.9% BP PLC, ADR ............................................ United Kingdom 3,500,000 218,400,000 (a) Callon Petroleum Co., wts., 12/08/10 ................... United States 1,537,500 8,931,338 Canadian Oil Sands Trust ............................... Canada 5,600,000 380,834,263 ChevronTexaco Corp. .................................... United States 5,000,000 291,550,000 Royal Dutch Petroleum Co., N.Y. shs. ................... Netherlands 6,000,000 360,240,000 (a) Yukos Corp., ADR ....................................... Russia 2,158,000 4,769,180 -------------- 1,264,724,781 -------------- FINANCE 6.6% Bank of America Corp. .................................. United States 4,886,640 215,500,824 Comerica Inc. .......................................... United States 4,000,000 220,320,000 Fannie Mae ............................................. United States 2,500,000 136,125,000 Fifth Third Bancorp .................................... United States 9,500,000 408,310,000 Freddie Mac ............................................ United States 5,500,000 347,600,000 JPMorgan Chase & Co. ................................... United States 11,500,000 397,900,000 Marsh & McLennan Cos. Inc. ............................. United States 3,000,000 91,260,000 MBNA Corp. ............................................. United States 13,000,000 319,150,000 -------------- 2,136,165,824 -------------- GAS UTILITIES 2.1% Atmos Energy Corp. ..................................... United States 2,200,000 59,400,000 KeySpan Corp. .......................................... United States 5,000,000 194,850,000 NiSource Inc. .......................................... United States 5,000,000 113,950,000 ONEOK Inc. ............................................. United States 3,956,500 121,939,330 Sempra Energy .......................................... United States 5,138,000 204,697,920 -------------- 694,837,250 -------------- HEALTH TECHNOLOGY 8.6% Bristol-Myers Squibb Co. ............................... United States 17,000,000 432,820,000 Johnson & Johnson ...................................... United States 2,600,000 174,616,000 Merck & Co. Inc. ....................................... United States 33,500,000 1,084,395,000 Pfizer Inc. ............................................ United States 30,000,000 788,100,000 Wyeth .................................................. United States 7,180,000 302,852,400 -------------- 2,782,783,400 -------------- NON-ENERGY MINERALS 0.5% AngloGold Ashanti Ltd., ADR ............................ South Africa 2,250,000 77,512,500 Barrick Gold Corp. ..................................... Canada 4,000,000 95,840,000 -------------- 173,352,500 -------------- PROCESS INDUSTRIES 0.4% Dow Chemical Co. ....................................... United States 2,505,000 124,874,250 -------------- Semiannual Report | 73 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - ----------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONT.) PRODUCER MANUFACTURING 0.1% General Electric Co. ...................................... United States 1,088,600 $ 39,254,916 --------------- REAL ESTATE INVESTMENT TRUSTS 0.7% Developers Diversified Realty Corp. ....................... United States 3,750,000 149,062,500 Glenborough Realty Trust Inc. ............................. United States 1,250,000 23,900,000 iStar Financial Inc. ...................................... United States 1,500,000 61,770,000 --------------- 234,732,500 --------------- TECHNOLOGY SERVICES 0.1% Electronic Data Systems Corp. ............................. United States 1,686,000 34,849,620 --------------- TOTAL COMMON STOCKS AND WARRANTS (COST $12,934,960,355) ... 14,585,162,188 --------------- PREFERRED STOCKS 0.2% FINANCE 0.2% Fannie Mae, 7.00%, pfd. ................................... United States 1,200,000 66,660,000 --------------- PROCESS INDUSTRIES 0.0%(b) (c), (d), (e) Asia Pulp & Paper Co. Ltd., 12.00%, pfd., Perpetual ....... Indonesia 75,000,000 841,500 --------------- TOTAL PREFERRED STOCKS (COST $117,833,250) ................ 67,501,500 --------------- CONVERTIBLE PREFERRED STOCKS 9.5% BIOTECHNOLOGY 0.2% (f) Morgan Stanley into Biogen Idec Inc., 8.50%, cvt. pfd. .... United States 1,600,000 55,720,480 --------------- COMMUNICATIONS 0.4% ALLTEL Corp., 7.75%, cvt. pfd. ............................ United States 2,400,000 121,176,000 (a) McLeodUSA Inc., 2.50%, cvt. pfd. .......................... United States 177,366 177,366 --------------- 121,353,366 --------------- CONSUMER DURABLES 2.1% Ford Motor Co. Capital Trust II, 6.50%, cvt. pfd. ......... United States 15,240,000 690,981,600 --------------- CONSUMER NON-DURABLES 0.4% Lehman Brothers Holdings Inc. into General Mills, 6.25%, cvt. pfd. ....................................... United States 4,750,000 126,468,750 --------------- ELECTRIC UTILITIES 0.6% Aquila Inc., 6.75%, cvt. pfd. ............................. United States 3,807,500 132,272,550 CMS Energy Trust I, 7.75%, cvt. pfd. ...................... United States 1,150,000 58,650,000 --------------- 190,922,550 --------------- ELECTRONIC TECHNOLOGY 1.4% Citigroup Global Markets Holdings into Altera, 9.00%, cvt. pfd. .............................................. United States 4,000,000 78,520,000 Citigroup Global Markets into Motorola Inc., 7.60%, cvt. pfd. .............................................. United States 4,300,000 67,725,000 Goldman Sachs Group into Applied Materials Inc., 7.35%, cvt. pfd. .............................................. United States 5,500,000 92,774,000 Goldman Sachs into Linear Technology Corp., 7.00%, cvt. pfd. .............................................. United States 1,400,000 54,171,600 Lehman Brothers Holdings Inc. into Solectron Corp., 7.00%, cvt. pfd. ....................................... United States 3,000,000 42,630,000 Morgan Stanley into Intel Corp., 6.50%, cvt. pfd. ......... United States 5,000,000 110,575,000 --------------- 446,395,600 --------------- 74 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - ---------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - ---------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS (CONT.) FINANCE 1.3% Fannie Mae, 5.375%, cvt. pfd. ............................. United States 3,750 $ 349,642,500 Genworth Financial Inc., 6.00%, cvt. pfd., A .............. United States 1,000,000 32,100,000 Travelers Property Casualty Corp., junior sub. note, 4.50%, cvt. pfd. ....................................... United States 1,834,500 40,579,140 -------------- 422,321,640 -------------- HEALTH TECHNOLOGY 0.6% Citigroup Global Markets into Wye Elks, 6.00%, cvt. pfd. .............................................. United States 1,000,000 41,250,000 Morgan Stanley into Forest Laboratories Inc., 6.25%, cvt. pfd. .............................................. United States 1,360,000 51,360,400 Schering-Plough Corp., 6.00%, cvt. pfd. ................... United States 2,100,000 105,630,000 -------------- 198,240,400 -------------- INDUSTRIAL SERVICES 0.3% Allied Waste Industries Inc., 6.25%, cvt. pfd. ............ United States 2,450,000 105,987,000 -------------- METALS & MINING 0.5% Freeport Mcmoran Copper & Gold Inc., 5.50%, cvt. pfd. ..... United States 30,000 29,737,500 Lehman Brothers Holdings Inc. into Alcoa, 6.50%, cvt. pfd. .............................................. United States 4,600,000 139,518,000 -------------- 169,255,500 -------------- PROCESS INDUSTRIES 0.2% Lehman Brothers Holdings Inc. into Lyondell Chemical, 8.00%, cvt. pfd. ....................................... United States 3,000,000 85,365,000 -------------- REAL ESTATE INVESTMENT TRUSTS 1.1% Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A ............ United States 3,000,000 74,220,000 Glenborough Realty Trust Inc., 7.75%, cvt. pfd., A ........ United States 1,333,594 33,873,288 Host Marriott Corp., 6.75%, cvt. pfd. ..................... United States 2,400,000 133,200,000 Lexington Corporate Properties Trust, 6.50%, cvt. pfd. .... United States 1,200,000 60,300,000 Simon Property Group Inc., 6.00%, cvt. pfd. ............... United States 799,980 44,342,891 -------------- 345,936,179 -------------- TECHNOLOGY SERVICES 0.4% Morgan Stanley into Accenture Inc., 6.00%, cvt. pfd. ...... United States 5,750,000 138,891,250 -------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $3,136,578,066)... 3,097,839,315 -------------- ------------------- PRINCIPAL AMOUNT(g) ------------------- BONDS 26.9% ALTERNATIVE POWER GENERATION 5.6% Calpine Canada Energy Finance, senior note, 8.50%, 5/01/08 .............................................. Canada $466,000,000 333,190,000 Calpine Corp., senior note, 7.875%, 4/01/08 ............. United States 151,000,000 110,230,000 Calpine Corp., senior note, 8.625%, 8/15/10 ............. United States 210,000,000 147,525,000 Calpine Corp., senior note, 8.50%, 2/15/11 .............. United States 405,000,000 287,550,000 Calpine Corp., senior secured note, 144A, 8.50%, 7/15/10 .............................................. United States 275,000,000 217,250,000 Calpine Corp., senior secured note, 144A, 8.75%, 7/15/13 .............................................. United States 119,000,000 90,440,000 Dynegy Holdings Inc., secured note, 144A, 9.875%, 7/15/10 United States 100,000,000 107,625,000 Dynegy Holdings Inc., senior note, 6.875%, 4/01/11 ...... United States 286,000,000 255,255,000 Semiannual Report | 75 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - ---------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - ---------------------------------------------------------------------------------------------------------------------------- BONDS (CONT.) ALTERNATIVE POWER GENERATION (CONT.) Dynegy Holdings Inc., senior note, 8.75%, 2/15/12 ............... United States $171,000,000 $ 164,587,500 Dynegy Holdings Inc., senior secured note, 144A, 10.125%, 7/15/13 ...................................................... United States 97,000,000 106,215,000 -------------- 1,819,867,500 -------------- COMMUNICATIONS 2.4% Qwest Capital Funding, 7.00%, 8/03/09 ........................... United States 275,000,000 259,187,500 Qwest Capital Funding, 7.25%, 2/15/11 ........................... United States 268,000,000 251,250,000 Qwest Communications International Inc., senior note, 144A, 7.50%, 2/15/14 ......................................... United States 108,000,000 106,110,000 Qwest Corp., 6.875%, 9/15/33 .................................... United States 75,000,000 65,062,500 Time Warner Telecom Holdings Inc., senior note, 9.25%, 2/15/14 .. United States 50,000,000 48,250,000 Time Warner Telecom Inc., senior note, 10.125%, 2/01/11 ......... United States 45,000,000 43,650,000 -------------- 773,510,000 -------------- CONSUMER DURABLES 1.1% Ford Motor Co., 7.45%, 7/16/31 .................................. United States 200,000,000 181,406,000 General Motors Corp., senior deb., 8.375%, 7/15/33 .............. United States 200,000,000 171,560,400 -------------- 352,966,400 -------------- CONSUMER SERVICES 3.0% (c) Adelphia Communications Corp., 7.875%, 5/01/09 .................. United States 23,600,000 19,588,000 (c) Adelphia Communications Corp., senior note, 10.875%, 10/01/10 ... United States 35,000,000 31,150,000 Cablevision Systems Corp., senior note, 144A, 8.00%, 4/15/12 .... United States 175,000,000 180,687,500 Charter Communications Holdings LLC, senior disc. note, 11.75%, 1/15/10 .............................................. United States 55,000,000 47,437,500 Charter Communications Holdings LLC, senior disc. note, 9.92%, 4/01/11 ............................................... United States 173,000,000 133,642,500 Charter Communications Holdings LLC, senior note, 8.625%, 4/01/09 ...................................................... United States 180,000,000 139,950,000 Charter Communications Holdings LLC, senior note, 10.75%, 10/01/09 ..................................................... United States 180,000,000 148,500,000 Charter Communications Operating LLC, senior note, 144A, 8.375%, 4/30/14 ...................................................... United States 117,500,000 118,675,000 CSC Holdings Inc., senior note, B, 7.625%, 4/01/11 .............. United States 100,000,000 104,500,000 Six Flags Inc., senior note, 9.625%, 6/01/14 .................... United States 44,200,000 40,995,500 -------------- 965,126,000 -------------- ELECTRIC UTILITIES 2.3% Allegheny Energy Supply Co. LLC, 7.80%, 3/15/11 ................. United States 90,000,000 93,825,000 Allegheny Energy Supply Co. LLC, 144A, 8.25%, 4/15/12 ........... United States 135,000,000 143,775,000 Aquila Inc., senior note, 14.875%, 7/01/12 ...................... United States 97,500,000 134,062,500 CMS Energy Corp., senior note, 7.75%, 8/01/10 ................... United States 30,000,000 31,425,000 FirstEnergy Corp., 6.45%, 11/15/11 .............................. United States 50,000,000 52,823,200 Sierra Pacific Resources Co., 8.75%, 5/15/05 .................... United States 114,900,000 115,515,634 TXU Corp., 144A, 5.55%, 11/15/14 ................................ United States 85,000,000 80,795,985 TXU Corp., 144A, 6.55%, 11/15/34 ................................ United States 100,000,000 95,104,100 -------------- 747,326,419 -------------- 76 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - ------------------------------------------------------------------------------------------------------------------------------------ BONDS (CONT.) ELECTRONIC TECHNOLOGY 0.7% Lucent Technologies, 6.45%, 3/15/29 ............................. United States $180,000,000 $156,150,000 Xerox Corp., senior note, 6.875%, 8/15/11 ....................... United States 74,400,000 76,167,000 ------------ 232,317,000 ------------ ENERGY MINERALS 0.7% Callon Petroleum Co., senior note, 9.75%, 12/08/10 .............. United States 117,500,000 124,550,000 Chesapeake Energy Corp., senior note, 144A, 6.375%, 6/15/15 ..... United States 34,300,000 34,042,750 Mission Resources Corp., senior note, 9.875%, 4/01/11 ........... United States 40,000,000 42,800,000 Sonat Inc., senior note, 7.625%, 7/15/11 ........................ United States 35,000,000 34,737,500 ------------ 236,130,250 ------------ FINANCE 2.6% Ford Motor Credit Co., 7.00%, 10/01/13 .......................... United States 150,000,000 145,535,250 General Motors Acceptance Corp., 6.875%, 9/15/11 ................ United States 600,000,000 543,586,800 General Motors Acceptance Corp., 6.75%, 12/01/14 ................ United States 200,000,000 173,052,200 ------------ 862,174,250 ------------ HEALTH SERVICES 2.6% Davita Inc., senior note, 144A, 6.625%, 3/15/13 ................. United States 23,600,000 23,482,000 Davita Inc., senior sub. note, 144A, 7.25%, 3/15/15 ............. United States 36,800,000 36,248,000 HCA Inc., 6.375%, 1/15/15 ....................................... United States 70,000,000 69,834,940 HealthSouth Corp., senior note, 7.625%, 6/01/12 ................. United States 75,000,000 72,375,000 Tenet Healthcare Corp., senior note, 6.375%, 12/01/11 ........... United States 372,000,000 345,030,000 Tenet Healthcare Corp., senior note, 6.50%, 6/01/12 ............. United States 81,000,000 74,925,000 Tenet Healthcare Corp., senior note, 7.375%, 2/01/13 ............ United States 250,000,000 236,875,000 ------------ 858,769,940 ------------ INDUSTRIAL SERVICES 3.0% Allied Waste Industries Inc., 7.40%, 9/15/35 .................... United States 40,000,000 33,000,000 Allied Waste North America Inc., senior note, 144A, 7.25%, 3/15/15 ...................................................... United States 100,000,000 95,500,000 Allied Waste North America Inc., senior note, B, 7.375%, 4/15/14 ...................................................... United States 150,000,000 136,500,000 Allied Waste North America Inc., senior secured note, 6.50%, 11/15/10 ..................................................... United States 85,000,000 82,875,000 Allied Waste North America Inc., senior secured note, 6.125%, 2/15/14 ...................................................... United States 110,000,000 98,725,000 El Paso Corp., senior note, 7.75%, 1/15/32 ...................... United States 250,000,000 236,875,000 (h) El Paso Energy, senior note, 6.75%, 5/15/09 ..................... United States 205,000,000 200,900,000 El Paso Production Holdings, 7.75%, 6/01/13 ..................... United States 87,500,000 89,031,250 ------------ 973,406,250 ------------ NON-ENERGY MINERALS 0.2% Novelis Inc., senior note, 144A, 7.25%, 2/15/15 ................. Canada 56,900,000 56,046,500 ------------ PROCESS INDUSTRIES 0.9% Lyondell Chemical Co., 9.625%, 5/01/07 .......................... United States 82,000,000 88,355,000 Rhodia SA, senior note, 10.25%, 6/01/10 ......................... France 170,000,000 186,150,000 (c), (d), (e) Tjiwi Kimia Finance Mauritius, senior note, 10.00%, 8/01/04 ..... Indonesia 87,000,000 26,995,230 ------------ 301,500,230 ------------ Semiannual Report | 77 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - ----------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - ----------------------------------------------------------------------------------------------------------------------------- BONDS (CONT.) PRODUCER MANUFACTURING 0.9% Case New Holland Inc., senior note, 144A, 6.00%, 6/01/09 ........ United States $200,000,000 $ 191,000,000 Dana Corp., 7.00%, 3/01/29 ...................................... United States 41,000,000 36,210,380 Invensys PLC, senior note, 144A, 9.875%, 3/15/11 ................ United Kingdom 51,100,000 52,249,750 -------------- 279,460,130 -------------- REAL ESTATE INVESTMENT TRUSTS 0.5% HMH Properties Inc., senior secured note, 7.875%, 8/01/08 ....... United States 18,887,000 19,359,175 Host Marriott LP, senior note, 7.125%, 11/01/13 ................. United States 60,000,000 59,850,000 Meristar Hospitality Corp., 9.125%, 1/15/11 ..................... United States 67,500,000 70,875,000 -------------- 150,084,175 -------------- TECHNOLOGY SERVICES 0.4% Electronic Data Systems Corp., B, 6.50%, 8/01/13 ................ United States 125,000,000 128,039,625 -------------- TOTAL BONDS (COST $8,609,028,831) ............................... 8,736,724,669 -------------- CONVERTIBLE BONDS 3.3% COMMUNICATIONS 0.1% Nextel Communications Inc., cvt., senior note, 5.25%, 1/15/10 ... United States 50,000,000 51,500,000 -------------- CONSUMER SERVICES 0.3% (c) Adelphia Communications Corp., cvt., junior sub. note, 6.00%, 2/15/06 ............................................... United States 75,000,000 5,250,000 Six Flags Inc., cvt., 4.50%, 5/15/15 ............................ United States 100,000,000 93,080,000 -------------- 98,330,000 -------------- ELECTRIC UTILITIES 0.4% CMS Energy Corp., cvt., senior note, 2.875%, 12/01/24 ........... United States 109,000,000 120,350,170 -------------- ELECTRONIC TECHNOLOGY 1.4% Conexant Systems Inc., cvt., sub. note, 4.00%, 2/01/07 .......... United States 220,000,000 194,425,000 Nortel Networks Corp., cvt., senior note, 4.25%, 9/01/08 ........ Canada 200,000,000 186,000,000 SCI Systems Inc., cvt., sub. note, 3.00%, 3/15/07 ............... United States 66,000,000 63,937,500 -------------- 444,362,500 -------------- HEALTH TECHNOLOGY 0.1% Enzon Pharmaceuticals Inc., cvt., sub. note, 4.50%, 7/01/08 ..... United States 30,000,000 27,112,500 -------------- INDUSTRIAL SERVICES 0.2% Hanover Compressor Co., cvt., senior note, 4.75%, 3/15/08 ....... United States 85,000,000 82,556,250 -------------- REAL ESTATE INVESTMENT TRUSTS 0.8% Host Marriott LP, cvt., senior deb., 144A, 3.25%, 3/15/24 ....... United States 140,000,000 153,300,000 Meristar Hospitality Corp., cvt., sub. note, 9.50%, 4/01/10 ..... United States 95,000,000 117,239,500 -------------- 270,539,500 -------------- TOTAL CONVERTIBLE BONDS (COST $1,062,813,603) ................... 1,094,750,920 -------------- 78 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - ------------------------------------------------------------------------------------------------------------------------------------ ZERO COUPON/STEP-UP BONDS 2.8% COMMERCIAL SERVICES 0.8% Dex Media Inc., zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 ...... United States $200,000,000 $ 153,000,000 JohnsonDiversey Holdings Inc., senior disc. note, zero cpn. to 5/17/07, 10.67% thereafter, 5/15/13 .......................................... United States 110,000,000 95,150,000 --------------- 248,150,000 --------------- CONSUMER SERVICES 0.9% Charter Communications Holdings LLC, senior disc. note, zero cpn. to 5/15/06, 11.75% thereafter, 5/15/11 ................................. United States 30,000,000 20,850,000 Charter Communications Holdings LLC, senior disc. note, zero cpn. to 1/15/06, 13.50% thereafter, 1/15/11 ................................. United States 325,000,000 261,625,000 --------------- 282,475,000 --------------- FINANCE 0.8% Nalco Finance Holdings, senior note, zero cpn. to 8/01/09, 9.00% thereafter, 2/01/14 ................................................. United States 369,016,000 280,452,160 --------------- INDUSTRIAL SERVICES 0.1% Hanover Compressor Co., sub. note, zero cpn., 3/31/07 .................. United States 36,000,000 31,860,000 --------------- PRODUCER MANUFACTURING 0.2% Polymer Holdings LLC, senior disc. note, 144A, zero cpn. to 7/15/09, 12.00% thereafter, 7/15/14 .......................................... United States 100,000,000 62,500,000 --------------- TOTAL ZERO COUPON/STEP-UP BONDS (COST $891,498,860) 905,437,160 --------------- AGENCY SECURITIES 3.4% FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 1.8% FHLMC Gold 30 Year, 5.00%, 5/01/33 - 8/01/34 ........................... United States 589,417,762 577,851,880 --------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 1.6% GNMA I SF 30 Year, 5.00%, 4/15/33 - 6/15/34 ............................ United States 525,857,875 519,621,595 --------------- TOTAL AGENCY SECURITIES (COST $1,098,879,818) .......................... 1,097,473,475 --------------- MUNICIPAL BOND SECURITIES 1.3% California State GO, 5.00%, 2/01/26 .................................... United States 10,450,000 10,677,601 California State GO, 5.25%, 11/01/26 ................................... United States 25,000,000 26,266,000 California State GO, 5.25%, 11/01/27 ................................... United States 20,400,000 21,403,476 California State GO, 5.25%, 2/01/28 .................................... United States 24,600,000 25,728,156 California State GO, 5.00%, 2/01/32 .................................... United States 65,250,000 66,311,617 California State GO, 5.00%, 2/01/33 .................................... United States 103,400,000 105,089,556 California State GO, 5.00%, 2/01/33 .................................... United States 23,250,000 23,612,235 California State GO, Refunding, 5.25%, 2/01/33 ......................... United States 28,500,000 29,608,650 California State GO, Various Purpose, 5.25%, 11/01/28 .................. United States 25,000,000 26,175,750 California State GO, Various Purpose, 5.25%, 11/01/29 .................. United States 22,500,000 23,525,550 California State GO, Various Purpose, 5.50%, 11/01/33 .................. United States 55,300,000 59,195,333 --------------- TOTAL MUNICIPAL BOND SECURITIES (COST $391,562,055) .................... 417,593,924 --------------- TOTAL LONG TERM INVESTMENTS (COST $28,243,154,838) ..................... 30,002,483,151 --------------- Semiannual Report | 79 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS 6.9% MONEY FUND (COST $176,023,849) 0.5% (i) Franklin Institutional Fiduciary Trust Money Market Portfolio......... United States 176,023,849 $ 176,023,849 -------------- ------------------- PRINCIPAL AMOUNT(g) ------------------- REPURCHASE AGREEMENTS 6.4% (j) Joint Repurchase Agreement, 2.721%, 4/01/05 (Maturity Value $2,042,624,939).................................. United States $2,042,470,562 2,042,470,562 ABN AMRO Bank, N.V., New York Branch (Maturity Value $192,353,991) Banc of America Securities LLC (Maturity Value $192,353,991) Barclays Capital Inc. (Maturity Value $192,353,991) Bear, Stearns & Co. Inc. (Maturity Value $118,349,688) BNP Paribas Securities Corp. (Maturity Value $192,353,991) Deutsche Bank Securities Inc. (Maturity Value $118,349,688) Goldman, Sachs & Co. (Maturity Value $88,752,053) Greenwich Capital Markets Inc. (Maturity Value $192,353,991) Lehman Brothers Inc. (Maturity Value $178,341,582) Merrill Lynch Government Securities Inc. (Maturity Value $192,353,991) Morgan Stanley & Co. Inc. (Maturity Value $192,353,991) UBS Securities LLC (Maturity Value $192,353,991) Collateralized by U.S. Government Agency Securities, 0.00 - 7.00%, 4/05/05 - 3/15/10; and (k)U.S. Treasury Bills, 6/30/05 - 9/22/05 (j), (l) Barclays Capital Inc., 2.84%, 4/01/2005 (Maturity Value $6,000,946) Collateralized by U.S. Government Agency Securities, 0.00% - 6.375%,4/15/05 - 7/09/21........................... United States 6,000,473 6,000,473 (j), (l) Bear Sterns & Co. Inc., 2.85%, 4/01/2005 (Maturity Value $4,903,776) Collateralized by U.S. Government Agency Securities, 0.00% - 7.25%, 4/05/05 - 3/15/31........................... United States 4,903,388 4,903,388 (j), (l) Goldman Sachs & Co., 2.90%, 4/01/2005 (Maturity Value $6,000,966) Collateralized by U.S. Government Agency Securities, 4.00% - 9.50%, 11/01/07 - 3/01/35......................... United States 6,000,483 6,000,483 (j), (l) JP Morgan Securities, 2.89%, 4/01/2005 (Maturity Value $4,000,642) Collateralized by U.S. Government Agency Securities, 3.143% - 5.648%, 7/01/20 - 1/01/35............................ United States 4,000,321 4,000,321 (j), (l) Morgan Stanley & Co. Inc., 2.90%, 4/01/2005 (Maturity Value $3,973,640) Collateralized by U.S. Government Agency Securities, 5.50% - 6.053%, 4/01/12 - 2/01/35.......................... United States 3,973,320 3,973,320 ------------- TOTAL REPURCHASE AGREEMENTS (COST $2,067,348,547)................... 2,067,348,547 ============= 80 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FRANKLIN INCOME FUND VALUE - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (COST $30,486,527,234) 99.2%................ $32,245,855,547 OTHER ASSETS, LESS LIABILITIES 0.8%........................... 253,066,705 --------------- NET ASSETS 100.0%............................................. $32,498,922,252 =============== See Selected Portfolio Abbreviations on page 97. (a) Non-income producing. (b) Rounds to less than 0.05% of net assets. (c) Defaulted securities. See Note 8. (d) See Note 11 regarding other considerations. (e) See Note 9 regarding restricted securities. (f) Security purchased on a when issued or delayed delivery basis. (g) The principal amount is stated in U.S. dollars unless otherwise indicated. (h) A portion or all of the security is on loan as of March 31, 2005. See Note 1(f). (i) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust Money Market Portfolio. (j) See Note 1(c) regarding repurchase agreement(s). (k) A portion or all of the security is traded on a discount basis with no stated coupon rate. (l) Investments from cash collateral received for loaned securities. See Note 1(f). Semiannual Report | See notes to financial statements. | 81 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN U.S. GOVERNMENT SECURITIES FUND --------------------------------------------------------------------------------------- Six Months Ended March 31, 2005 Year Ended September 30, CLASS A (unaudited) 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .... $ 6.68 $ 6.81 $ 6.99 $ 6.93 $ 6.63 $ 6.62 --------------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ............. 0.14 0.27 0.28 0.38 0.41(e) 0.43 Net realized and unrealized gains (losses) .......................... (0.07) (0.04) (0.10) 0.09 0.33(e) 0.01 --------------------------------------------------------------------------------------- Total from investment operations ........ 0.07 0.23 0.18 0.47 0.74 0.44 Less distributions from net investment income ............................... (0.17) (0.36) (0.36) (0.41) (0.44) (0.43) Redemption fees ......................... --(c) --(c) -- -- -- -- --------------------------------------------------------------------------------------- Net asset value, end of period .......... $ 6.58 $ 6.68 $ 6.81 $ 6.99 $ 6.93 $ 6.63 ======================================================================================= Total return(b) ......................... 1.01% 3.46% 2.66% 7.06% 11.52% 6.90% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ....... $6,097,159 $6,420,381 $7,286,317 $7,726,914 $7,197,334 $6,852,374 Ratios to average net assets: Expenses ............................. 0.72%(d) 0.70% 0.70% 0.69% 0.68% 0.70% Net investment income ................ 4.31%(d) 4.09% 4.11% 5.48% 6.12%(e) 6.62% Portfolio turnover rate ................. 16.87% 41.45% 66.96% 44.62% 19.18% 3.98% (a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ........................ $(0.008) Net realized and unrealized gains (losses) per share ... 0.008 Ratio of net investment income to average net assets ... (0.11)% Per share data and ratios for prior periods have not been restated to reflect this change in accounting policy. 82 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED) ---------------------------------------------------------------------------- Six Months Ended March 31, 2005 Year Ended September 30, CLASS B (unaudited) 2004 2003 2002 2001 2000 ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .... $ 6.67 $ 6.80 $ 6.98 $ 6.93 $ 6.63 $ 6.62 ---------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ............. 0.13 0.24 0.25 0.34 0.37(e) 0.39 Net realized and unrealized gains (losses) .......................... (0.08) (0.05) (0.10) 0.09 0.33(e) 0.01 ---------------------------------------------------------------------------- Total from investment operations ........ 0.05 0.19 0.15 0.43 0.70 0.40 Less distributions from net investment income (0.15) (0.32) (0.33) (0.38) (0.40) (0.39) Redemption fees ......................... --(c) --(c) -- -- -- -- ---------------------------------------------------------------------------- Net asset value, end of period .......... $ 6.57 $ 6.67 $ 6.80 $ 6.98 $ 6.93 $ 6.63 ============================================================================ Total return(b) ......................... 0.74% 2.92% 2.13% 6.37% 10.94% 6.35% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ....... $521,131 $568,276 $678,814 $559,966 $225,517 $80,167 Ratios to average net assets: Expenses ............................. 1.24%(d) 1.23% 1.23% 1.22% 1.22% 1.25% Net investment income ................ 3.79%(d) 3.56% 3.58% 4.95% 5.51%(e) 6.07% Portfolio turnover rate ................. 16.87% 41.45% 66.96% 44.62% 19.18% 3.98% (a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ........................ $(0.008) Net realized and unrealized gains (losses) per share ... 0.008 Ratio of net investment income to average net assets ... (0.11)% Per share data and ratios for prior periods have not been restated to reflect this change in accounting policy. Semiannual Report | See notes to financial statements. | 83 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED) ----------------------------------------------------------------------------- Six Months Ended March 31, 2005 Year Ended September 30, CLASS C (unaudited) 2004 2003 2002 2001 2000 ----------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .... $ 6.65 $ 6.78 $ 6.97 $ 6.91 $ 6.61 $ 6.60 ----------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ............. 0.13 0.24 0.25 0.34 0.37(e) 0.39 Net realized and unrealized gains (losses) .......................... (0.08) (0.05) (0.11) 0.10 0.33(e) 0.01 ----------------------------------------------------------------------------- Total from investment operations ........ 0.05 0.19 0.14 0.44 0.70 0.40 Less distributions from net investment income (0.15) (0.32) (0.33) (0.38) (0.40) (0.39) Redemption fees ......................... --(c) --(c) -- -- -- -- ----------------------------------------------------------------------------- Net asset value, end of period .......... $ 6.55 $ 6.65 $ 6.78 $ 6.97 $ 6.91 $ 6.61 ============================================================================= Total return(b) ......................... 0.74% 2.91% 2.00% 6.53% 10.96% 6.36% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ....... $539,510 $597,451 $814,635 $803,049 $422,114 $264,413 Ratios to average net assets: Expenses ............................. 1.24%(d) 1.23% 1.23% 1.21% 1.22% 1.25% Net investment income ................ 3.79%(d) 3.56% 3.58% 4.96% 5.55%(e) 6.08% Portfolio turnover rate ................. 16.87% 41.45% 66.96% 44.62% 19.18% 3.98% (a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ........................ $(0.008) Net realized and unrealized gains (losses) per share ... 0.008 Ratio of net investment income to average net assets ... (0.11)% Per share data and ratios for prior periods have not been restated to reflect this change in accounting policy. 84 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED) ------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS R (UNAUDITED) 2004 2003 2002(e) ------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 6.68 $ 6.81 $ 6.99 $ 6.81 ------------------------------------------------- Income from investment operations: Net investment income(a) ..................... 0.13 0.25 0.25 0.25 Net realized and unrealized gains (losses) ... (0.09) (0.05) (0.09) 0.22 ------------------------------------------------- Total from investment operations ................ 0.04 0.20 0.16 0.47 Less distributions from net investment income ... (0.15) (0.33) (0.34) (0.29) Redemption fees ................................. --(c) --(c) -- -- ------------------------------------------------- Net asset value, end of period .................. $ 6.57 $ 6.68 $ 6.81 $ 6.99 ================================================= Total return(b) ................................. 0.66% 3.08% 2.29% 7.03% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $62,551 $59,431 $54,042 $14,042 Ratios to average net assets: Expenses ..................................... 1.09%(d) 1.08% 1.08% 1.07%(d) Net investment income ........................ 3.94%(d) 3.71% 3.73% 5.10%(d) Portfolio turnover rate ......................... 16.87% 41.45% 66.96% 44.62% (a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the period January 1, 2002 (effective date) to September 30, 2002. Semiannual Report | See notes to financial statements. | 85 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED) -------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, ADVISOR CLASS (UNAUDITED) 2004 2003 2002 2001 2000 -------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .............. $ 6.69 $ 6.83 $ 7.01 $ 6.94 $ 6.64 $ 6.63 -------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ....................... 0.15 0.28 0.29 0.38 0.43(e) 0.44 Net realized and unrealized gains (losses) ..... (0.08) (0.06) (0.10) 0.11 0.32(e) -- -------------------------------------------------------------------------- Total from investment operations .................. 0.07 0.22 0.19 0.49 0.75 0.44 Less distributions from net investment income ..... (0.17) (0.36) (0.37) (0.42) (0.45) (0.43) Redemption fees ................................... --(c) --(c) -- -- -- -- -------------------------------------------------------------------------- Net asset value, end of period .................... $ 6.59 $ 6.69 $ 6.83 $ 7.01 $ 6.94 $ 6.64 ========================================================================== Total return(b) ................................... 1.07% 3.42% 2.79% 7.33% 11.63% 7.02% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................. $302,202 $340,279 $308,411 $198,437 $19,960 $46,775 Ratios to average net assets: Expenses ....................................... 