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 ------------------------ (Exact name of registrant as specified in charter) ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ------------------------------------------------ (Address of principal executive offices) (Zip code) CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: 650 312-2000 ------------ Date of fiscal year end: 9/30 ---- Date of reporting period: 3/31/08 ------- ITEM 1. REPORTS TO STOCKHOLDERS. [PHOTO] MARCH 31, 2008 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 CUSTODIAN FUNDS Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. - -------------------------------------------------------------------------------- [FRANKLIN TEMPLETON INVESTMENTS LOGO] Franklin - Templeton - Mutual Series Semiannual Report Franklin DynaTech Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks capital appreciation by investing substantially in equity securities of companies emphasizing scientific or technological development or that are in fast-growing industries. Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. Please visit FRANKLINTEMPLETON.COM or call 1-800/342-5236 for most recent month-end performance. This semiannual report for Franklin DynaTech Fund covers the period ended March 31, 2008. PERFORMANCE OVERVIEW Franklin DynaTech Fund - Class A had a -12.16% cumulative total return for the six months under review. For the same period, the Fund performed better than its narrow benchmark, the NASDAQ 100 Index, which had a price-only return of - -14.79%; and performed comparably with the broader Standard & Poor's 500 Index (S&P 500), which posted a -12.46% total return.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 7. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2008, the U.S. economy slowed. The housing downturn negatively affected the overall economy by fourth quarter 2007 as credit conditions worsened and the pace of consumer spending declined. Gross domestic product (GDP) growth fell to a 0.6% annualized rate in the fourth quarter largely due to decelerating inventory investment, exports and federal government spending. For the overall six-month period, however, a weaker U.S. dollar compared with many foreign currencies contributed to increased exports. First quarter 2008 GDP growth remained at a 0.6% estimated annualized rate due to the effects of the troubled housing market and subsequent credit market tightening. 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 51. Semiannual Report | 3 PORTFOLIO BREAKDOWN Franklin DynaTech Fund Based on Total Net Assets as of 3/31/08 Software 11.7% Biotechnology 9.6% Semiconductors & Semiconductor Equipment 9.4% Computers & Peripherals 7.4% Health Care Equipment & Supplies 7.1% Chemicals 6.2% Communications Equipment 6.1% Pharmaceuticals 5.5% Wireless Telecommunication Services 5.3% Internet Software & Services 5.3% Energy Equipment & Services 5.3% IT Services 4.5% Life Sciences Tools & Services 3.7% Other 10.3% Short-Term Investments & Other Net Assets 2.6% The unemployment rate increased from 4.7% at the beginning of the period to 5.1% in March 2008.2 Consumer confidence declined during the period, hitting a five-year low in March, amid rising mortgage and fuel costs, falling home prices and a weaker job market. Volatile oil prices reached a historical high in March, topping $110 per barrel, before retreating somewhat to $102 by period-end. For the 12 months ended March 31, 2008, the core Consumer Price Index (CPI), which excludes food and energy costs, rose 2.4%, which was higher than its 10-year average rate. (2) Faced with a deepening housing contraction and stressed financial markets, the Federal Reserve Board made several cuts to the federal funds target rate during the period, including 200 basis points so far in 2008. Overall, the federal funds target rate fell 250 basis points from 4.75% to 2.25%. As investors fled riskier, poorer-performing assets, U.S. Treasuries rallied and the 10-year Treasury note yield fell from 4.59% at the beginning of the period to 3.45% on March 31, 2008. Stock markets were volatile during the period partly due to investor concerns about slowing economic growth. Overall, the blue chip stocks of the Dow Jones Industrial Average had a six-month total return of -10.64%, while the broader S&P 500 had a -12.46% return, and the technology-heavy NASDAQ Composite Index had a -15.32% return. (3) The consumer staples, materials and energy sectors performed relatively well. Large-capitalization stocks generally outperformed small caps, and growth stocks fared better than their value counterparts. 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. 2. Source: Bureau of Labor Statistics. 3. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. 4 | Semiannual Report MANAGER'S DISCUSSION One of the most significant contributors to performance during the six months under review was biopharmaceutical company Gilead Sciences. The company's stock appreciated amid strong revenues and a promising drug development pipeline. Other major contributors to performance included global retail electronic payments network operator Visa, which had an initial public offering in March, and specialty chemicals company Sigma-Aldrich. From a sector perspective, the materials sector, particularly the chemicals industry, contributed notably to performance for the reporting period. (4) In addition to the aforementioned Sigma-Aldrich, other chemicals companies that helped performance included Monsanto, Mosaic and Potash. Fund holdings that declined in value and were among the Fund's major detractors included Internet search engine Google, computer technology firm NVIDIA and semiconductor provider Varian Semiconductor Equipment Associates. Google's shares suffered largely due to decelerating advertising revenue. NVIDIA's and Varian's share prices declined mainly due to expectations for slowing computer and semiconductor sales. By sector, our information technology holdings hurt performance on an absolute basis during the period, largely due to the aforementioned Google, NVIDIA and Varian. (5) Other sector holdings that hindered results included Intel and Apple. The health care sector also weighed on the Fund's performance, in part due to veterinary services provider VCA Antech and analytical instruments manufacturer Waters, which reported disappointing earnings during the period. (6) 4. The materials sector comprises chemicals, and metals and mining in the SOI. 5. The information technology sector comprises communications equipment, computers and peripherals, electronic equipment and instruments, Internet software and services, IT services, semiconductors and semiconductor equipment, and software in the SOI. 6. The health care sector comprises biotechnology, health care equipment and supplies, health care providers and services, life sciences tools and services, and pharmaceuticals in the SOI. TOP 10 HOLDINGS Franklin DynaTech Fund 3/31/08 COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------- ---------- Intel Corp. 4.5% Semiconductors & Semiconductor Equipment Apple Inc. 4.4% Computers & Peripherals Genentech Inc. 3.8% Biotechnology Visa Inc., A 3.6% IT Services Google Inc., A 3.3% Internet Software & Services Hewlett-Packard Co. 2.9% Computers & Peripherals Gilead Sciences Inc. 2.9% Biotechnology Sigma-Aldrich Corp. 2.8% Chemicals Alcon Inc. (Switzerland) 2.7% Health Care Equipment & Supplies Schlumberger Ltd. 2.4% Energy Equipment & Services Semiannual Report | 5 Thank you for your continued participation in Franklin DynaTech Fund. We look forward