0.59%(d) 0.58% 0.58% 0.57% 0.57% 0.60% Net investment income .......................... 4.44%(d) 4.21% 4.23% 5.60% 6.30%(e) 6.73% Portfolio turnover rate ........................... 16.87% 41.45% 66.96% 44.62% 19.18% 3.98% (a) Based on average daily shares outstanding. (b) Total return is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ............................... $(0.008) Net realized and unrealized gains (losses) per share .......... 0.008 Ratio of net investment income to average net assets .......... (0.11)% Per share data and ratios for prior periods have not been restated to reflect this change in accounting policy. 86 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) - --------------------------------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 97.7% GNMA I GP 30 Year, 8.25%, 3/15/17 - 11/15/17 ........ $ 383,464 $ 415,345 GNMA I GP 30 Year, 9.25%, 5/15/16 - 12/15/16 ........ 600,123 657,627 GNMA I GP 30 Year, 10.00%, 11/15/09 - 4/15/10 ....... 553,902 596,481 GNMA I GP 30 Year, 10.25%, 6/15/18 - 5/15/20 ........ 13,373 15,081 GNMA I GP 30 Year, 11.00%, 12/15/09 - 1/15/11 ....... 1,168,178 1,276,110 GNMA I GP 30 Year, 11.25%, 6/15/13 - 1/15/16 ........ 446,932 495,325 GNMA I GP 30 Year, 11.50%, 2/15/13 - 6/15/13 ........ 97,478 108,471 GNMA I GP 30 Year, 11.75%, 7/15/13 - 12/15/15 ....... 91,754 101,987 GNMA I GP 30 Year, 12.00%, 3/15/11 - 1/15/13 ........ 44,997 49,989 GNMA I GP 30 Year, 12.50%, 4/15/10 - 7/15/10 ........ 102,605 114,114 GNMA I GP 30 Year, 12.75%, 5/15/14 .................. 6,570 7,391 GNMA I SF 15 Year, 7.00%, 10/15/09 .................. 3,847,953 3,981,198 GNMA I SF 30 Year, 5.00%, 2/15/33 - 3/15/35 ......... 661,904,526 654,178,141 GNMA I SF 30 Year, 5.50%, 5/15/28 - 12/15/34 ........ 1,743,539,551 1,761,979,616 GNMA I SF 30 Year, 6.00%, 10/15/23 - 9/15/34 ........ 894,905,145 921,597,665 GNMA I SF 30 Year, 6.50%, 5/15/23 - 2/15/34 ......... 638,633,256 668,932,723 GNMA I SF 30 Year, 6.75%, 3/15/26 - 4/15/26 ......... 190,825 201,308 GNMA I SF 30 Year, 7.00%, 4/15/16 - 9/15/32 ......... 437,259,502 463,581,571 GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 ........ 1,054,999 1,129,326 GNMA I SF 30 Year, 7.50%, 12/15/05 - 8/15/32 ........ 115,850,598 124,852,319 GNMA I SF 30 Year, 7.70%, 12/15/20 - 1/15/22 ........ 886,201 950,857 GNMA I SF 30 Year, 8.00%, 10/15/07 - 9/15/30 ........ 88,100,030 95,168,056 GNMA I SF 30 Year, 8.25%, 3/15/27 - 11/15/27 ........ 203,379 220,564 GNMA I SF 30 Year, 8.50%, 12/15/09 - 6/15/25 ........ 17,841,057 19,577,994 GNMA I SF 30 Year, 9.00%, 11/15/08 - 7/15/23 ........ 23,172,763 25,399,229 GNMA I SF 30 Year, 9.50%, 5/15/09 - 1/15/23 ......... 14,722,698 16,268,425 GNMA I SF 30 Year, 10.00%, 4/15/12 - 3/15/25 ........ 17,238,320 19,449,244 GNMA I SF 30 Year, 10.50%, 12/15/09 - 10/15/21 ...... 13,421,871 15,228,685 GNMA I SF 30 Year, 11.00%, 11/15/09 - 5/15/21 ....... 13,211,591 14,629,789 GNMA I SF 30 Year, 11.50%, 2/15/13 - 12/15/17 ....... 3,082,110 3,449,896 GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 ........ 14,523,206 16,327,897 GNMA I SF 30 Year, 12.50%, 4/15/10 - 8/15/18 ........ 13,355,685 15,035,998 GNMA I SF 30 Year, 13.00%, 7/15/10 - 1/15/16 ........ 14,908,392 16,889,356 GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 ........ 92,915 100,700 GNMA II GP 30 Year, 11.50%, 8/20/13 ................. 19,175 21,265 GNMA II SF 30 Year, 5.00%, 7/20/33 - 2/15/35 ........ 107,266,047 105,826,455 GNMA II SF 30 Year, 5.00%, 9/15/33 .................. 426,785,611 421,177,246 GNMA II SF 30 Year, 5.00%, 10/20/33 ................. 90,071,739 88,869,787 GNMA II SF 30 Year, 5.00%, 11/20/33 ................. 85,114,914 83,979,108 GNMA II SF 30 Year, 5.50%, 1/20/34 - 3/20/35 ........ 168,842,603 170,372,661 GNMA II SF 30 Year, 5.50%, 6/20/34 .................. 116,148,778 117,200,830 GNMA II SF 30 Year, 5.50%, 12/20/34 ................. 256,540,850 258,864,546 GNMA II SF 30 Year, 5.50%, 1/15/35 .................. 79,449,475 80,172,911 GNMA II SF 30 Year, 5.50%, 2/15/35 .................. 166,150,689 167,663,592 GNMA II SF 30 Year, 6.00%, 10/20/23 - 2/20/35 ....... 332,464,334 341,604,912 GNMA II SF 30 Year, 6.00%, 6/20/34 .................. 100,548,692 103,249,987 GNMA II SF 30 Year, 6.00%, 9/20/34 .................. 124,129,880 127,459,631 GNMA II SF 30 Year, 6.50%, 6/20/24 - 9/15/34 ........ 225,016,202 234,693,898 Semiannual Report | 87 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - ---------------------------------------------------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - ---------------------------------------------------------------------------------------------------------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) (CONT.) GNMA II SF 30 Year, 7.00%, 2/20/28 - 7/20/33 ........................... $139,082,298 $ 146,588,816 GNMA II SF 30 Year, 7.50%, 10/20/22 - 4/20/32 .......................... 16,835,423 18,046,231 GNMA II SF 30 Year, 8.00%, 8/20/16 - 6/20/30 ........................... 7,388,846 7,942,150 GNMA II SF 30 Year, 8.50%, 4/20/16 - 6/20/25 ........................... 3,477,308 3,799,999 GNMA II SF 30 Year, 9.00%, 7/20/16 - 11/20/21 .......................... 1,133,950 1,238,965 GNMA II SF 30 Year, 9.50%, 8/20/17 - 4/20/25 ........................... 731,468 811,187 GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 .......................... 1,408,707 1,583,945 GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 .......................... 3,725,146 4,208,181 GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 .......................... 647,419 718,589 GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 .......................... 308,220 344,473 GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 .......................... 639,561 717,297 GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 ........................ 533,576 601,646 GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 ......................... 480,473 544,750 -------------- TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (COST $7,297,812,377) ... 7,351,271,536 -------------- -------------- SHARES -------------- SHORT TERM INVESTMENT (COST $157,147,840) 2.1% MONEY FUND 2.1% (a) Franklin Institutional Fiduciary Trust Money Market Portfolio .......... 157,147,840 157,147,840 -------------- TOTAL INVESTMENTS (COST $7,454,960,217 ) 99.8% ......................... 7,508,419,376 OTHER ASSETS, LESS LIABILITIES 0.2% .................................... 14,132,799 -------------- NET ASSETS 100.0% ...................................................... $7,522,552,175 ============== See Selected Portfolio Abbreviations on page 97. (a) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust Money Market Portfolio. 88 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN UTILITIES FUND ------------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2004 2003 2002 2001 2000 ------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .... $ 10.16 $ 8.80 $ 7.96 $ 10.02 $ 10.89 $ 9.58 ------------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ............. 0.20 0.43 0.42 0.46 0.46 0.43 Net realized and unrealized gains (losses) .......................... 1.09 1.33 0.85 (1.60) (0.86) 1.69 ------------------------------------------------------------------------------------- Total from investment operations ........ 1.29 1.76 1.27 (1.14) (0.40) 2.12 ------------------------------------------------------------------------------------- Less distributions from: Net investment income ................ (0.24) (0.40) (0.43) (0.45) (0.45) (0.45) Net realized gains ................... -- -- -- (0.47) (0.02) (0.36) ------------------------------------------------------------------------------------- Total distributions ..................... (0.24) (0.40) (0.43) (0.92) (0.47) (0.81) ------------------------------------------------------------------------------------- Redemption fees ......................... --(c) --(c) -- -- -- -- ------------------------------------------------------------------------------------- Net asset value, end of period .......... $ 11.21 $ 10.16 $ 8.80 $ 7.96 $ 10.02 $ 10.89 ===================================================================================== Total return(b) ......................... 12.79% 20.40% 16.38% (12.49)% (4.03)% 24.27% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ....... $1,654,518 $1,450,832 $1,259,886 $1,090,216 $1,349,027 $1,574,897 Ratios to average net assets: Expenses ............................. 0.78%(d) 0.80% 0.83% 0.80% 0.79% 0.83% Net investment income ................ 3.66%(d) 4.49% 5.00% 4.87% 4.26% 4.74% Portfolio turnover rate ................. 9.31% 16.13% 25.81% 30.60% 34.03% 19.86% (a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 89 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED) ----------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2004 2003 2002 2001 2000 ----------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .... $ 10.15 $ 8.80 $ 7.97 $ 10.02 $ 10.90 $ 9.59 ----------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ............. 0.17 0.38 0.37 0.41 0.41 0.38 Net realized and unrealized gains (losses) .......................... 1.10 1.33 0.85 (1.58) (0.87) 1.70 ----------------------------------------------------------------------------------- Total from investment operations ........ 1.27 1.71 1.22 (1.17) (0.46) 2.08 ----------------------------------------------------------------------------------- Less distributions from: Net investment income ................ (0.21) (0.36) (0.39) (0.41) (0.40) (0.41) Net realized gains ................... -- -- -- (0.47) (0.02) (0.36) ----------------------------------------------------------------------------------- Total distributions ..................... (0.21) (0.36) (0.39) (0.88) (0.42) (0.77) ----------------------------------------------------------------------------------- Redemption fees ......................... --(c) --(c) -- -- -- -- ----------------------------------------------------------------------------------- Net asset value, end of period .......... $ 11.21 $ 10.15 $ 8.80 $ 7.97 $ 10.02 $10.90 =================================================================================== Total return(b) ......................... 12.58% 19.71% 15.88% (12.88)% (4.58)% 23.79% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ....... $140,938 $127,105 $95,321 $32,802 $15,212 $8,819 Ratios to average net assets: Expenses ............................. 1.28%(d) 1.30% 1.34% 1.31% 1.30% 1.34% Net investment income ................ 3.16%(d) 3.99% 4.49% 4.44% 3.74% 4.11% Portfolio turnover rate ................. 9.31% 16.13% 25.81% 30.60% 34.03% 19.86% (a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. 90 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED) ------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2004 2003 2002 2001 2000 ------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 10.13 $ 8.78 $ 7.95 $ 10.01 $ 10.88 $ 9.57 ------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ...................... 0.17 0.38 0.36 0.41 0.41 0.38 Net realized and unrealized gains (losses) .... 1.10 1.33 0.86 (1.59) (0.87) 1.69 ------------------------------------------------------------------------- Total from investment operations ................. 1.27 1.71 1.22 (1.18) (0.46) 2.07 ------------------------------------------------------------------------- Less distributions from: Net investment income ......................... (0.21) (0.36) (0.39) (0.41) (0.39) (0.40) Net realized gains ............................ -- -- -- (0.47) (0.02) (0.36) ------------------------------------------------------------------------- Total distributions .............................. (0.21) (0.36) (0.39) (0.88) (0.41) (0.76) ------------------------------------------------------------------------- Redemption fees .................................. --(c) --(c) -- -- -- -- ------------------------------------------------------------------------- Net asset value, end of period ................... $ 11.19 $ 10.13 $ 8.78 $ 7.95 $ 10.01 $ 10.88 ========================================================================= Total return(b) .................................. 12.60% 19.76% 15.77% (12.90)% (4.50)% 23.65% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $349,263 $283,747 $222,030 $67,428 $44,985 $37,837 Ratios to average net assets: Expenses ...................................... 1.28%(d) 1.30% 1.34% 1.29% 1.30% 1.34% Net investment income ......................... 3.16%(d) 3.99% 4.49% 4.43% 3.76% 4.22% Portfolio turnover rate .......................... 9.31% 16.13% 25.81% 30.60% 34.03% 19.86% (a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 91 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED) -------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, CLASS R (UNAUDITED) 2004 2003 2002(e) -------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $10.15 $ 8.79 $ 7.96 $ 9.81 -------------------------------------------------- Income from investment operations: Net investment income(a) ..................... 0.18 0.39 0.37 0.32 Net realized and unrealized gains (losses) ... 1.09 1.34 0.86 (1.85) -------------------------------------------------- Total from investment operations ................ 1.27 1.73 1.23 (1.53) -------------------------------------------------- Less distributions from net investment income ... (0.22) (0.37) (0.40) (0.32) -------------------------------------------------- Redemption fees ................................. --(c) --(c) -- -- -------------------------------------------------- Net asset value, end of period .................. $11.20 $10.15 $ 8.79 $ 7.96 ================================================== Total return(b) ................................. 12.61% 20.02% 15.96% (16.01)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $4,502 $1,590 $1,142 $ 142 Ratios to average net assets: Expenses ..................................... 1.13%(d) 1.15% 1.19% 1.16%(d) Net investment income ........................ 3.31%(d) 4.14% 4.64% 4.82%(d) Portfolio turnover rate ......................... 9.31% 16.13% 25.81% 30.60% (a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. (e) For the period January 1, 2002 (effective date) to September 30, 2002. 92 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED) --------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2005 YEAR ENDED SEPTEMBER 30, ADVISOR CLASS (UNAUDITED) 2004 2003 2002 2001 2000 --------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 10.20 $ 8.84 $ 7.99 $ 10.05 $10.92 $ 9.61 --------------------------------------------------------------------- Income from investment operations: Net investment income(a) ..................... 0.21 0.44 0.42 0.47 0.48 0.44 Net realized and unrealized gains (losses) ... 1.09 1.34 0.87 (1.60) (0.87) 1.69 --------------------------------------------------------------------- Total from investment operations ................ 1.30 1.78 1.29 (1.13) (0.39) 2.13 --------------------------------------------------------------------- Less distributions from: Net investment income ........................ (0.25) (0.42) (0.44) (0.46) (0.46) (0.46) Net realized gains ........................... -- -- -- (0.47) (0.02) (0.36) --------------------------------------------------------------------- Total distributions ............................. (0.25) (0.42) (0.44) (0.93) (0.48) (0.82) --------------------------------------------------------------------- Redemption fees ................................. --(c) --(c) -- -- -- -- --------------------------------------------------------------------- Net asset value, end of period .................. $ 11.25 $ 10.20 $ 8.84 $ 7.99 $10.05 $10.92 ===================================================================== Total return(b) ................................. 12.86% 20.48% 16.61% (12.32)% (3.89)% 24.50% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $82,557 $51,586 $47,167 $15,664 $8,829 $9,234 Ratios to average net assets: Expenses ..................................... 0.63%(d) 0.65% 0.69% 0.66% 0.65% 0.69% Net investment income ........................ 3.81%(d) 4.64% 5.14% 5.07% 4.39% 4.87% Portfolio turnover rate ......................... 9.31% 16.13% 25.81% 30.60% 34.03% 19.86% (a) Based on average daily shares outstanding. (b) Total return is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Annualized. Semiannual Report | See notes to financial statements. | 93 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) - ------------------------------------------------------------------------------------------ FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------ COMMON STOCKS 89.3% ELECTRIC UTILITIES 63.8% Alliant Energy Corp. ................... United States 900,000 $ 24,102,000 Ameren Corp. ........................... United States 700,000 34,307,000 American Electric Power Co. Inc. ....... United States 1,500,000 51,090,000 CenterPoint Energy Inc. ................ United States 1,262,800 15,191,484 Central Vermont Public Service Corp. ... United States 169,200 3,803,616 Cinergy Corp. .......................... United States 1,700,000 68,884,000 Consolidated Edison Inc. ............... United States 750,000 31,635,000 DTE Energy Co. ......................... United States 400,000 18,192,000 Duke Energy Corp. ...................... United States 1,000,000 28,010,000 Edison International ................... United States 1,600,000 55,552,000 Energy East Corp. ...................... United States 1,100,000 28,842,000 Entergy Corp. .......................... United States 1,500,000 105,990,000 Exelon Corp. ........................... United States 2,300,000 105,547,000 FirstEnergy Corp. ...................... United States 1,800,000 75,510,000 FPL Group Inc. ......................... United States 2,200,000 88,330,000 Hawaiian Electric Industries Inc. ...... United States 400,000 10,208,000 Northeast Utilities .................... United States 1,400,000 26,978,000 Pepco Holdings Inc. .................... United States 1,788,700 37,544,813 PG&E Corp. ............................. United States 1,500,000 51,150,000 Pinnacle West Capital Corp. ............ United States 1,200,000 51,012,000 PPL Corp. .............................. United States 1,361,000 73,480,390 Progress Energy Inc. ................... United States 1,500,000 62,925,000 Public Service Enterprise Group Inc. ... United States 900,000 48,951,000 Puget Energy Inc. ...................... United States 1,725,000 38,019,000 Scottish & Southern Energy PLC ......... United Kingdom 1,500,000 25,017,482 Scottish Power PLC ..................... United Kingdom 6,000,000 46,378,017 (a) Sierra Pacific Resources Co. ........... United States 1,500,000 16,125,000 Southern Co. ........................... United States 2,300,000 73,209,000 TECO Energy Inc. ....................... United States 200,000 3,136,000 TXU Corp. .............................. United States 579,600 46,153,548 Westar Energy Inc. ..................... United States 900,000 19,476,000 Wisconsin Energy Corp. ................. United States 1,100,000 39,050,000 Xcel Energy Inc. ....................... United States 1,200,000 20,616,000 -------------- 1,424,415,350 -------------- GAS UTILITIES 11.2% AGL Resources Inc. ..................... United States 1,000,000 34,930,000 Atmos Energy Corp. ..................... United States 1,000,000 27,000,000 KeySpan Corp. .......................... United States 1,000,000 38,970,000 Nicor Inc. ............................. United States 550,000 20,399,500 NiSource Inc. .......................... United States 2,800,000 63,812,000 Sempra Energy .......................... United States 1,000,000 39,840,000 Vectren Corp. .......................... United States 900,000 23,976,000 -------------- 248,927,500 -------------- 94 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - ----------------------------------------------------------------------------------------------------------- FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) INTEGRATED TELECOMMUNICATION SERVICES 2.6% SBC Communications Inc. ................................. United States 1,400,000 $ 33,166,000 Verizon Communications Inc. ............................. United States 700,000 24,850,000 -------------- 58,016,000 -------------- MULTI-UTILITIES & UNREGULATED POWER 10.7% Dominion Resources Inc. ................................. United States 1,450,000 107,923,500 National Grid Transco PLC ............................... United Kingdom 5,000,000 46,349,668 ONEOK Inc. .............................................. United States 500,000 15,410,000 United Utilities PLC .................................... United Kingdom 4,000,000 47,700,943 United Utilities PLC, A ................................. United Kingdom 2,500,000 21,320,375 -------------- 238,704,486 -------------- OIL & GAS REFINING,MARKETING & TRANSPORTATION 1.0% Kinder Morgan Inc. ...................................... United States 300,000 22,710,000 -------------- TOTAL COMMON STOCKS (COST $1,480,737,267) ............... 1,992,773,336 -------------- CONVERTIBLE PREFERRED STOCKS 3.5% ELECTRIC UTILITIES 3.5% Ameren Corp., 9.75%, cvt. pfd. .......................... United States 800,600 21,716,275 American Electric Power Co. Inc., 9.25%, cvt. pfd. ...... United States 354,700 15,110,220 Aquila Inc., 6.75%, cvt. pfd. ........................... United States 500,000 17,370,000 CMS Energy Trust I, 7.75%, cvt. pfd. .................... United States 260,000 13,260,000 (a) PNM Resources Inc., 6.75%, cvt. pfd. .................... United States 205,000 10,209,000 -------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $73,134,200) ... 77,665,495 -------------- ---------------- PRINCIPAL AMOUNT ---------------- BONDS 5.7% ELECTRIC UTILITIES 5.7% CalEnergy Co. Inc., senior note, 8.48%, 9/15/28 .......... United States $25,000,000 32,782,125 CMS Energy Corp., senior note, 9.875%, 10/15/07 .......... United States 8,500,000 9,265,000 FirstEnergy Corp., senior note, 7.375%, 11/15/31 ......... United States 25,000,000 28,405,725 Northeast Generation Co., senior note, 8.812%, 10/15/26 .. United States 7,500,000 8,307,983 PPL Capital Funding, 8.375%, 6/15/07 ..................... United States 15,000,000 16,193,415 TXU Corp., 144A, 6.55%, 11/15/34 ......................... United States 20,000,000 19,020,820 Utilicorp United Inc., senior note, 9.95%, 2/01/11 ....... United States 6,000,000 6,750,000 Utilicorp United Inc., senior note, 8.27%, 11/15/21 ...... United States 6,100,000 6,237,250 ------------- TOTAL BONDS (COST $111,897,294) .......................... 126,962,318 ------------- CONVERTIBLE BOND (COST $9,000,000) 1.0% MULTI-UTILITIES & UNREGULATED POWER 1.0% Sierra Pacific Resources Co., cvt., senior note, 144A, 7.25%, 2/14/10 .................................. 9,000,000 22,792,500 ------------- TOTAL LONG TERM INVESTMENTS (COST $1,674,768,761) ........ 2,220,193,649 ------------- Semiannual Report | 95 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) - ------------------------------------------------------------------------------------------------------------- FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENT (COST $7,311,412) 0.3% MONEY FUND 0.3% (b) Franklin Institutional Fiduciary Trust Money Market Portfolio .... 7,311,412 $ 7,311,412 -------------- TOTAL INVESTMENTS (COST $1,682,080,173) 99.8% .................... 2,227,505,061 OTHER ASSETS, LESS LIABILITIES 0.2% .............................. 4,272,915 -------------- NET ASSETS 100.0% ................................................ $2,231,777,976 ============== (a) Non-income producing. (b) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust Money Market Portfolio. 96 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED) SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt FHLMC - Federal Home Loan Mortgage Corporation GNMA - Government National Mortgage Association GO - General Obligation GP - Graduated Payment PLC - Public Limited Co. SF - Single Family Semiannual Report | See notes to financial statements. | 97 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES March 31, 2005 (unaudited) ------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------ Assets: Investments in securities: Cost - Unaffiliated issuers ............... $479,823,807 $ 970,831,491 $28,243,154,838 Cost - Sweep Money Fund (Note 7) .......... 4,093,487 4,408,451 176,023,849 Cost - Repurchase agreements .............. -- -- 2,067,348,547 ------------------------------------------------ Total cost of investments ................. $483,917,294 $ 975,239,942 $30,486,527,234 ================================================ Value - Unaffiliated issuers .............. $688,955,849 $2,175,525,998 $30,002,483,151 Value - Sweep Money Fund (Note 7) ......... 4,093,487 4,408,451 176,023,849 Value - Repurchase agreements ............. -- -- 2,067,348,547 ------------------------------------------------ Total value of investments ................ 693,049,336 2,179,934,449 32,245,855,547 Cash ......................................... -- -- 4,848,453 Receivables: Investment securities sold ................ -- 4,783,338 162,862,164 Capital shares sold ....................... 921,949 1,847,295 168,311,808 Dividends and interest .................... 219,761 1,916,483 280,370,451 ------------------------------------------------ Total assets ........................... 694,191,046 2,188,481,565 32,862,248,423 ------------------------------------------------ Liabilities: Payables: Investment securities purchased ........... -- -- 243,545,592 Capital shares redeemed ................... 1,361,101 4,051,665 54,360,203 Affiliates ................................ 764,713 2,375,182 29,488,396 Unaffiliated transfer agent fees .......... 66,790 557,905 1,644,407 Payable upon return of securities loaned ..... -- -- 24,877,985 Deferred sale proceeds (Note 11) ............. -- -- 9,239,222 Other liabilities ............................ 23,793 58,855 170,366 ------------------------------------------------ Total liabilities ...................... 2,216,397 7,043,607 363,326,171 ------------------------------------------------ Net assets, at value ................ $691,974,649 $2,181,437,958 $32,498,922,252 ================================================ Net assets consist of: Undistributed net investment income (loss) ... $ 864,123 $ 1,147,875 $ (84,475,582) Net unrealized appreciation (depreciation) ... 209,132,042 1,204,694,507 1,759,328,106 Accumulated net realized gain (loss) ......... (98,719,778) (208,840,766) 457,273,001 Paid-in capital .............................. 580,698,262 1,184,436,342 30,366,796,727 ------------------------------------------------ Net assets, at value ................ $691,974,649 $2,181,437,958 $32,498,922,252 ================================================ 98 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2005 (unaudited) ------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------- CLASS A: Net assets, at value ................................................. $ 600,801,530 $1,563,357,461 $18,107,258,979 ------------------------------------------------- Shares outstanding ................................................... 26,449,280 47,128,475 7,398,956,161 ------------------------------------------------- Net asset value per share(a) ......................................... $ 22.72 $ 33.17 $ 2.45 ------------------------------------------------- Maximum offering price per share (net asset value per share / 94.25%, 94.25% and 95.75%, respectively) .................................. $ 24.11 $ 35.19 $ 2.56 ------------------------------------------------- CLASS B: Net assets, at value ................................................. $ 18,821,558 $ 126,077,529 $ 3,935,777,224 ------------------------------------------------- Shares outstanding ................................................... 854,045 3,909,941 1,613,495,167 ------------------------------------------------- Net asset value and maximum offering price per share(a) .............. $ 22.04 $ 32.25 $ 2.44 ------------------------------------------------- CLASS B1: Net assets, at value ................................................. -- -- $ 504,139,381 ------------------------------------------------- Shares outstanding ................................................... -- -- 205,935,560 ------------------------------------------------- Net asset value and maximum offering price per share(a) .............. -- -- $ 2.45 ------------------------------------------------- CLASS C: Net assets, at value ................................................. $ 72,351,561 $ 272,894,770 $ 8,299,236,291 ------------------------------------------------- Shares outstanding ................................................... 3,317,747 8,537,137 3,372,966,168 ------------------------------------------------- Net asset value and maximum offering price per share(a) .............. $ 21.81 $ 31.97 $ 2.46 ------------------------------------------------- CLASS R: Net assets, at value ................................................. -- $ 23,079,602 $ 98,997,973 ------------------------------------------------- Shares outstanding ................................................... -- 699,692 40,792,728 ------------------------------------------------- Net asset value and maximum offering price per share(a) .............. -- $ 32.99 $ 2.43 ------------------------------------------------- ADVISOR CLASS: Net assets, at value ................................................. -- $ 196,028,596 $ 1,553,512,404 ------------------------------------------------- Shares outstanding ................................................... -- 5,906,420 637,435,494 ------------------------------------------------- Net asset value and maximum offering price per share(a) .............. -- $ 33.19 $ 2.44 ------------------------------------------------- (a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. Semiannual Report | See notes to financial statements. | 99 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2005 (unaudited) -------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND -------------------------------- Assets: Investments in securities: Cost - Unaffiliated issuers ............... $7,297,812,377 $1,674,768,761 Cost - Sweep Money Fund (Note 7) .......... 157,147,840 7,311,412 -------------------------------- Total cost of investments ................. $7,454,960,217 $1,682,080,173 ================================ Value - Unaffiliated issuers .............. $7,351,271,536 $2,220,193,649 Value - Sweep Money Fund (Note 7) ......... 157,147,840 7,311,412 -------------------------------- Total value of investments ................ 7,508,419,376 2,227,505,061 Cash ......................................... -- 552,420 Receivables: Capital shares sold ....................... 4,926,819 4,296,962 Dividends and interest .................... 34,350,826 5,974,622 -------------------------------- Total assets ........................... 7,547,697,021 2,238,329,065 -------------------------------- Liabilities: Payables: Investment securities purchased ........... -- 250,750 Capital shares redeemed ................... 18,616,695 4,058,707 Affiliates ................................ 5,516,658 1,833,400 Unaffiliated transfer agent fees .......... 720,379 319,901 Other liabilities ............................ 291,114 88,331 -------------------------------- Total liabilities ...................... 25,144,846 6,551,089 -------------------------------- Net assets, at value ................ $7,522,552,175 $2,231,777,976 ================================ Net assets consist of: Undistributed net investment income (loss) ... $ (28,015,643) $ (2,983,881) Net unrealized appreciation (depreciation) ... 53,459,159 545,424,888 Accumulated net realized gain (loss) ......... (409,198,516) (16,261,212) Paid-in capital .............................. 7,906,307,175 1,705,598,181 -------------------------------- Net assets, at value ................ $7,522,552,175 $2,231,777,976 ================================ 100 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2005 (unaudited) -------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND -------------------------------- CLASS A: Net assets, at value ................................................... $6,097,159,226 $1,654,517,869 -------------------------------- Shares outstanding ..................................................... 927,317,300 147,556,401 -------------------------------- Net asset value per share(a) ........................................... $ 6.58 $ 11.21 -------------------------------- Maximum offering price per share (net asset value per share / 95.75%) .. $ 6.87 $ 11.71 -------------------------------- CLASS B: Net assets, at value ................................................... $ 521,130,549 $ 140,937,977 -------------------------------- Shares outstanding ..................................................... 79,364,931 12,574,289 -------------------------------- Net asset value and maximum offering price per share(a) ................ $ 6.57 $ 11.21 -------------------------------- CLASS C: Net assets, at value ................................................... $ 539,509,941 $ 349,262,904 -------------------------------- Shares outstanding ..................................................... 82,407,884 31,219,921 -------------------------------- Net asset value and maximum offering price per share(a) ................ $ 6.55 $ 11.19 -------------------------------- CLASS R: Net assets, at value ................................................... $ 62,550,882 $ 4,501,804 -------------------------------- Shares outstanding ..................................................... 9,519,200 401,917 -------------------------------- Net asset value and maximum offering price per share(a) ................ $ 6.57 $ 11.20 -------------------------------- ADVISOR CLASS: Net assets, at value ................................................... $ 302,201,577 $ 82,557,422 -------------------------------- Shares outstanding ..................................................... 45,864,644 7,336,058 -------------------------------- Net asset value and maximum offering price per share(a) ................ $ 6.59 $ 11.25 -------------------------------- (a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. Semiannual Report | See notes to financial statements. | 101 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the six months ended March 31, 2005 (unaudited) ---------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ---------------------------------------------- Investment income: Dividends Unaffiliated issuers ................................ $ 4,700,697 $ 16,335,340 $ 331,392,647 Sweep Money Fund (Note 7) ........................... 69,844 38,370 1,655,984 Interest Unaffiliated issuers ................................ -- -- 539,593,403 Non-controlled affiliated issuers (Note 10) ......... -- -- 1,964,028 Income from securities loaned - net ................. 8,310 -- 105,847 Other Income (Note 12) ................................. 27,651 104,408 679,464 ---------------------------------------------- Total investment income .......................... 4,806,502 16,478,118 875,391,373 ---------------------------------------------- Expenses: Management fees (Note 3) ............................... 1,764,776 5,036,250 61,568,717 Distribution fees: (Note 3) Class A ............................................. 799,928 1,992,465 12,428,716 Class B ............................................. 98,555 631,509 19,056,788 Class B1 ............................................ -- -- 1,665,640 Class C ............................................. 384,658 1,380,194 24,504,334 Class R ............................................. -- 56,599 217,995 Transfer agent fees (Note 3) ........................... 