to serving your future investment needs. [PHOTO OF RUPERT H. JOHNSON] - -s- Rupert H. Johnson Rupert H. Johnson, Jr. [PHOTO OF MATTHEW J. MOBERG] - -s- Matthew J. Moberg Matthew J. Moberg, CPA Portfolio Management Team Franklin DynaTech Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 6 | Semiannual Report Performance Summary as of 3/31/08 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 that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION CLASS A (SYMBOL: FKDNX) CHANGE 3/31/08 9/30/07 - -------------------------------- ------- ------- ------- Net Asset Value (NAV) -$ 4.55 $ 27.78 $ 32.33 DISTRIBUTIONS (10/1/07 - 3/31/08) Long-Term Capital Gain $ 0.7062 CLASS B (SYMBOL: FDNBX) CHANGE 3/31/08 9/30/07 - -------------------------------- ------- ------- ------- Net Asset Value (NAV) -$ 4.46 $ 26.32 $ 30.78 DISTRIBUTIONS (10/1/07 - 3/31/08) Long-Term Capital Gain $ 0.7062 CLASS C (SYMBOL: FDYNX) CHANGE 3/31/08 9/30/07 - -------------------------------- ------- ------- ------- Net Asset Value (NAV) -$ 4.42 $ 26.04 $ 30.46 DISTRIBUTIONS (10/1/07 - 3/31/08) Long-Term Capital Gain $ 0.7062 PERFORMANCE Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. CLASS A: 5.75% maximum initial sales charge; CLASS B: contingent deferred sales charge (CDSC) declining from 4% to 1% over six years, and eliminated thereafter; CLASS C: 1% CDSC in first year only. The Fund may charge a 2% fee on redemptions made within seven days of purchase. CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- ------ ------ ------- Cumulative Total Return (1) -12.16% +4.44% +72.64% +71.07% Average Annual Total Return (2) -17.21% -1.57% +10.23% +4.89% Value of $10,000 Investment (3) $ 8,279 $9,843 $16,274 $16,124 Total Annual Operating Expenses (4) 0.99% CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (2/1/00) - ------------------------------------- ------- ------ ------ ------------------ Cumulative Total Return (1) -12.49% +3.64% +66.28% -1.00% Average Annual Total Return (2) -15.91% -0.36% +10.44% -0.12% Value of $10,000 Investment (3) $ 8,409 $9,964 $16,428 $ 9,900 Total Annual Operating Expenses (4) 1.75% Semiannual Report | 7 Performance Summary (continued) PERFORMANCE (continued) Class C 6-Month 1-Year 5-Year 10-Year - -------------------------------------- ------- ------ ------- ------- Cumulative Total Return (1) -12.49% +3.64% +66.29% +58.66% Average Annual Total Return (2) -13.34% +2.64% +10.71% +4.72% Value of $10,000 Investment (3) $ 8,666 $10,264 $16,629 $15,866 Total Annual Operating Expenses (4) 1.74% Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, see "Funds and Performance" at FRANKLINTEMPLETON.COM or call 1-800/342-5236. ENDNOTES THE FUND'S INVESTMENTS IN FAST-GROWING INDUSTRIES, INCLUDING THE TECHNOLOGY AND TELECOMMUNICATIONS SECTORS (WHICH HAVE HISTORICALLY BEEN VOLATILE) COULD RESULT IN INCREASED PRICE FLUCTUATION, ESPECIALLY OVER THE SHORT TERM, DUE TO THE RAPID PACE OF PRODUCT CHANGE AND DEVELOPMENT AND CHANGES IN GOVERNMENT REGULATION OF COMPANIES EMPHASIZING SCIENTIFIC OR TECHNOLOGICAL ADVANCEMENTS. THE FUND MAY ALSO INVEST IN SMALL-CAPITALIZATION COMPANIES, WHICH INVOLVES SPECIAL RISKS SUCH AS RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND MODEST MARKET SHARE. THE PRICES OF THESE SECURITIES CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM, AND INVESTORS SHOULD EXPECT FLUCTUATION IN THE VALUE OF THEIR INVESTMENT. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. 1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. 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. 4. Figures are as stated in the Fund's prospectus current as of the date of this report. 8 | Semiannual Report Your Fund's Expenses FRANKLIN DYNATECH FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration: 1. Divide your account value by $1,000. If an account had an $8,600 value, then $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 9 Your Fund's Expenses (continued) Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges or redemption fees. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses. BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 10/1/07 VALUE 3/31/08 PERIOD* 10/1/07 - 3/31/08 ----------------- -------------- ------------------------- CLASS A Actual $ 1,000 $ 878.40 $ 4.56 Hypothetical (5% return before expenses) $ 1,000 $ 1,020.15 $ 4.90 CLASS B Actual $ 1,000 $ 875.10 $ 8.11 Hypothetical (5% return before expenses) $ 1,000 $ 1,016.35 $ 8.72 CLASS C Actual $ 1,000 $ 875.10 $ 8.11 Hypothetical (5% return before expenses) $ 1,000 $ 1,016.35 $ 8.72 * Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.97%; B: 1.73%; and C: 1.73%), multiplied by the average account value over the period, multiplied by 183/366 to reflect the one-half year period. 10 | Semiannual Report Franklin Growth Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Fund seeks capital apprecia-tion by investing substantially in equity securities of companies that are leaders in their industries. Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. Please visit FRANKLINTEMPLETON.COM or call 1-800/342-5236 for most recent month-end performance. This semiannual report for Franklin Growth Fund covers the period ended March 31, 2008. PERFORMANCE OVERVIEW Franklin Growth Fund - Class A had a -12.61% cumulative total return for the six months under review. The Fund performed comparably with its benchmark, the Standard & Poor's 500 Index (S&P 500), which returned -12.46% for the same period. (1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 14. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2008, the U.S. economy slowed. The housing downturn negatively affected the overall economy by fourth quarter 2007 as credit conditions worsened and the pace of consumer spending declined. Gross domestic product (GDP) growth fell to a 0.6% annualized rate in the fourth quarter largely due to decelerating inventory investment, exports and federal government spending. For the overall six-month period, however, a weaker U.S. dollar compared with many foreign currencies contributed to increased exports. First quarter 2008 GDP growth remained at a 0.6% estimated annualized rate due to the effects of the troubled housing market and subsequent credit market tightening. The unemployment rate increased from 4.7% at the beginning of the period to 5.1% in March 2008. (2) Consumer confidence declined during the period, hitting a five-year low in March, amid rising mortgage and fuel costs, falling home prices and a weaker job market. Volatile oil prices reached a historical high in March, topping $110 per barrel, before retreating somewhat to $102 by period-end. For the 12 months ended March 31, 2008, the core Consumer Price Index (CPI), which excludes food and energy costs, rose 2.4%, which was higher than its 10-year average rate. (2) 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 reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 2. Source: 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 59. Semiannual Report | 11 PORTFOLIO BREAKDOWN Franklin Growth Fund Based on Total Net Assets as of 3/31/08 Industrials* 41.2% Health Care 21.4% Information Technology 21.2% Consumer Discretionary 9.0% Materials 2.6% Energy 2.3% Financials 0.9% Consumer Staples 0.9% Utilities 0.3% Telecommunication Services 0.2% * Significant exposure to a single sector may result in greater volatility for the Fund than a more broadly diversified portfolio. Faced with a deepening housing contraction and stressed financial markets, the Federal Reserve Board made several cuts to the federal funds target rate during the period, including 200 basis points so far in 2008. Overall, the federal funds target rate fell 250 basis points from 4.75% to 2.25%. As investors fled riskier, poorer-performing assets, U.S. Treasuries rallied and the 10-year Treasury note yield fell from 4.59% at the beginning of the period to 3.45% on March 31, 2008. Stock markets were volatile during the period partly due to investor concerns about slowing economic growth. Overall, the blue chip stocks of the Dow Jones Industrial Average had a six-month total return of -10.64%, while the broader S&P 500 had a -12.46% return, and the technology-heavy NASDAQ Composite Index had a -15.32% return. (3) The consumer staples, materials and energy sectors performed relatively well. Large-capitalization stocks generally outperformed small caps, and growth stocks fared better than their value counterparts. INVESTMENT STRATEGY We seek to invest in companies that have qualities such as strong management teams, financials and industry leadership. The Fund looks for opportunities in new and rapidly growing businesses and in 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 Franklin Growth Fund owned 120 companies at period-end. We continue to invest in a broad array of companies of all sizes and in varied industries. During the period under review, Fund performance was largely driven by the positive returns of road and rail holdings within the industrials sector. Among 3. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. 12 | Semiannual Report these were trucking company Arkansas Best and Union Pacific, North America's largest railroad operator. Biotechnology leader Genentech, part of the health care sector, was another key contributor to performance during the period. The Fund also benefited from its materials holdings such as chemical producer Sigma-Aldrich. The Fund had some detractors from performance during the reporting period. Within the industrials sector, our position in major aerospace and defense company Boeing was a major detractor. In the same sector, the airlines industry struggled and some airline holdings weighed on Fund performance during the period. Some of the poorest performers were Texas-based AMR, the parent company of American Airlines, and U.K.-based British Airways. Thank you for your continued participation in Franklin Growth Fund. We look forward to serving your future investment needs. [PHOTO OF V. JERRY PALMIERI] - -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, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. TOP 10 HOLDINGS Franklin Growth Fund 3/31/08 COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Apple Inc. 4.4% Information Technology General Dynamics Corp. 3.2% Industrials Genentech Inc. 3.1% Health Care Northrop Grumman Corp. 3.0% Industrials The Boeing Co. 3.0% Industrials Johnson & Johnson 2.7% Health Care 3M Co. 2.6% Industrials International Business Machines Corp. 2.5% Information Technology United Technologies Corp. 2.2% Industrials Textron Inc. 2.2% Industrials Semiannual Report | 13 Performance Summary as of 3/31/08 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 that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION CLASS A (SYMBOL: FKGRX) CHANGE 3/31/08 9/30/07 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$5.96 $ 40.40 $ 46.36 DISTRIBUTIONS (10/1/07 - 3/31/08) Dividend Income $ 0.1302 CLASS B (SYMBOL: FKGBX) CHANGE 3/31/08 9/30/07 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$5.76 $ 38.66 $ 44.42 CLASS C (SYMBOL: FRGSX) CHANGE 3/31/08 9/30/07 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$5.70 $ 38.33 $ 44.03 CLASS R (SYMBOL: FGSRX) CHANGE 3/31/08 9/30/07 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$5.88 $ 40.11 $ 45.99 DISTRIBUTIONS (10/1/07 - 3/31/08) Dividend Income $ 0.0304 ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 3/31/08 9/30/07 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) -$6.02 $ 40.43 $ 46.45 DISTRIBUTIONS (10/1/07 - 3/31/08) Dividend Income $ 0.2332 14 | Semiannual Report Performance Summary (continued) PERFORMANCE Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. CLASS A: 5.75% maximum initial sales charge; CLASS B: contingent deferred sales charge (CDSC) declining from 4% to 1% over six years, and eliminated thereafter; CLASS C: 1% CDSC in first year only; CLASS R/ADVISOR CLASS: no sales charges. The Fund may charge a 2% fee on redemptions made within seven days of purchase. CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- -------- -------- --------- --------- Cumulative Total Return (1) -12.61% -3.74% +82.51% +56.16% Average Annual Total Return (2) -17.63% -9.28% +11.46% +3.94% Value of $10,000 Investment (3) $ 8,237 $ 9,072 $ 17,205 $ 14,717 Total Annual Operating Expenses (4) 0.93% CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - ------- -------- -------- --------- ------------------ Cumulative Total Return (1) -12.97% -4.47% +75.73% +33.50% Average Annual Total Return (2) -16.45% -8.29% +11.68% +3.17% Value of $10,000 Investment (3) $ 8,355 $ 9,171 $ 17,373 $ 13,350 Total Annual Operating Expenses (4) 1.69% CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- -------- -------- --------- --------- Cumulative Total Return (1) -12.95% -4.49% +75.74% +44.81% Average Annual Total Return (2) -13.82% -5.44% +11.94% +3.77% Value of $10,000 Investment (3) $ 8,618 $ 9,456 $ 17,574 $ 14,481 Total Annual Operating Expenses (4) 1.69% CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------- -------- -------- --------- ------------------ Cumulative Total Return (1) -12.73% -4.00% +80.19% +27.42% Average Annual Total Return (2) -12.73% -4.00% +12.50% +3.96% Value of $10,000 Investment (3) $ 8,727 $ 9,600 $ 18,019 $ 12,742 Total Annual Operating Expenses (4) 1.19% ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------- -------- -------- --------- ---------- Cumulative Total Return (1) -12.51% -3.52% +84.68% +59.97% Average Annual Total Return (2) -12.51% -3.52% +13.05% +4.81% Value of $10,000 Investment (3) $ 8,749 $ 9,648 $ 18,468 $ 15,997 Total Annual Operating Expenses (4) 0.69% Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, see "Funds and Performance" at FRANKLINTEMPLETON.COM or call 1-800/342-5236. Semiannual Report | 15 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 PRICES OF THESE SECURITIES CAN BE VOLATILE, PARTICULARLY OVER THE SHORT TERM. IN ADDITION, THE FUND MAY INVEST UP TO 40% OF ITS NET ASSETS IN STOCKS OF FOREIGN COMPANIES, WHICH INVOLVE SPECIAL RISKS, INCLUDING CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. THE FUND'S PORTFOLIO INCLUDES INVESTMENTS IN TECHNOLOGY, WHICH HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. 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. 4. Figures are as stated in the Fund's prospectus current as of the date of this report. 16 | Semiannual Report Your Fund's Expenses FRANKLIN GROWTH FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration: 1. Divide your account value by $1,000. If an account had an $8,600 value, then $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 17 Your Fund's Expenses (continued) Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges or redemption fees. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses. BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 10/1/07 VALUE 3/31/08 PERIOD* 10/1/07 - 3/31/08 ----------------- -------------- ------------------------- CLASS A Actual $ 1,000 $ 873.90 $ 4.26 Hypothetical (5% return before expenses) $ 1,000 $ 1,020.45 $ 4.60 CLASS B Actual $ 1,000 $ 870.30 $ 7.81 Hypothetical (5% return before expenses) $ 1,000 $ 1,016.65 $ 8.42 CLASS C Actual $ 1,000 $ 870.50 $ 7.81 Hypothetical (5% return before expenses) $ 1,000 $ 1,016.65 $ 8.42 CLASS R Actual $ 1,000 $ 872.70 $ 5.48 Hypothetical (5% return before expenses) $ 1,000 $ 1,019.15 $ 5.91 ADVISOR CLASS Actual $ 1,000 $ 874.90 $ 3.14 Hypothetical (5% return before expenses) $ 1,000 $ 1,021.65 $ 3.39 * Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.91%; B: 1.67%; C: 1.67%; R: 1.17%; and Advisor: 0.67%), multiplied by the average account value over the period, multiplied by 183/366 to reflect the one-half year period. 18 | Semiannual Report 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 debt and equity securities. Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. Please visit FRANKLINTEMPLETON.COM or call 1-800/342-5236 for most recent month-end performance. This semiannual report for Franklin Income Fund covers the period ended March 31, 2008. PERFORMANCE OVERVIEW Franklin Income Fund - Class A had a -7.22% cumulative total return for the six months under review. The Fund performed better than its equity benchmark, the Standard & Poor's 500 Index (S&P 500), which returned -12.46%; underperformed its fixed income benchmark, the Lehman Brothers (LB) U.S. Aggregate Index, which returned +5.23%; and underperformed its peers as measured by the Lipper Mixed-Asset Target Allocation Moderate Funds Classification Average, which returned -6.29%, for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 24. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2008, the U.S. economy slowed. The housing downturn negatively affected the overall economy by fourth quarter 2007 as credit conditions worsened and the pace of consumer spending declined. Gross domestic product (GDP) growth fell to a 0.6% annualized rate in the fourth quarter largely due to decelerating inventory investment, exports and federal government spending. For the overall six-month period, however, a 1. Sources: Standard & Poor's Micropal; Lipper Inc. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The LB U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The Lipper Mixed-Asset Target Allocation Moderate Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Mixed-Asset Target Allocation Moderate Funds classification in the Lipper Open-End underlying funds universe. Lipper Mixed-Asset Target Allocation Moderate Funds are defined as funds that, by portfolio practice, maintain a mix of between 40%-60% equity securities, with the remainder invested in bonds, cash and cash equivalents. For the six-month period ended 3/31/08, there were 503 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. The Fund's performance relative to the average may have differed if these and other factors had been considered. Past performance does not guarantee future results. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 69. Semiannual Report | 19 weaker U.S. dollar compared with many foreign currencies contributed to increased exports. First quarter 2008 GDP growth remained at a 0.6% estimated annualized rate due to the effects of the troubled housing market and subsequent credit market tightening. The unemployment rate increased from 4.7% at the beginning of the period to 5.1% in March 2008.(2) Consumer confidence declined during the period, hitting a five-year low in March, amid rising mortgage and fuel costs, falling home prices and a weaker job market. Volatile oil prices reached a historical high in March, topping $110 per barrel, before retreating somewhat to $102 by period-end. For the 12 months ended March 31, 2008, the core Consumer Price Index (CPI), which excludes food and energy costs, rose 2.4%, which was higher than its 10-year average rate.(2) Faced with a deepening housing contraction and stressed financial markets, the Federal Reserve Board made several cuts to the federal funds target rate during the period, including 200 basis points so far in 2008. Overall, the federal funds target rate fell 250 basis points from 4.75% to 2.25%. As investors fled riskier, poorer-performing assets, U.S. Treasuries rallied and the 10-year Treasury note yield fell from 4.59% at the beginning of the period to 3.45% on March 31, 2008. Stock markets were volatile during the period partly due to investor concerns about slowing economic growth. Overall, the blue chip stocks of the Dow Jones Industrial Average had a six-month total return of -10.64%, while the broader S&P 500 had a -12.46% return, and the technology-heavy NASDAQ Composite Index had a -15.32% return.(3) The consumer staples, materials and energy sectors performed relatively well. The credit crisis negatively impacted most fixed income markets, especially high yield corporate bonds. High yield credit spreads over Treasuries widened and ended the period nearly 800 basis points above Treasuries, the highest level in five years.(4) Investors' flight to quality, subprime market concerns, lack of liquidity and pending leverage buyouts (LBOs) contributed to the significantly wider spreads. General risk aversion led investors to the relative safety of Treasury securities. Subprime market turmoil and the resulting credit crunch resulted in recession fears and expectations for increasing default rates in the near future. In addition, despite a somewhat reduced forward calendar of LBO transactions, pending supply arranged in a more favorable environment weighed on the high 2. Source: Bureau of Labor Statistics. 3. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. 4. Source: Bear Stearns. 20 | Semiannual Report DIVIDEND DISTRIBUTIONS* Franklin Income Fund 10/1/07-3/31/08 DIVIDEND PER SHARE ------------------------------------------------------------------------- MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS - ----------- ---------- ---------- ---------- ---------- ---------- ------------- October 1.20 cents 1.01 cents 1.09 cents 1.09 cents 1.12 cents 1.24 cents November 1.20 cents 1.01 cents 1.09 cents 1.09 cents 1.12 cents 1.24 cents December*** 1.75 cents 1.55 cents 1.63 cents 1.63 cents 1.67 cents 1.78 cents January 1.20 cents 1.00 cents 1.08 cents 1.08 cents 1.12 cents 1.23 cents February 1.25 cents 1.05 cents 1.13 cents 1.13 cents 1.17 cents 1.28 cents March 1.25 cents 1.08 cents 1.15 cents 1.15 cents 1.18 cents 1.28 cents ---------- ---------- ---------- ---------- ---------- ------------- TOTAL 7.85 CENTS 6.70 CENTS 7.17 CENTS 7.17 CENTS 7.38 CENTS 8.05 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. *** Includes an additional 0.55 cent per share distribution to meet excise tax requirements. yield sector. Due to these factors, high yield corporate bonds had a return of - -4.27% during the period as measured by the LB U.S. Corporate High Yield Index.(5) In comparison, the LB U.S. Aggregate Index, which has no high yield exposure and has about 35% in Treasuries and other government bonds, performed much better with a +5.23% return for the same period.(1) The LB U.S. Aggregate Index benefited from Treasuries, which returned +8.56% as measured by the LB U.S. Treasury Index, while investment-grade corporate bonds, as measured by the LB U.S. Corporate Investment Grade Index, returned +1.80%.