776,256 2,139,671 10,770,059 Custodian fees (Note 4) ................................ 9,735 21,817 257,414 Reports to shareholders ................................ 49,375 105,021 448,127 Registration and filing fees ........................... 31,005 41,340 974,089 Professional fees ...................................... 13,550 27,804 173,311 Directors' fees and expenses ........................... 1,923 3,869 56,205 Other .................................................. 12,623 50,899 570,243 ---------------------------------------------- Total expenses ................................... 3,942,384 11,487,438 132,691,639 Expense reductions (Note 4) ...................... (5) (287) (23,232) ---------------------------------------------- Net expenses .................................. 3,942,379 11,487,151 132,668,407 ---------------------------------------------- Net investment income ...................... 864,123 4,990,967 742,722,966 ---------------------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments: Unaffiliated issuers ............................. (6,261,559) 36,912,599 520,854,214 Non-controlled affiliated issuers (Note 10) ...... -- -- 12,827,824 Foreign currency transactions .................... 511 (4,880) 479,468 ---------------------------------------------- Net realized gain (loss) ...................... (6,261,048) 36,907,719 534,161,506 Net change in unrealized appreciation (depreciation) on: Investments ......................................... 30,216,153 136,315,151 32,976,099 Translation of assets and liabilities denominated in foreign currencies ............................... -- -- (207) ---------------------------------------------- Net change in unrealized appreciation (depreciation) ............................. 30,216,153 136,315,151 32,975,892 ---------------------------------------------- Net realized and unrealized gain (loss) ................... 23,955,105 173,222,870 567,137,398 ---------------------------------------------- Net increase (decrease) in net assets resulting from operations ............................................. $24,819,228 $178,213,837 $1,309,860,364 ============================================== 102 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) for the six months ended March 31, 2005 (unaudited) -------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND -------------------------------- Investment income: Dividends Unaffiliated issuers ............................................. $ -- $ 42,030,450 Sweep Money Fund (Note 7) ........................................ 1,591,809 92,222 Interest ............................................................ 193,270,970 4,698,871 Other income (Note 12) .............................................. -- 52,932 ------------------------------- Total investment income ....................................... 194,862,779 46,874,475 ------------------------------- Expenses: Management fees (Note 3) ............................................ 17,220,677 4,932,777 Distribution fees: (Note 3) Class A .......................................................... 3,944,553 1,164,744 Class B .......................................................... 1,766,691 444,770 Class C .......................................................... 1,847,658 1,042,927 Class R .......................................................... 153,800 6,928 Transfer agent fees (Note 3) ........................................ 4,793,834 1,404,752 Custodian fees (Note 4) ............................................. 79,136 37,056 Reports to shareholders ............................................. 397,905 168,825 Registration and filing fees ........................................ 79,985 80,205 Professional fees ................................................... 83,266 25,735 Directors' fees and expenses ........................................ 16,466 4,471 Other ............................................................... 248,314 27,593 ------------------------------- Total expenses ................................................ 30,632,285 9,340,783 Expense reductions (Note 4) ................................... (15,689) (1,514) ------------------------------- Net expenses ............................................... 30,616,596 9,339,269 ------------------------------- Net investment income ................................... 164,246,183 37,535,206 ------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ...................................................... 3,025,142 63,525,922 Foreign currency transactions .................................... -- (87,854) ------------------------------- Net realized gain (loss) ................................... 3,025,142 63,438,068 Net change in unrealized appreciation (depreciation) on investments.. (97,755,176) 145,372,029 ------------------------------- Net realized and unrealized gain (loss) ................................ (94,730,034) 208,810,097 ------------------------------- Net increase (decrease) in net assets resulting from operations ........ $ 69,516,149 $246,345,303 ============================== Semiannual Report | See notes to financial statements. | 103 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS for the six months ended March 31, 2005 (unaudited) and the year ended September 30, 2004 ----------------------------------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ----------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED MARCH 31, 2005 SEPTEMBER 30, 2004 MARCH 31, 2005 SEPTEMBER 30, 2004 ----------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ............... $ 864,123 $ (3,634,884) $ 4,990,967 $ 1,223,391 Net realized gain (loss) from investments and foreign currency transactions ....... (6,261,048) (14,029,079) 36,907,719 6,262,419 Net change in unrealized appreciation (depreciation) on investments ........... 30,216,153 73,445,772 136,315,151 247,296,583 ---------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ........................ 24,819,228 55,781,809 178,213,837 254,782,393 ---------------------------------------------------------------------------- Distributions to shareholders from: Net investment income: Class A ................................. -- -- (3,882,891) (1,532,029) Class R ................................. -- -- (10,415) -- Advisor Class ........................... -- -- (732,270) (173,053) ---------------------------------------------------------------------------- Total distributions to shareholders ........... -- -- (4,625,576) (1,705,082) ---------------------------------------------------------------------------- Capital share transactions: (Note 2) Class A ................................. (61,361,579) 31,657,014 (96,800,537) (98,948,884) Class B ................................. (539,652) 7,768,447 (5,968,709) 4,780,418 Class C ................................. (5,529,547) 3,332,636 (19,240,647) (22,857,255) Class R ................................. -- -- 1,224,359 3,224,209 Advisor Class ........................... -- -- 51,249,706 85,716,783 ---------------------------------------------------------------------------- Total capital share transactions .............. (67,430,778) 42,758,097 (69,535,828) (28,084,729) ---------------------------------------------------------------------------- Redemption fees ............................... 595 691 5,859 6,295 ---------------------------------------------------------------------------- Net increase (decrease) in net assets ........................ (42,610,955) 98,540,597 104,058,292 224,998,877 Net assets: Beginning of period ........................... 734,585,604 636,045,007 2,077,379,666 1,852,380,789 ---------------------------------------------------------------------------- End of period ................................. $691,974,649 $734,585,604 $2,181,437,958 $2,077,379,666 ============================================================================ Undistributed net investment income included in net assets: End of period .............................. $ 864,123 $ -- $ 1,147,875 $ 782,484 ============================================================================ 104 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) for the six months ended March 31, 2005 (unaudited) and the year ended September 30, 2004 ----------------------------------------------------------------------------- FRANKLIN FRANKLIN INCOME FUND U.S. GOVERNMENT SECURITIES FUND ----------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED MARCH 31, 2005 SEPTEMBER 30, 2004 MARCH 31, 2005 SEPTEMBER 30, 2004 ----------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ...................... $ 742,722,966 $ 1,044,441,688 $ 164,246,183 $ 339,860,811 Net realized gain (loss) from investments and foreign currency transactions ....... 534,161,506 451,159,295 3,025,142 2,260,202 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ....... 32,975,892 1,332,443,859 (97,755,176) (71,149,291) ----------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ......... 1,309,860,364 2,828,044,842 69,516,149 270,971,722 ----------------------------------------------------------------------------- Distributions to shareholders from: Net investment income: Class A .................................... (510,625,522) (798,349,922) (158,059,697) (364,404,705) Class B .................................... (102,672,661) (162,621,962) (12,391,779) (29,981,316) Class B1 ................................... (14,816,396) (31,263,684) -- -- Class C .................................... (211,649,915) (316,248,066) (12,942,725) (33,894,559) Class R .................................... (2,542,555) (3,457,009) (1,423,126) (2,762,490) Advisor Class .............................. (37,548,722) (28,902,829) (7,558,350) (17,122,309) Net realized gains: Class A .................................... (84,143,096) (55,088,598) -- -- Class B .................................... (19,751,225) (12,569,134) -- -- Class B1 ................................... (2,705,174) (2,636,974) -- -- Class C .................................... (37,975,944) (22,715,500) -- -- Class R .................................... (432,526) (216,288) -- -- Advisor Class .............................. (5,808,100) (943,590) -- -- ----------------------------------------------------------------------------- Total distributions to shareholders .............. (1,030,671,836) (1,435,013,556) (192,375,677) (448,165,379) ----------------------------------------------------------------------------- Capital share transactions: (Note 2) Class A .................................... 3,208,027,945 4,294,278,432 (223,547,145) (724,886,754) Class B .................................... 408,567,134 1,219,777,152 (38,513,442) (97,262,940) Class B1 ................................... (13,751,525) (19,911,534) -- -- Class C .................................... 1,611,729,043 2,514,302,239 (48,943,036) (201,426,271) Class R .................................... 25,205,958 33,450,501 4,108,338 6,444,739 Advisor Class .............................. 647,138,975 783,062,664 (33,523,493) 37,919,958 ----------------------------------------------------------------------------- Total capital share transactions ................. 5,886,917,530 8,824,959,454 (340,418,778) (979,211,268) ----------------------------------------------------------------------------- Redemption fees .................................. 70,811 13,225 13,361 3,103 ----------------------------------------------------------------------------- Net increase (decrease) in net assets ............................... 6,166,176,869 10,218,003,965 (463,264,945) (1,156,401,822) Net assets: Beginning of period ........................... 26,332,745,383 16,114,741,418 7,985,817,120 9,142,218,942 ----------------------------------------------------------------------------- End of period ................................. $32,498,922,252 $26,332,745,383 $7,522,552,175 $ 7,985,817,120 ============================================================================= Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of period .............................. $ (84,475,582) $ 52,657,223 $ (28,015,643) $ 113,851 ============================================================================= Semiannual Report | See notes to financial statements. | 105 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) for the six months ended March 31, 2005 (unaudited) and the year ended September 30, 2004 ------------------------------------- FRANKLIN UTILITIES FUND ------------------------------------- SIX MONTHS ENDED YEAR ENDED MARCH 31, 2005 SEPTEMBER 30, 2004 ------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ........................................................ $ 37,535,206 $ 77,992,985 Net realized gain (loss) from investments and foreign currency transactions .. 63,438,068 17,758,493 Net change in unrealized appreciation (depreciation) on investments .......... 145,372,029 229,110,659 ------------------------------------- Net increase (decrease) in net assets resulting from operations ........... 246,345,303 324,862,137 ------------------------------------- Distributions to shareholders from: Net investment income: Class A ...................................................................... (35,118,393) (57,157,619) Class B ...................................................................... (2,665,812) (4,239,501) Class C ...................................................................... (6,256,741) (9,771,431) Class R ...................................................................... (61,882) (51,170) Advisor Class ................................................................ (1,590,503) (2,242,376) ------------------------------------- Total distributions to shareholders ................................................ (45,693,331) (73,462,097) ------------------------------------- Capital share transactions: (Note 2) Class A ...................................................................... 52,409,567 (1,380,506) Class B ...................................................................... 590,058 15,905,081 Class C ...................................................................... 35,303,329 25,559,310 Class R ...................................................................... 2,707,553 262,939 Advisor Class ................................................................ 25,253,791 (2,434,692) ------------------------------------- Total capital share transactions ................................................... 116,264,298 37,912,132 ------------------------------------- Redemption fees .................................................................... 1,438 1,274 ------------------------------------- Net increase (decrease) in net assets ..................................... 316,917,708 289,313,446 Net assets: Beginning of period ............................................................. 1,914,860,268 1,625,546,822 ------------------------------------- End of period ................................................................... $2,231,777,976 $1,914,860,268 ===================================== Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of period ................................................................ $ (2,983,881) $ 5,174,244 ===================================== 106 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Custodian Funds, Inc. (the Custodian Funds) is registered under the Investment Company Act of 1940 as a diversified, open-end investment company, consisting of five series (the Funds). The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Corporate debt securities, U.S. Government securities, Mortgage pass-through securities, other mortgage-backed securities, collateralized mortgage obligations and asset-backed securities generally trade in the over-the-counter market rather than on a securities exchange. The Funds may utilize independent pricing services, quotations from bond dealers and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Funds have procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Some methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund's Board of Directors. Semiannual Report | 107 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund's Board of Directors. The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollars equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. REPURCHASE AGREEMENTS The Funds may enter into a joint repurchase agreement whereby their uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the Funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Funds to the seller, collateralized by securities which are delivered to the Funds' custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the Funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. Repurchase agreements are valued at cost. At March 31, 2005, all repurchase agreements held by the Funds had been entered into on that date. D. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS The Funds may purchase securities on a when-issued or delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Funds will generally purchase these securities with the intention of holding the securities, they may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. 108 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. FOREIGN CURRENCY CONTRACTS When the Funds purchase or sell foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts. F. SECURITIES LENDING The Franklin DynaTech Fund and the Franklin Income Fund loan securities to certain brokers through a securities lending agent for which they receive cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. The collateral is invested in short-term instruments. The funds receive interest income 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 and the securities loaned. The securities lending agent has agreed to indemnify the funds in the case of default of any securities borrower. At March 31, 2005, the Franklin DynaTech Fund had no securities on loan. G. INCOME TAXES No provision has been made for U.S. income taxes because each Fund's policy is to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and to distribute substantially all of its taxable income. Fund distributions to shareholders are determined on an income tax basis and may differ from net investment income and realized gains for financial reporting purposes. 