(6) 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. PORTFOLIO BREAKDOWN Franklin Income Fund Based on Total Net Assets as of 3/31/08 Corporate Straight Bonds 40.5% Utilities Stocks 13.9% Financials Stocks 8.7% Energy Stocks 7.2% Health Care Stocks 6.0% Mortgage-Backed Securities 4.4% Senior Floating Rate Interests 3.3% Telecommunication Services Stocks 3.2% Information Technology Stocks 2.6% Industrials Stocks 1.7% Consumer Discretionary Stocks 1.6% Materials Stocks 1.3% Corporate Convertible Bonds 0.7% Short-Term Investments & Other Net Assets 4.9% 5. Source: Standard & Poor's Micropal. The LB U.S. Corporate High Yield Index is the corporate component of the LB U.S. High Yield Index, which includes fixed rate, non-investment grade debt. 6. Source: Standard & Poor's Micropal. The LB U.S. Treasury Index includes public obligations of the U.S. Treasury with a remaining maturity of one year or more. All issues must have at least one year to final maturity regardless of call features, have at least $250 million par amount outstanding and be rated investment grade (Baa3 or better). They must also be dollar denominated, nonconvertible and publicly issued. The LB U.S. Corporate Investment Grade Index is the corporate component of the LB U.S. Credit Index, which includes publicly issued, SEC-registered bonds that meet specified maturity, liquidity and quality requirements. Semiannual Report | 21 TOP 5 EQUITY HOLDINGS Franklin Income Fund 3/31/08 COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- AT&T Inc. 2.5% Telecommunication Services Pfizer Inc. 2.2% Health Care Canadian Oil Sands Trust (Canada) 1.8% Energy Bank of America Corp. 1.7% Financials Intel Corp. 1.7% Information Technology TOP 5 BOND HOLDINGS* Franklin Income Fund 3/31/08 COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Ford Motor Credit Co. LLC 3.4% Consumer Discretionary GMAC LLC 3.2% Financials Tenet Healthcare Corp. 2.3% Health Care Dynegy Holdings Inc. 1.5% Utilities Dollar General Corp. 1.4% Consumer Discretionary * Does not include convertible bonds. MANAGER'S DISCUSSION Within equity markets, some of our energy- and commodity-related holdings performed well due to strong commodity prices driven by the weakening U.S. dollar and continued solid demand from global economies. Canadian Oil Sands Trust and Chesapeake Energy (sold by period-end) benefited the Fund as crude oil and natural gas prices increased, while Newmont Mining (sold by period-end) contributed to Fund returns as gold and metals prices rose. Some of the Fund's utility investments also boosted Fund performance. Utility holdings such as FirstEnergy and FPL Group generated attractive total returns driven by strong dividend yields and favorable outlooks for future earnings growth and infrastructure investment opportunities. Detractors among equity holdings centered on financials negatively impacted by the credit crisis and deteriorating loan performance. Washington Mutual, Bank of America, Citigroup and Merrill Lynch were hurt by subprime mortgage or related structured-securities exposure. These firms were forced to raise capital from investors to shore up their financial positions. Pharmaceutical companies Schering-Plough and Merck also declined following a study that challenged the efficacy of Vytorin, a cholesterol lowering drug, and heightened concerns about the drug's sales going forward. We sold our Citigroup and Schering-Plough stocks by period-end. Within fixed income markets, the Fund's emphasis on high current yield and investment grade and non-investment grade corporate loans and bonds negatively impacted results relative to the LB U.S. Aggregate Index. The LB U.S. Aggregate Index, which does not have any high yield exposure, outperformed the L.B. U.S. Corporate High Yield Index, which is more representative of the spread and performance of the Fund's holdings in the current environment. Nevertheless, several of the Fund's high yield corporate bond holdings, particularly those with tangible underlying asset value, performed well. Examples included hospital operator Tenet Healthcare, power generator Dynegy Holdings and natural gas pipeline operator El Paso. Another strong contributor was retail chain Dollar General whose recent LBO led to improved company management and subsequent credit improvement despite a fairly leveraged balance sheet and a difficult retail environment. Freddie Mac (FHLMC) and Fannie Mae (FNMA) mortgage-backed securities also boosted Fund returns due to the U.S. Treasury rally and yield decline. With widening spreads and fear that access to capital markets may be constrained for some issuers, many companies with highly leveraged balance sheets or dependence on ready access to capital suffered. Among the Fund's holdings, Charter Communications (CCH) declined despite favorable revenue and earnings performance. Auto finance companies GMAC Financial Services and Ford 22 | Semiannual Report Motor Credit Company (FMCC) also detracted from Fund returns due to continued concerns regarding weakening consumer spending and potential credit losses going forward. R.H. Donnelly (RHD and Dex Media in the SOI; Dex is a wholly owned subsidiary of RHD) hampered the Fund as the sluggish economy pressured yellow pages advertising, particularly in markets hit hard by real estate and home price deterioration. According to our analysis, some of the Fund's short-maturity high yield bonds proved defensive and offered attractive profit-taking opportunities. Our motivation for selling many of these short-maturity bonds near par value was to reallocate the assets into other opportunities with what we viewed as more attractive potential total return over the long term. During the period, we sold at a profit our Nortel Networks senior notes and some of our El Paso, Qwest Capital Funding and Allied Waste North America senior notes. GMAC and FMCC had average weighted maturities of less than three years but remained major debt holdings in the Fund's portfolio. Thank you for your continued participation in Franklin Income Fund. We look forward to serving your future investment needs. [PHOTO OF EDWARD PERKS] - -s- Edward Perks Edward Perks, CFA [PHOTO OF CHARLES B. JOHNSON] - -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, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Semiannual Report | 23 Performance Summary as of 3/31/08 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 that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION CLASS A (SYMBOL: FKINX) CHANGE 3/31/08 9/30/07 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$0.33 $ 2.41 $ 2.74 DISTRIBUTIONS (10/1/07-3/31/08) Dividend Income $0.0785 Short-Term Capital Gain $0.0172 Long-Term Capital Gain $0.0437 TOTAL $0.1394 CLASS B (SYMBOL: FBICX) CHANGE 3/31/08 9/30/07 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$0.33 $ 2.40 $ 2.73 DISTRIBUTIONS (10/1/07-3/31/08) Dividend Income $0.0670 Short-Term Capital Gain $0.0172 Long-Term Capital Gain $0.0437 TOTAL $0.1279 CLASS B1 (SYMBOL: FICBX) CHANGE 3/31/08 9/30/07 - ------------------------ ------ ------- ------- Net Asset Value (NAV) -$0.33 $ 2.41 $ 2.74 DISTRIBUTIONS (10/1/07-3/31/08) Dividend Income $0.0717 Short-Term Capital Gain $0.0172 Long-Term Capital Gain $0.0437 TOTAL $0.1326 CLASS C (SYMBOL: FCISX) CHANGE 3/31/08 9/30/07 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$0.34 $ 2.42 $ 2.76 DISTRIBUTIONS (10/1/07-3/31/08) Dividend Income $0.0717 Short-Term Capital Gain $0.0172 Long-Term Capital Gain $0.0437 TOTAL $0.1326 24 | Semiannual Report Performance Summary (continued) PRICE AND DISTRIBUTION INFORMATION (continued) CLASS R (SYMBOL: FISRX) CHANGE 3/31/08 9/30/07 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$0.33 $ 2.38 $ 2.71 DISTRIBUTIONS (10/1/07-3/31/08) Dividend Income $0.0738 Short-Term Capital Gain $0.0172 Long-Term Capital Gain $0.0437 TOTAL $0.1347 ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 3/31/08 9/30/07 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) -$0.34 $ 2.39 $ 2.73 DISTRIBUTIONS (10/1/07-3/31/08) Dividend