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 Custodian Funds 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. Semiannual Report | 109 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. I. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. J. REDEMPTION FEES Effective June 1, 2004, redemptions and exchanges of the Funds' shares held five trading days or less may be subject to the Funds' redemption fee, which is 2% of the amount redeemed. Such fees are retained by the Funds and accounted for as additional paid-in capital. K. GUARANTEES AND INDEMNIFICATIONS Under the Custodian Fund's organizational documents, its officers and trustees are indemnified by the Custodian Funds against certain liabilities arising out of the performance of their duties to the Custodian Funds. Additionally, in the normal course of business, the Custodian Funds enter into contracts with service providers that contain general indemnification clauses. The Custodian Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Custodian Funds that have not yet occurred. However, based on experience, the Custodian Funds expect the risk of loss to be remote. 2. CAPITAL STOCK The classes of shares offered within each of the Funds are indicated below. Effective March 1, 2005, Class B shares will no longer be offered except to existing Class B shareholders through reinvested distributions or exchanges into other Franklin Templeton funds' Class B shares, as permitted by the applicable fund prospectus. 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 110 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED) At March 31, 2005, there were 32 billion shares authorized ($0.01 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: Six months ended March 31, 2005 Shares sold .............................. 2,870,480 $ 66,608,471 2,397,485 $ 78,084,505 Shares issued in reinvestment of distributions ...................... -- -- 106,686 3,548,365 Shares redeemed .......................... (5,503,558) (127,970,050) (5,462,956) (178,433,407) -------------------------------------------------------- Net increase (decrease) .................. (2,633,078) $ (61,361,579) (2,958,785) $ (96,800,537) ======================================================== Year ended September 30, 2004 Shares sold .............................. 9,014,383 $ 201,786,839 6,395,481 $ 193,229,695 Shares issued in reinvestment of distributions ...................... -- -- 47,975 1,399,446 Shares redeemed .......................... (7,626,280) (170,129,825) (9,722,445) (293,578,025) -------------------------------------------------------- Net increase (decrease) .................. 1,388,103 $ 31,657,014 (3,278,989) $ (98,948,884) ======================================================== CLASS B SHARES: Six months ended March 31, 2005 Shares sold .............................. 101,591 $ 2,289,686 176,692 $ 5,568,777 Shares redeemed .......................... (125,745) (2,829,338) (364,477) (11,537,486) -------------------------------------------------------- Net increase (decrease) .................. (24,154) $ (539,652) (187,785) $ (5,968,709) ======================================================== Year ended September 30, 2004 Shares sold .............................. 463,560 $ 10,173,910 731,263 $ 21,476,065 Shares redeemed .......................... (111,081) (2,405,463) (565,876) (16,695,647) -------------------------------------------------------- Net increase (decrease) .................. 352,479 $ 7,768,447 165,387 $ 4,780,418 ======================================================== Semiannual Report | 111 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED) --------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND --------------------------------------------------- SHARES AMOUNT SHARES AMOUNT --------------------------------------------------- CLASS C SHARES: Six months ended March 31, 2005 Shares sold ..................................... 263,603 $ 5,878,836 412,494 $ 13,011,391 Shares redeemed ................................. (512,171) (11,408,383) (1,028,731) (32,252,038) --------------------------------------------------- Net increase (decrease) ......................... (248,568) $ (5,529,547) (616,237) $(19,240,647) =================================================== Year ended September 30, 2004 Shares sold ..................................... 917,943 $ 19,881,973 1,305,882 $ 38,083,688 Shares redeemed ................................. (769,633) (16,549,337) (2,084,652) (60,940,943) --------------------------------------------------- Net increase (decrease) ......................... 148,310 $ 3,332,636 (778,770) $(22,857,255) =================================================== CLASS R SHARES: Six months ended March 31, 2005 Shares sold ............................................................... 128,391 $ 4,107,622 Shares issued in reinvestment of distributions ............................ 314 10,387 Shares redeemed ........................................................... (89,048) (2,893,650) ------------------------- Net increase (decrease) ................................................... 39,657 $ 1,224,359 ========================= Year ended September 30, 2004 Shares sold ............................................................... 254,043 $ 7,608,802 Shares redeemed ........................................................... (145,872) (4,384,593) ------------------------- Net increase (decrease) ................................................... 108,171 $ 3,224,209 ========================= ADVISOR CLASS SHARES: Six months ended March 31, 2005 Shares sold ............................................................... 1,632,942 $ 53,825,617 Shares issued in reinvestment of distributions ............................ 21,696 721,407 Shares redeemed ........................................................... (100,648) (3,297,318) ------------------------- Net increase (decrease) ................................................... 1,553,990 $ 51,249,706 ========================= Year ended September 30, 2004 Shares sold ............................................................... 2,942,725 $ 89,412,412 Shares issued in reinvestment of distributions ............................ 5,745 167,517 Shares redeemed ........................................................... (127,887) (3,863,146) ------------------------- Net increase (decrease) ................................................... 2,820,583 $ 85,716,783 ========================= 112 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED) ---------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND ---------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------- CLASS A SHARES: Six months ended March 31, 2005 Shares sold ................. 1,533,144,461 $ 3,781,386,048 37,513,794 $ 249,334,651 Shares issued in reinvestment of distributions ......... 157,246,401 386,511,582 15,022,255 99,648,374 Shares redeemed ............. (388,964,944) (959,869,685) (86,171,572) (572,530,170) ---------------------------------------------------------------- Net increase (decrease) ..... 1,301,425,918 $ 3,208,027,945 (33,635,523) $ (223,547,145) ================================================================ Year ended September 30, 2004 Shares sold ................. 2,247,241,860 $ 5,316,264,931 86,401,010 $ 578,723,039 Shares issued in reinvestment of distributions ......... 226,682,607 533,294,345 33,946,772 226,702,288 Shares redeemed ............. (658,551,288) (1,555,280,844) (228,919,042) (1,530,312,081) ---------------------------------------------------------------- Net increase (decrease) ..... 1,815,373,179 $ 4,294,278,432 (108,571,260) $ (724,886,754) ================================================================ CLASS B SHARES: Six months ended March 31, 2005 Shares sold ................. 200,447,516 $ 491,581,008 2,037,216 $ 13,543,504 Shares issued in reinvestment of distributions ......... 32,241,978 78,954,949 1,302,958 8,634,644 Shares redeemed ............. (65,848,114) (161,968,823) (9,145,954) (60,691,590) ---------------------------------------------------------------- Net increase (decrease) ..... 166,841,380 $ 408,567,134 (5,805,780) $ (38,513,442) ================================================================ Year ended September 30, 2004 Shares sold ................. 580,969,805 $ 1,367,704,171 8,827,015 $ 59,118,085 Shares issued in reinvestment of distributions ......... 43,346,237 108,838,135 3,121,214 20,832,270 Shares redeemed ............. (109,027,856) (256,765,154) (26,551,545) (177,213,295) ---------------------------------------------------------------- Net increase (decrease) ..... 515,288,186 $ 1,219,777,152 (14,603,316) $ (97,262,940) ================================================================ CLASS B1 SHARES: Six months ended March 31, 2005 Shares sold ................. 1,778,254 $ 4,371,261 Shares issued in reinvestment of distributions ......... 4,101,663 10,081,382 Shares redeemed ............. (11,430,435) (28,204,168) -------------------------------- Net increase (decrease) ..... (5,550,518) $ (13,751,525) ================================ Year ended September 30, 2004 Shares sold ................. 6,809,085 $ 16,060,956 Shares issued in reinvestment of distributions ......... 8,043,400 18,919,939 Shares redeemed ............. (23,231,386) (54,892,429) -------------------------------- Net increase (decrease) ..... (8,378,901) $ (19,911,534) ================================ Semiannual Report | 113 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED) ------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND ------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------- CLASS C SHARES: Six months ended March 31, 2005 Shares sold ...................................... 774,592,847 $1,920,430,236 5,211,408 $ 34,478,795 Shares issued in reinvestment of distributions ... 65,542,920 162,036,806 1,279,392 8,453,007 Shares redeemed .................................. (189,742,931) (470,737,999) (13,887,012) (91,874,838) ------------------------------------------------------------- Net increase (decrease) .......................... 650,392,836 $1,611,729,043 (7,396,212) $ (48,943,036) ============================================================= Year ended September 30, 2004 Shares sold ...................................... 1,255,981,744 $2,984,372,367 14,861,247 $ 99,281,128 Shares issued in reinvestment of distributions ... 91,955,343 217,651,704 3,312,543 22,050,949 Shares redeemed .................................. (289,468,688) (687,721,832) (48,451,915) (322,758,348) ------------------------------------------------------------- Net increase (decrease) .......................... 1,058,468,399 $2,514,302,239 (30,278,125) $(201,426,271) ============================================================= CLASS R SHARES: Six months ended March 31, 2005 Shares sold ...................................... 13,166,315 $ 32,276,197 1,987,710 $ 13,200,410 Shares issued in reinvestment of distributions ... 1,160,592 2,830,328 212,971 1,411,914 Shares redeemed .................................. (4,038,935) (9,900,567) (1,582,393) (10,503,986) ------------------------------------------------------------- Net increase (decrease) .......................... 10,287,972 $ 25,205,958 618,288 $ 4,108,338 ============================================================= Year ended September 30, 2004 Shares sold ...................................... 19,381,084 $ 45,663,790 3,748,305 $ 25,113,231 Shares issued in reinvestment of distributions ... 1,500,196 3,505,433 411,848 2,748,659 Shares redeemed .................................. (6,682,743) (15,718,722) (3,195,508) (21,417,151) ------------------------------------------------------------- Net increase (decrease) .......................... 14,198,537 $ 33,450,501 964,645 $ 6,444,739 ============================================================= ADVISOR CLASS SHARES: Six months ended March 31, 2005 Shares sold ...................................... 257,106,861 $ 632,287,257 6,614,193 $ 44,052,858 Shares issued in reinvestment of distributions ... 16,577,880 40,620,008 983,597 6,537,260 Shares redeemed .................................. (10,489,996) (25,768,290) (12,561,687) (84,113,611) ------------------------------------------------------------- Net increase (decrease) .......................... 263,194,745 $ 647,138,975 (4,963,897) $ (33,523,493) ============================================================= Year ended September 30, 2004 Shares sold ...................................... 335,191,629 $ 790,679,833 10,246,929 $ 68,640,458 Shares issued in reinvestment of distributions ... 11,426,569 26,885,121 2,127,795 14,230,250 Shares redeemed .................................. (14,744,719) (34,502,290) (6,731,932) (44,950,750) ------------------------------------------------------------- Net increase (decrease) .......................... 331,873,479 $ 783,062,664 5,642,792 $ 37,919,958 ============================================================= 114 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED) ---------------------------- FRANKLIN UTILITIES FUND ---------------------------- SHARES AMOUNT ---------------------------- CLASS A SHARES: Six months ended March 31, 2005 Shares sold ...................................... 13,674,704 $ 149,777,298 Shares issued in reinvestment of distributions ... 2,402,770 26,253,074 Shares redeemed .................................. (11,295,762) (123,620,805) ---------------------------- Net increase (decrease) .......................... 4,781,712 $ 52,409,567 ============================ Year ended September 30, 2004 Shares sold ...................................... 18,406,095 $ 176,356,055 Shares issued in reinvestment of distributions ... 4,465,126 42,773,250 Shares redeemed .................................. (23,203,973) (220,509,811) ---------------------------- Net increase (decrease) .......................... (332,752) $ (1,380,506) ============================ CLASS B SHARES: Six months ended March 31, 2005 Shares sold ...................................... 1,197,130 $ 13,033,582 Shares issued in reinvestment of distributions ... 127,984 1,401,282 Shares redeemed .................................. (1,268,928) (13,844,806) ---------------------------- Net increase (decrease) .......................... 56,186 $ 590,058 ============================ Year ended September 30, 2004 Shares sold ...................................... 3,179,780 $ 30,167,433 Shares issued in reinvestment of distributions ... 230,148 2,206,595 Shares redeemed .................................. (1,725,148) (16,468,947) ---------------------------- Net increase (decrease) .......................... 1,684,780 $ 15,905,081 ============================ CLASS C SHARES: Six months ended March 31, 2005 Shares sold ...................................... 5,822,427 $ 63,615,271 Shares issued in reinvestment of distributions ... 268,427 2,933,432 Shares redeemed .................................. (2,868,288) (31,245,374) ---------------------------- Net increase (decrease) .......................... 3,222,566 $ 35,303,329 ============================ Year ended September 30, 2004 Shares sold ...................................... 9,181,623 $ 87,063,153 Shares issued in reinvestment of distributions ... 515,325 4,924,301 Shares redeemed .................................. (6,976,972) (66,428,144) ---------------------------- Net increase (decrease) .......................... 2,719,976 $ 25,559,310 ============================ CLASS R SHARES: Six months ended March 31, 2005 Shares sold ...................................... 285,541 $ 3,150,160 Shares issued in reinvestment of distributions ... 5,490 60,348 Shares redeemed .................................. (45,719) (502,955) ---------------------------- Net increase (decrease) .......................... 245,312 $ 2,707,553 ============================ Year ended September 30, 2004 Shares sold ...................................... 91,198 $ 872,504 Shares issued in reinvestment of distributions ... 5,281 50,695 Shares redeemed .................................. (69,748) (660,260) ---------------------------- Net increase (decrease) .......................... 26,731 $ 262,939 ============================ Semiannual Report | 115 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED) ------------------------- FRANKLIN UTILITIES FUND ------------------------- SHARES AMOUNT ------------------------- ADVISOR CLASS SHARES: Six months ended March 31, 2005 Shares sold ..................................... 3,356,699 $ 37,110,564 Shares issued in reinvestment of distributions .. 121,661 1,339,026 Shares redeemed ................................. (1,199,635) (13,195,799) ------------------------- Net increase (decrease) ......................... 2,278,725 $ 25,253,791 ========================= Year ended September 30, 2004 Shares sold ..................................... 3,628,361 $ 34,881,431 Shares issued in reinvestment of distributions .. 