Income $0.0805 Short-Term Capital Gain $0.0172 Long-Term Capital Gain $0.0437 TOTAL $0.1414 PERFORMANCE Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. CLASS A: 4.25% maximum initial sales charge; CLASS B/B1: contingent deferred sales charge (CDSC) declining from 4% to 1% over six years, and eliminated thereafter; CLASS C: 1% CDSC in first year only; CLASS R/ADVISOR CLASS: no sales charges. The Fund may charge a 2% fee on redemptions made within seven days of purchase. CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- ------ -------- ------- Cumulative Total Return (1) -7.22% -3.69% +74.68% +106.23% Average Annual Total Return (2) -11.12% -7.78% +10.81% +7.06% Value of $10,000 Investment (3) $ 8,888 $9,222 $ 16,709 $19,777 Distribution Rate (4) 5.95% 30-Day Standardized Yield (5) 6.97% Total Annual Operating Expenses (6) 0.63% CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (11/1/01) - ------------------------------------- ------- ------ -------- ------------------ Cumulative Total Return (1) -7.67% -4.55% +67.81% +70.63% Average Annual Total Return (2) -11.19% -8.11% +10.64% +8.69% Value of $10,000 Investment (3) $ 8,881 $9,189 $ 16,581 $17,063 Distribution Rate (4) 5.40% 30-Day Standardized Yield (5) 6.42% Total Annual Operating Expenses (6) 1.48% CLASS B1 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - ------------------------------------- ------- ------ -------- ------------------- Cumulative Total Return (1) -7.48% -4.19% +70.29% +103.09% Average Annual Total Return (2) -11.00% -7.75% +10.97% +7.96% Value of $10,000 Investment (3) $ 8,900 $9,225 $ 16,829 $20,309 Distribution Rate (4) 5.73% 30-Day Standardized Yield (5) 6.77% Total Annual Operating Expenses (6) 1.13% Semiannual Report | 25 Performance Summary (continued) PERFORMANCE (continued) CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- -------- ------- --------- -------- Cumulative Total Return (1) -7.79% -4.55% +69.85% +96.28% Average Annual Total Return (2) -8.67% -5.44% +11.18% +6.98% Value of $10,000 Investment (3) $ 9,133 $9,456 $ 16,985 $19,628 Distribution Rate (4) 5.70% 30-Day Standardized Yield (5) 6.82% Total Annual Operating Expenses (6) 1.13% CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------------------------------------- -------- ------- --------- ------------------ Cumulative Total Return (1) -7.49% -4.45% +71.81% +70.18% Average Annual Total Return (2) -7.49% -4.45% +11.43% +8.89% Value of $10,000 Investment (3) $ 9,251 $9,555 $ 17,181 $17,018 Distribution Rate (4) 5.95% 30-Day Standardized Yield (5) 6.95% Total Annual Operating Expenses (6) 0.98% ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- -------- ------- --------- -------- Cumulative Total Return (1) -7.57% -3.97% +75.67% +109.00% Average Annual Total Return (2) -7.57% -3.97% +11.93% +7.65% Value of $10,000 Investment (3) $ 9,243 $9,603 $ 17,567 $20,900 Distribution Rate (4) 6.43% 30-Day Standardized Yield (5) 7.50% Total Annual Operating Expenses (6) 0.48% Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, see "Funds and Performance" at FRANKLINTEMPLETON.COM or call 1-800/342-5236. 26 | Semiannual Report Performance Summary (continued) ENDNOTES THE FUND'S PORTFOLIO INCLUDES A SUBSTANTIAL PORTION OF HIGHER-YIELDING, LOWER-RATED CORPORATE BONDS BECAUSE OF THE RELATIVELY HIGHER YIELDS THEY OFFER. THESE SECURITIES CARRY A GREATER DEGREE OF CREDIT RISK RELATIVE TO INVESTMENT GRADE SECURITIES. THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS B1 (formerly Class B): These shares have higher annual fees and expenses than Class A shares. Effective 11/1/01, closed to new investors. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. 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. 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 3/31/08. 5. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/08. 6. Figures are as stated in the Fund's prospectus current as of the date of this report. Semiannual Report | 27 Your Fund's Expenses FRANKLIN INCOME FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration: 1. Divide your account value by $1,000. If an account had an $8,600 value, then $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 28 | Semiannual Report Your Fund's Expenses(continued) Please note that expense shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges or redemption fees. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses. BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 10/1/07 VALUE 3/31/08 PERIOD* 10/1/07 - 3/31/08 ----------------- -------------- ------------------------- CLASS A Actual $ 1,000 $ 927.80 $ 2.99 Hypothetical (5% return before expenses) $ 1,000 $ 1,021.90 $ 3.13 CLASS B Actual $ 1,000 $ 923.30 $ 7.07 Hypothetical (5% return before expenses) $ 1,000 $ 1,017.65 $ 7.41 CLASS B1 Actual $ 1,000 $ 925.20 $ 5.39 Hypothetical (5% return before expenses) $ 1,000 $ 1,019.40 $ 5.65 CLASS C Actual $ 1,000 $ 922.10 $ 5.33 Hypothetical (5% return before expenses) $ 1,000 $ 1,019.45 $ 5.60 CLASS R Actual $ 1,000 $ 925.10 $ 4.67 Hypothetical (5% return before expenses) $ 1,000 $ 1,020.15 $ 4.90 ADVISOR CLASS Actual $ 1,000 $ 924.30 $ 2.26 Hypothetical (5% return before expenses) $ 1,000 $ 1,022.65 $ 2.38 * Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.62%; B: 1.47%; B1: 1.12%; C: 1.11%; R: 0.97%; and Advisor: 0.47%), multiplied by the average account value over the period, multiplied by 183/366 to reflect the one-half year period. Semiannual Report | 29 Franklin U.S. Government Securities Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Government Securities Fund seeks income by investing at least 80% of its net assets in U.S. government securities. The Fund presently invests substantially all of its assets in Government National Mortgage Association obligations (Ginnie Maes). Since 1983, the Fund has invested substantially in Ginnie Mae securities, which carry a guarantee backed by the full faith and credit of the U.S. government as to the timely payment of interest and principal. (1) Issued by the Government National Mortgage Association (GNMA), Ginnie Maes have been among the highest yielding U.S. government obligations available. PORTFOLIO BREAKDOWN Franklin U.S. Government Securities Fund Based on Total Net Assets as of 3/31/08 [PIE CHART] GNMA 96.5% Short-Term Investments & Other Net Assets 3.5% Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. Please visit FRANKLINTEMPLETON.COM or call 1-800/342-5236 for most recent month-end performance. This semiannual report for Franklin U.S. Government Securities Fund covers the period ended March 31, 2008. PERFORMANCE OVERVIEW Franklin U.S. Government Securities Fund - Class A posted a +5.40% cumulative total return for the six months under review. The Fund performed comparably to the +5.46% total return of its peers as measured by the Lipper GNMA Funds Classification Average. (2) In comparison, the Lehman Brothers (LB) U.S. 1. Securities owned by the Fund, but not shares of the Fund, are guaranteed by the U.S. government, its agencies or instrumentalities as to timely payment of principal and interest. The Fund's yield and share price are not guaranteed and will vary with market conditions. 2. Source: Lipper Inc. The Lipper GNMA Funds Classification Average is calculated by averaging the total return for all funds within the Lipper GNMA Funds classification in the Lipper Open-End underlying funds universe for the period indicated. Lipper GNMA Funds are defined as funds that invest primarily in GNMA securities. For the six-month period ended 3/31/08, there were 63 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. The Fund's performance relative to the average may have differed if these or other factors had been considered. Past performance does not guarantee future results. The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 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 84. 30 | Semiannual Report Government: Intermediate Index returned +7.61% for the same period. (3) The Fund's return reflects the effect of management fees and expenses, while the LB U.S. Government: Intermediate Index does not have such costs. You can find the Fund's long-term performance data in the Performance Summary beginning on page 35. ECONOMIC AND MARKET OVERVIEW The U.S. economy slowed during the six months ended March 31, 2008, as gross domestic product growth decelerated sharply and registered an annualized rate of 0.6% in the fourth quarter of 2007 and first quarter of 2008. This was a significant change from the third quarter's fairly robust 4.9% annualized growth, which was the highest in more than seven years. A softening labor market, tighter credit conditions and ongoing housing market weakness rattled consumer confidence and hurt consumer spending. These factors as well as upward inflationary pressures from rising food, energy and commodity prices, and a weaker dollar significantly weighed on the overall economy. Volatile oil prices reached a historical high in March, topping $110 per barrel before retreating to $102 by period-end. Core inflation, which excludes food and energy costs, rose modestly for the period, signaling that inflation risk remains. For March 2008, core inflation had a 12-month increase of 2.4%. (4) The Federal Reserve Board's (Fed's) preferred measure of inflation, the core personal consumption expenditures price index, reported a 12-month increase of 2.1%. (5) As financial market turmoil and investor uncertainty persisted, the Fed remained committed to act in an effort to restore confidence and liquidity to U.S. financial markets. The Fed implemented a number of programs to buffer downside risk, such as a $200 billion package to increase liquidity to banks, an extension on direct credit lines to non-banking financial service companies and the orchestration of Bear Stearns' acquisition by JPMorgan Chase. The Fed cut interest rates five times over the six-month period, bringing the federal funds target rate to 2.25%. In addition, regulators eased capital requirements on government sponsored Fannie Mae and Freddie Mac. Despite the Fed's aggressive actions, 3. Source: Standard & Poor's Micropal. The LB U.S. Government: Intermediate Index includes fixed-rate debt issues rated investment grade or higher by Moody's, S&P or Fitch, in that order. All issues have at least one year to maturity and an outstanding par value of at least $100 million for U.S. government issues. All returns are market value weighted inclusive of accrued interest. The index includes issues of the U.S. government or any agency thereof. It includes only issues with a remaining term to maturity of less than 10 years. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The total return index is rebalanced monthly by market capitalization. The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 4. Source: Bureau of Labor Statistics. 5. Source: Bureau of Economic Analysis. Semiannual Report | 31 DIVIDEND DISTRIBUTIONS* Franklin U.S. Government Securities Fund 10/1/07 - 3/31/08 DIVIDEND PER SHARE ----------------------------------------------------------------- MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS - -------- ----------- ----------- ----------- ----------- ------------- October 2.69 cents 2.41 cents 2.41 cents 2.49 cents 2.75 cents November 2.69 cents 2.41 cents 2.41 cents 2.49 cents 2.75 cents December 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.75 cents January 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.75 cents February 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.75 cents March 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.77 cents ----------- ----------- ----------- ----------- ------------- TOTAL 16.14 CENTS 14.42 CENTS 14.46 CENTS 14.94 CENTS 16.52 CENTS * All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. U.S. Treasuries rallied in a flight to quality and equities continued to fall during the period. Over the period, as investors sought the relative safety of short-term U.S. Treasuries, Treasury yields declined and the yield curve steepened. Short-term, two-and five-year yields declined substantially, with the two-year bill yielding 1.62% at the end of March, down from 3.97% six months prior. The 10-year U.S. Treasury note ended March yielding 3.45%, compared with 4.59% at the beginning of the period. 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 may include short-term government securities and cash or cash equivalents. MANAGER'S DISCUSSION During the six months ended March 31, 2008, the environment for fixed income investing grew more volatile and uncertain as a series of financial market disruptions prompted investors to seek the relative safety of U.S. government and agency securities. In this environment, mortgage-backed securities (MBS) generally performed well compared with many other credit-related sectors. For 32 | Semiannual Report example, during the review period, Ginnie Mae (GNMA) MBS performed in line with their conventional Fannie Mae and Freddie Mac counterparts, however, they lagged the robust performance of U.S. Treasuries with comparable durations. What first appeared as an isolated matter in a relatively narrow segment of the mortgage market quickly unfolded into a much larger affair with wide-ranging implications for the greater economy, affecting access to credit and financial market liquidity. It is important to note that GNMAs have a different credit profile than those mortgage issuers recently in the news and that Franklin U.S. Government Securities Fund does not invest in subprime MBS. During the reporting period, we continued to invest only in GNMA MBS, which are guaranteed by the full faith and credit of the U.S. government. (1) Within the mortgage market, GNMAs were somewhat buffered from recent market turbulence as GNMA securities have maintained their premium status due to their explicit government guarantee. A fundamental part of our strategy is to uncover dislocations across the GNMA market where prepayment risk may have offered value. The primary risk for GNMA investors is prepayment risk -- the risk of uncertain cash flows caused by prepayments in the pools' underlying mortgages. However, rather than avoid prepayment risk, we actively seek those areas of the GNMA market where we believe this risk offers value. While housing market volatility does not have an effect on GNMA credit quality, it can affect prepayment characteristics. With tightening credit standards and a pullback in housing and refinancing activity, investors saw a decline in prepayments across all coupons and program types. Because we believe income will continue to drive performance within the GNMA markets, we have focused primarily on 30-year collateral bonds rather than their shorter-term 15-year counterparts. We typically seek to allocate our portfolio strategically between the two tiers of the GNMA market and incrementally adjust our weightings based on the findings from our extensive research and analysis. Over the period, we decreased the Fund's allocation to GNMA II securities (comprising multiple-issuer pools) as the sector richened and as we believed the GNMA I sector (comprising single-issuer pools) offered better