159,863 1,540,703 Shares redeemed ................................. (4,069,192) (38,856,826) ------------------------- Net increase (decrease) ......................... (280,968) $ (2,434,692) ========================= 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and directors of the Funds are also officers and/or directors of the following subsidiaries: - -------------------------------------------------------------------------------- SUBSIDIARY 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 A. MANAGEMENT FEES 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 month-end net assets of the Funds as follows: - -------------------------------------------------------------------------------- Annualized Fee Rate Net Assets - -------------------------------------------------------------------------------- 0.625% First $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $10 billion 0.440% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20.0 billion 0.360% In excess of $20 billion 116 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) B. ADMINISTRATIVE FEES 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. C. DISTRIBUTION FEES The Funds reimburse Distributors for costs incurred in marketing the Funds' shares under a Rule 12b-1 plan 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 ......... 0.25% 0.25% 0.15% 0.15% 0.15% Class B ......... 1.00% 1.00% 1.00% 0.65% 0.65% Class B1 ........ -- -- 0.65% -- -- Class C ......... 1.00% 1.00% 0.65% 0.65% 0.65% Class R ......... -- 0.50% 0.50% 0.50% 0.50% Under the Class A distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the period: ------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ------------------------------- Net sales charges received .................... $60,890 $186,764 $11,629,840 Contingent deferred sales charges retained .... $57,931 $148,859 $ 3,502,114 --------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND --------------------------- Net sales charges received ....................... $353,458 $199,490 Contingent deferred sales charges retained ....... $619,784 $121,699 Semiannual Report | 117 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) E. TRANSFER AGENT FEES The Funds paid transfer agent fees as noted in the Statement of Operations of which the following amounts were retained by Investor Services: ---------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ---------------------------------- Transfer agent fees ....................... $609,339 $1,836,858 $6,836,736 --------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND --------------------------- Transfer agent fees .............................. $3,461,629 $932,036 F. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS Effective May 1, 2005, the Franklin Income Fund agreed in advance to voluntarily waive a portion of management fees in the form of additional breakpoints based on month-end net assets of the fund as follows: - ----------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - ----------------------------------------------------------------------- 0.355% Over $35 billion, up to and including $50 billion 0.350% In excess of $50 billion G. OTHER AFFILIATED TRANSACTIONS Included in professional fees are legal fees of $36,305 that were paid to a law firm in which a partner is an officer of the Funds. 4. EXPENSE OFFSET ARRANGEMENT The Funds have entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds' custodian expenses. During the period ended March 31, 2005, the custodian fees were reduced as noted in the Statement of Operations. 118 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. INCOME TAXES At September 30, 2004, the following 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 2012 ........................................... 21,838,085 39,052,129 -------------------------- $78,105,024 $245,748,485 ========================== ----------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ----------------------------- Capital loss carryovers expiring in: 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 ........................................... 33,556,845 54,600,730 2012 ........................................... 129,102,166 8,123,186 ----------------------------- $339,079,149 $62,723,916 ============================= At September 30, 2004, the Franklin DynaTech Fund and the Franklin U.S. Government Securities Fund had deferred capital losses occurring subsequent to October 31, 2003 of $13,880,328 and $73,144,508, respectively. For tax purposes, such losses will be reflected in the year ending September 30, 2005. At September 30, 2004, the Franklin Income Fund had deferred currency losses occurring subsequent to October 31, 2003 of $16,670,944. For tax purposes, such losses will be reflected in the year ending September 30, 2005. On September 30, 2004, the Franklin U.S. Government Securities Fund had expired capital loss carryovers of $57,539,178, which were reclassified to paid-in capital. Semiannual Report | 119 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. INCOME TAXES (CONTINUED) At March 31, 2005, the net unrealized appreciation (depreciation) based on the cost of investments for income tax purposes were as follows: ------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ------------------------------------------------ Cost of investments ................................ $484,390,672 $ 975,239,942 $30,490,099,855 ================================================ Unrealized appreciation ............................ $228,717,648 $1,238,768,867 $ 2,910,447,191 Unrealized depreciation ............................ (20,058,984) (34,074,360) (1,154,691,499) ------------------------------------------------ Net unrealized appreciation (depreciation) ......... $208,658,664 $1,204,694,507 $ 1,755,755,692 ================================================ --------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND --------------------------------- Cost of investments ................................ $7,454,960,217 $1,685,747,452 ================================= Unrealized appreciation ............................ $ 96,467,290 $ 574,400,727 Unrealized depreciation ............................ (43,008,131) (32,643,118) --------------------------------- Net unrealized appreciation (depreciation) ......... $ 53,459,159 $ 541,757,609 ================================= Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, foreign currency transactions, paydown losses, bond discounts and premiums. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatment of wash sales, foreign currency transactions, paydown losses, and bond discounts and premiums. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short-term securities) for the period ended March 31, 2005, were as follows: -------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND -------------------------------------------- Purchases .......................................... $ 82,779,709 $12,544,360 $10,930,095,161 Sales .............................................. $119,807,196 $86,357,708 $ 4,159,743,993 120 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. INVESTMENT TRANSACTIONS (CONTINUED) ------------------------------ FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------------------------ Purchases .......................................... $1,272,829,353 $313,300,984 Sales .............................................. $1,599,170,228 $195,061,564 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management fees paid by the Sweep Money Fund. 8. CREDIT RISK AND DEFAULTED SECURITIES The Franklin Income Fund has 25.47% of its portfolio invested in below investment grade and comparable quality unrated high yield securities, which tend to be more sensitive to economic conditions than higher rated securities. The risk of loss due to default by the issuer may be significantly greater for the holders of high yielding securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. The fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At March 31, 2005, the value of these securities was $83,824,730, representing 0.26% of the fund's net assets. The fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. For information as to specific securities, see the accompanying Statement of Investments. 9. RESTRICTED SECURITIES At March 31, 2005, investments in securities included issues that are restricted and 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 March 31, 2005, the Franklin Income Fund held investments in restricted and illiquid securities, as follows: Semiannual Report | 121 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 9. RESTRICTED SECURITIES (CONTINUED) - ----------------------------------------------------------------------------------------------------------------------------- PRINCIPAL AMOUNT/ ACQUISITION SHARES ISSUER DATE COST VALUE - ----------------------------------------------------------------------------------------------------------------------------- 75,000,000 Asia Pulp & Paper Co. Ltd., 12.00%, pfd., Perpetual ........... 2/14/97 $57,833,250 $ 841,500 $87,000,000 Tjiwi Kimia Finance Mauritius, senior note, 10.00%, 8/01/04 ... 7/29/97 78,711,240 26,995,230 ----------- TOTAL RESTRICTED SECURITIES (0.09% of Net Assets) ............. $27,836,730 =========== 10. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The Investment Company Act of 1940 defines "affiliated companies" to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" for the Franklin Income Fund at March 31, 2005, were as shown below. - ---------------------------------------------------------------------------------------------------------------------------------- NUMBER OF NUMBER OF SHARES HELD SHARES HELD VALUE REALIZED AT BEGINNING GROSS GROSS AT END AT END INVESTMENT GAIN NAME OF ISSUER OF PERIOD ADDITIONS REDUCTIONS OF PERIOD OF PERIOD INCOME (LOSS) - ---------------------------------------------------------------------------------------------------------------------------------- Mission Resources Corp .............. 3,330,000 -- 3,330,000 -- -- $ -- $12,827,824 Mission Resources Corp., senior note, 9.875%, 4/01/11 ............ 40,000,000 -- -- 40,000,000 (a) 1,964,028 -- ----------------------------------- TOTAL AFFILIATED SECURITIES (0.00% of Net Assets) ...... $ -- $1,964,028 $12,827,824 =================================== (a) As of March 31, 2005, no longer an affiliate. 11. OTHER CONSIDERATIONS Subject to certain terms and conditions, the Franklin Income Fund has agreed to sell its holdings in Asia Pulp and Paper and related subsidiaries in November 2006. Until the completion of the sale, the transaction will be accounted for as a secured borrowing with a pledge of collateral and any preliminary sales proceeds received are deferred until the completion of the transaction. 12. REGULATORY MATTERS INVESTIGATIONS AND SETTLEMENTS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, including the Securities and Exchange Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the National Association of Securities Dealers, Inc. ("NASD"), relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares, Franklin Resources, Inc. and certain of its subsidiaries (as used in this section, together, the "Company"), as well as certain current or former executives and employees of the Company, provided documents and information in response to subpoenas and/or requests for documents, information 122 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 12. REGULATORY MATTERS (CONTINUED) INVESTIGATIONS AND SETTLEMENTS (CONTINUED) and/or testimony. Beginning in August 2004, the Company entered into settlements with certain of the regulators and a governmental entity investigating the mutual fund industry practices noted above. The Company believes that settlement of each of the matters is in the best interest of the Company and shareholders of the Franklin, Templeton, and Mutual Series mutual funds (the "funds"). Two of the settlement agreements, those with the SEC and the CAGO concerning marketing support payments, provide that the distribution of settlement monies are to be made to the relevant funds, not to individual shareholders. The CAGO has approved the distribution plan pertaining to the distribution of the monies owed under the CAGO settlement agreement and, in accordance with the terms and conditions of that settlement, the monies were disbursed to the participating funds and are recorded as other income in the current period. The SEC has not yet approved the distribution plan pertaining to the SEC settlement. When approved, disbursements of settlement monies under the SEC's settlement will be made promptly in accordance with the terms and conditions of that order. OTHER LEGAL PROCEEDINGS On April 12, 2005, the Attorney General of West Virginia filed a complaint in the Circuit Court of Marshall County, West Virginia against a number of companies engaged in the mutual fund industry, including Franklin Resources, Inc. and its subsidiary, Franklin Advisers, Inc., and certain other parties alleging violations of the West Virginia Consumer Credit and Protection Act and seeking, among other things, civil penalties and attorneys' fees and costs. To the extent applicable to the Company, the complaint arises from activity that occurred in 2001 and duplicates, in whole or in part, the allegations asserted in the February 4, 2004 Massachusetts Administrative Complaint concerning one instance of market timing (the "Administrative Complaint") and the SEC's findings regarding market timing in its August 2, 2004 Order (the "SEC Order"), both of which matters were previously reported. The Funds, in addition to the Company and other funds, and certain current and former officers, employees, and directors have been named in multiple lawsuits in different courts alleging violations of various federal securities laws and seeking, among other relief, monetary damages, restitution, removal of fund trustees, directors, advisers, administrators, and distributors, rescission of management contracts and 12b-1 plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach of duty with respect to alleged arrangements to permit market timing and/or late trading activity, or breach of duty with respect to the valuation of the portfolio securities of certain Templeton funds managed by Franklin Resources, Inc. subsidiaries, resulting in alleged market timing activity. The majority of these lawsuits duplicate, in whole or in part, the allegations asserted in the Administrative Complaint and the SEC's findings regarding market timing in the SEC Order. The lawsuits are styled as class actions, or derivative actions on behalf of either the named funds or Franklin Resources, Inc. Semiannual Report | 123 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 12. REGULATORY MATTERS (CONTINUED) OTHER LEGAL PROCEEDINGS (CONTINUED) In addition, the Company, as well as certain current and former officers, employees, and directors, have been named in multiple lawsuits alleging violations of various securities laws and pendent state law claims relating to the disclosure of marketing support payments and/or payment of allegedly excessive commissions and/or advisory or distribution fees, and seeking, among other relief, monetary damages, restitution, rescission of advisory contracts, including recovery of all fees paid pursuant to those contracts, an accounting of all monies paid to the named advisers, declaratory relief, injunctive relief, and/or attorneys' fees and costs. These lawsuits are styled as class actions or derivative actions brought on behalf of the Funds and other funds. The Company and fund management strongly believe that the claims made in each of the lawsuits described above are without merit and intends to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. Public trust and confidence are critical to the Company's business and any material loss of investor and/or client confidence could result in a significant decline in assets under management by the Company, which would have an adverse effect on future financial results. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Funds, it is committed to making the Funds or their shareholders whole, as appropriate. The Company is committed to taking all appropriate actions to protect the interests of its funds' shareholders. 124 | Semiannual Report Franklin Custodian Funds, Inc. SHAREHOLDER INFORMATION BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT At a meeting held February 28, 2005, the Board of Directors (the "Board"), including a majority of non-interested or independent Directors, approved renewal of the investment advisory contract for each of the five separate funds comprising the Franklin Custodian Funds (the "Fund(s)"). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for each Fund, as well as periodic reports on shareholder services, legal compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager ("Manager") and its affiliates. Information furnished specifically in connection with the renewal process included a report for each Fund prepared by Lipper Financial Services ("Lipper"), an independent organization, as well as a Fund Profitability Analysis Report prepared by management. The Lipper Reports compared each Fund's investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund Profitability Analysis Report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis utilizing expense allocation methodologies deemed reasonable by the Fund's independent accountants. Included with such Profitability Analysis Report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager including management's explanation of differences where relevant, and a three year expense analysis with an explanation for any increase in expense ratios. Additional information accompanying such Report were a memorandum prepared by management describing enhancements to the services provided to the funds by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale. In considering such materials, the independent Directors received assistance and advice from and met separately with independent counsel. While the investment advisory contracts for all Funds were approved at the same Board meeting, the Board dealt with each Fund separately. In approving continuance of the investment advisory contract for each Fund, the Board, including a majority of independent Directors, determined that the existing management fee structure was fair and reasonable and that continuance of the investment advisory contract was in the best interests of each Fund and its shareholders. While attention was given to all information furnished, the following discusses the primary factors relevant to the Board's decision. NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Funds and their shareholders. In addition to investment performance and expenses discussed later, the Board's opinion was based, in part, upon periodic reports furnished them showing that the investment policies and restrictions for each Fund were consistently complied with as well as other reports periodically furnished the Board covering matters such as the compliance of portfolio managers and other management personnel with the Code of Ethics adopted throughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net Semiannual Report | 125 Franklin Custodian Funds, Inc. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED) asset value calculations. The Board also noted the extent of benefits provided Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management's efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted by the Board that such systems and procedures had been favorably reported on in discussions with the Fund's outside accountants and had functioned smoothly during the hurricanes and blackout experienced last year in Florida. Other factors taken into account by the Board were the Manager's best execution trading policies, including a favorable third party report on portfolio execution, as well as the compliance procedures and qualifications of the Chief Compliance Officer established in accordance with recently adopted SEC requirements. Consideration was also given to the experience of each Fund's portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management's determination of a portfolio manager's bonus compensation was the relative investment performance of the funds he or she managed so as to be aligned with the interest of Fund shareholders. The Board also took into account the transfer agent and shareholder services provided Fund shareholders by an affiliate of the Manager, noting continuing expenditures by management to increase and improve the scope of such services, periodic favorable reports on such service conducted by third parties such as Dalbar, and the first hand experience of the individual Directors who deal with the shareholder services department in their capacities as shareholders in one or more of the various Franklin Templeton Funds. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of each Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings during the year, particular attention in assessing performance was given to the Lipper Reports furnished for the contract renewals. The Lipper Reports prepared for each individual Fund showed the investment performance of its Class A shares during 2004 and the previous ten years in comparison with a performance universe selected by Lipper. The following summarizes the performance results for each Fund. FRANKLIN DYNA TECH FUND - This Fund's investment objective is capital appreciation and performance was shown in comparison to a performance universe consisting of the Fund and all retail and institutional science and technology funds as classified by Lipper. The Fund's total return during 2004 placed it in the second highest quintile of such performance universe. Its total return on an annualized basis placed it in the top quintile for the previous three and five year periods and the second highest quintile for the previous ten year period. The Board expressed satisfaction with such performance. 126 | Semiannual Report Franklin Custodian Funds, Inc. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED) FRANKLIN GROWTH FUND - The Fund's investment objective is capital appreciation, and performance was shown in comparison to a performance universe consisting of all retail and institutional multi-cap core funds as classified by Lipper. The Fund's total return during 2004 ranked it in the top half of its performance universe. Its total return on an annualized basis ranked it in the fourth lowest quintile during the previous three year period, the upper half during the previous five year period and the fourth quintile during the previous ten year period. The Board found such performance acceptable, noting that the Fund's 2004 total return exceeded 11% and that its total annualized return for the previous ten year period exceeded 10% as shown in such Lipper Report. FRANKLIN INCOME FUND - While maintaining prospects for capital appreciation, this Fund's investment objective is to maximize income, and its investment performance was shown in comparison to a performance universe consisting of the Fund and all other retail and institutional funds as classified by Lipper. The Fund's income return, as shown in such Report during 2004 and for each of the previous ten years, placed it in the first or highest quintile of this performance universe. The Fund's total return on an annualized basis also placed it in the first quintile of its performance universe during each of the previous three and five year periods and in the second highest quintile during the ten year period. The Board expressed satisfaction with such performance. FRANKLIN U.S. GOVERNMENT SECURITIES FUND - The investment objective of this Fund is realizing income, and its investment performance was shown in comparison to a performance universe consisting of all retail and institutional Ginnie Mae funds as classified by Lipper. The Fund's income return during 2004 and during each of the previous three, five and ten year periods on an annualized basis, placed it in the first or highest quintile of such performance universe. The Fund's total return during 2004, as shown in such Report, also placed it in the first quintile of its performance universe and on an annualized basis was in the top half for the previous three years and in the second highest quintile for the previous five and ten year periods. The Board expressed satisfaction with such performance. FRANKLIN UTILITIES FUND - The investment objectives of this Fund are current income and capital appreciation, and its investment performance was shown in comparison to a performance universe consisting of all retail and institutional utility funds as classified by Lipper. The Fund's income return, as shown in such Report, during 2004 placed it in the first or highest quintile of this performance group and its income return on an annualized basis also placed it in the first quintile for each of the three, five and ten year periods. The Fund's total return during 2004 also placed it in the top half of its performance universe and on an annualized basis placed it in the first quintile of its performance universe during the previous three and five year periods, and in the second highest quintile for the ten year period. The Board expressed satisfaction with such performance. Semiannual Report | 127 Franklin Custodian Funds, Inc. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED) COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the management fees and total expense ratios of each Fund compared with those of a group of other funds selected by Lipper as constituting its appropriate Lipper Expense Group. Prior to making such comparison, the Board relied upon a survey showing that the scope of management advisory services covered under each Fund's investment advisory contract was similar to those provided by fund managers to other mutual fund groups which would be used as a basis of comparison in the Lipper Reports. In reviewing comparative costs, emphasis was given to each Fund's management fee in comparison with the effective management fee that would have been charged by other funds within its Lipper Expense Group assuming they were the same size as the Fund, as well as the actual total expenses of the Fund in comparison with those of its peer group which for comparative consistency was shown by Lipper for Fund Class A shares. The results of such expense comparisons showed that the effective management fee rate for each of the Franklin DynaTech Fund, Franklin Growth Fund, Franklin Income Fund and Franklin Utilities Fund was in the lowest or least expensive quintile of their respective Lipper Expense Group and for the Franklin U.S. Government Securities Fund, was in the lower half of its Lipper Expense Group. The actual total expenses for all the Funds were in the lowest or least expensive quintile of their respective Lipper expense groups, and this was true whether such expenses were computed for such Groups on a basis that included or excluded 12b-1 fees. While realizing that other factors such as the Manager's profitability and economies of scale bear on the reasonableness of fees, the Board was satisfied with the management fees and total expenses of each Fund in comparison to its expense peer group as shown in the Lipper Reports. MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board reviewed the Fund Profitability Analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services to each of the individual funds. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including its interest in a joint venture entity which finances up-front commissions paid to brokers/dealers who sold fund Class B and Class B1 shares, as well as potential benefits resulting from allocation of fund brokerage and the use of "soft" commission dollars to pay for research. Specific attention was given to the methodology followed in allocating costs to each Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that the cost allocation methodology was consistent with that followed in profitability report presentations for the Fund made in prior years and that such methodology was subject to review and testing by the Fund's outside accountants every other year. It was also noted that legal costs and payments incurred by Franklin Templeton in resolving various legal proceedings arising from its U.S. fund operations had not been allocated to the Funds for purposes of determining profitability. Included in the analysis for each Fund were the revenue and related costs broken down separately from the management, underwriting, and shareholder services functions provided by the Manager and its affiliates to each Fund, as well as the relative contribution of each Fund to the 128 | Semiannual Report Franklin Custodian Funds, Inc. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED) profitability of the Manager's parent. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary to the type of mutual fund operations conducted by the Manager and its corporate affiliates may not be fully reflected in the expenses allocated to each Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management's expenditures in improving shareholder services provided the Funds, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC requirements. In addition, the Board considered a third party study comparing the profitability of the Manager's parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. Based upon their consideration of all these factors, the Board determined that the level of profits realized by the Manager under its investment advisory contract with each Fund was not excessive in view of the nature, quality and extent of services provided. ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Manager as the Funds grow larger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund Profitability Analysis, it appears that as some funds get larger, at some point economies of scale do result in the Manager realizing a larger profit margin on management services provided such a fund. The Board also noted that economies of scale are shared with each Fund and its shareholders through management fee breakpoints so that as a Fund grows in size, its effective management fee rate declines. The fee structure under the investment advisory contract with each Fund provides an initial annual fee of .625% on the first $100 million of assets; .50% on the next $150 million of assets; .45% on the next $9.75 billion of assets; .44% on the next $2.5 billion of assets; and thereafter declines by .02% for each subsequent $2.5 billion until it reaches a final breakpoint of .36% for assets in excess of $20 billion. As a result of substantial net sales during the previous year, the assets of the Franklin Income Fund, however, had grown to exceed the $20 billion last breakpoint level and were approximately $33 billion at the time of the February 28, 2005 Board meeting. In view of such fact, the independent Directors requested that management consider adding further fee breakpoints for such Fund. Management's position in response to such request was that the Franklin Income Fund is a great value to shareholders in providing outstanding performance at very low cost and that no further breakpoints were warranted. Management also expressed its view that the existing fee schedule reflected anticipated economies of scale and pointed out the favorable effective management fee and total expense comparisons of the Franklin Income Fund as well as each of the other Funds within their respective Lipper Expense Groups. Management also observed, and the Board acknowledged the fact that the Franklin Income Fund had assets beyond the last breakpoint level did not mean that it no longer benefited from economies of scale since the amount of assets being charged at the lowest .36% fee level resulted in a lower overall management fee rate. While intending to continue discussions on this topic with Semiannual Report | 129 Franklin Custodian Funds, Inc. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED) management, the Board believed that to the extent economies of scale may be realized by the Manager and its affiliates, the schedule of fees under the investment advisory contract for each Fund provides a sharing of benefits with the Fund and its shareholders. At a Board meeting held April 19, 2005, management agreed to fee waivers reducing the annual management fee to .355% on Franklin Income Fund net assets in excess of $35 billion up to $50 billion, and to .35% thereafter. 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. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. 130 | Semiannual Report This page intentionally left blank. This page intentionally left blank. Literature Request LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT 1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service departments. These calls can be identified by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II(1) VALUE Franklin Balance Sheet Investment Fund(2) Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund(2) Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund(3) Mutual Shares Fund BLEND Franklin Blue Chip Fund Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Technology Fund Franklin Utilities Fund Mutual Financial Services Fund ASSET ALLOCATION Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund TARGET FUNDS Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund(4) Franklin's AGE High Income Fund Franklin Floating Rate Daily Access Fund Franklin Income Fund Franklin Limited Maturity U.S. Government Securities Fund(4),(5) Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(4) Templeton Global Bond Fund TAX-FREE INCOME(6) NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(7) LIMITED-TERM FUNDS California Limited-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Limited-Term Tax-Free Income Fund INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California(8) Colorado Connecticut Florida(8) Georgia Kentucky Louisiana Maryland Massachusetts(7) Michigan(7) Minnesota(7) Missouri New Jersey New York(8) North Carolina Ohio(7) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(9) (1) The fund is closed to new investors. Existing shareholders can continue adding to their accounts. (2) The fund is only open to existing shareholders and select retirement plans. (3) The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. (4) An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. (5) Formerly Franklin Short-Intermediate U.S. Government Securities Fund. Effective 9/1/04, the fund's name changed; its investment goal and strategy remained the same. (6) For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. (7) Portfolio of insured municipal securities. (8) These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and limited-term, intermediate-term and money market portfolios (CA and NY). (9) The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 01/05 Not part of the semiannual report [LOGO] (R) One Franklin Parkway FRANKLIN(R) TEMPLETON(R) San Mateo, CA 94403-1906 INVESTMENTS |_| WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. SEMIANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN CUSTODIAN FUNDS, INC. INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. 1-800/DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES 1-800/632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FCF S2005 05/05 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 11(A), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial experts are Edith E. Holiday and Harris J. Ashton and they are "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein. ITEM 10. 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 11. EXHIBITS. (A) Code of Ethics (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 Galen G. Vetter, 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 Galen G. Vetter, Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN CUSTODIAN FUNDS, INC. By /s/Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date May 20, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date May 20, 2005 By /s/Galen G. Vetter Chief Financial Officer Date May 20, 2005