value. In some cases, we swapped GNMA IIs into GNMA Is, which benefited the portfolio. Consistent with our investment strategy, we continually evaluate opportunities across the entire GNMA sector and coupon spectrum to isolate those securities that we believe offer the best total return potential. Semiannual Report | 33 Thank you for your continued participation in Franklin U.S. Government Securities Fund. We welcome your comments and questions and look forward to serving your investment needs in the years ahead. [PHOTO OF ROGER A. BAYSTON] - -s- Roger A. Bayston Roger A. Bayston, CFA [PHOTO OF JACK LEMEIN] - -s- Jack Lemein Jack Lemein [PHOTO OF PAUL VARUNOK] - -s- Paul Varunok Paul Varunok Portfolio Management Team Franklin U.S. Government Securities Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 34 | Semiannual Report Performance Summary as of 3/31/08 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 that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION CLASS A (SYMBOL: FKUSX) CHANGE 3/31/08 9/30/07 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) +$0.18 $ 6.57 $ 6.39 DISTRIBUTIONS (10/1/07 - 3/31/08) Dividend Income $0.1614 CLASS B (SYMBOL: FUGBX) CHANGE 3/31/08 9/30/07 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) +$0.18 $ 6.56 $ 6.38 DISTRIBUTIONS (10/1/07 - 3/31/08) Dividend Income $0.1442 CLASS C (SYMBOL: FRUGX) CHANGE 3/31/08 9/30/07 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) +$0.18 $ 6.54 $ 6.36 DISTRIBUTIONS (10/1/07 - 3/31/08) Dividend Income $0.1446 CLASS R (SYMBOL: FUSRX) CHANGE 3/31/08 9/30/07 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) +$0.17 $ 6.56 $ 6.39 DISTRIBUTIONS (10/1/07 - 3/31/08) Dividend Income $0.1494 ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 3/31/08 9/30/07 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) +$0.18 $ 6.59 $ 6.41 DISTRIBUTIONS (10/1/07 - 3/31/08) Dividend Income $0.1652 Semiannual Report | 35 Performance Summary (continued) PERFORMANCE Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. CLASS A: 4.25% maximum initial sales charge; CLASS B: contingent deferred sales charge (CDSC) declining from 4% to 1% over six years, and eliminated thereafter; CLASS C: 1% CDSC in first year only; CLASS R/ADVISOR CLASS: no sales charges. The Fund may charge a 2% fee on redemptions made within seven days of purchase. CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- ------ ------- ------- Cumulative Total Return (1) +5.40% +7.46% +21.66% +67.85% Average Annual Total Return (2) +0.98% +2.82% +3.10% +4.85% Distribution Rate (3) 4.71% 30-Day Standardized Yield (4) 4.37% Total Annual Operating Expenses (5) 0.73% CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - ------------------------------------- ------- ------ ------- ------------------ Cumulative Total Return (1) +5.13% +6.90% +18.55% +53.05% Average Annual Total Return (2) +1.13% +2.90% +3.13% +4.71% Distribution Rate (3) 4.39% 30-Day Standardized Yield (4) 4.04% Total Annual Operating Expenses (5) 1.26% CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- ------ ------- ------- Cumulative Total Return (1) +5.15% +6.93% +18.60% +59.28% Average Annual Total Return (2) +4.15% +5.93% +3.47% +4.76% Distribution Rate (3) 4.42% 30-Day Standardized Yield (4) 4.01% Total Annual Operating Expenses (5) 1.26% CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------------------------------------- ------- ------ ------- ------------------ Cumulative Total Return (1) +5.05% +6.90% +19.25% +30.23% Average Annual Total Return (2) +5.05% +6.90% +3.58% +4.32% Distribution Rate (3) 4.55% 30-Day Standardized Yield (4) 4.18% Total Annual Operating Expenses (5) 1.11% ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- ------ ------- ------- Cumulative Total Return (1) +5.45% +7.57% +22.37% +69.95% Average Annual Total Return (2) +5.45% +7.57% +4.12% +5.45% Distribution Rate (3) 5.04% 30-Day Standardized Yield (4) 4.70% Total Annual Operating Expenses (5) 0.61% Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, see "Funds and Performance" at FRANKLINTEMPLETON.COM or call 1-800/342-5236. 36 | Semiannual Report Performance Summary (continued) ENDNOTES THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS AND MORTGAGE PREPAYMENTS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. 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 3/31/08. 4. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/08. 5. Figures are as stated in the Fund's prospectus current as of the date of this report. Semiannual Report | 37 Your Fund's Expenses FRANKLIN U.S. GOVERNMENT SECURITIES FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration: 1. Divide your account value by $1,000. If an account had an $8,600 value, then $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 38 | 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 VALUE 10/1/07 VALUE 3/31/08 PERIOD* 10/1/07 - 3/31/08 ----------------- -------------- ------------------------- CLASS A Actual $1,000 $1,054.00 $3.70 Hypothetical (5% return before expenses) $1,000 $1,021.40 $3.64 CLASS B Actual $1,000 $1,051.30 $6.36 Hypothetical (5% return before expenses) $1,000 $1,018.80 $6.26 CLASS C Actual $1,000 $1,051.50 $6.36 Hypothetical (5% return before expenses) $1,000 $1,018.80 $6.26 CLASS R Actual $1,000 $1,050.50 $5.59 Hypothetical (5% return before expenses) $1,000 $1,019.55 $5.50 ADVISOR CLASS Actual $1,000 $1,054.50 $3.03 Hypothetical (5% return before expenses) $1,000 $1,022.05 $2.98 * Expenses are calculated using the most recent six-month expense ratio, annualized 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 183/366 to reflect the one-half year period. Semiannual Report | 39 Franklin Utilities Fund YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Utilities Fund seeks both capital appreciation and current income by investing at least 80% of its net assets in public utility company securities. Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. Please visit FRANKLINTEMPLETON.COM or call 1-800/342-5236 for most recent month-end performance. This semiannual report for Franklin Utilities Fund covers the period ended March 31, 2008. PERFORMANCE OVERVIEW For the six months under review, Franklin Utilities Fund - Class A had a -4.18% cumulative total return. The Fund performed better than its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which returned -12.46% for the same period.(1) The Fund underperformed its narrow benchmark, the S&P 500 Utilities Index, which returned -3.14%.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 43. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2008, the U.S. economy slowed. The housing downturn negatively affected the overall economy by fourth quarter 2007 as credit conditions worsened and the pace of consumer spending declined. Gross domestic product (GDP) growth fell to a 0.6% annualized rate in the fourth quarter largely due to decelerating inventory investment, exports and federal government spending. For the overall six-month period, however, a weaker U.S. dollar compared with many foreign currencies contributed to increased exports. First quarter 2008 GDP growth remained at a 0.6% estimated annualized rate due to the effects of the troubled housing market and subsequent credit market tightening. The unemployment rate increased from 4.7% at the beginning of the period to 5.1% in March 2008.(3) Consumer confidence declined during the period, hitting a five-year low in March, amid rising mortgage and fuel costs, falling 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. 2. Source: Standard & Poor's Micropal. The S&P 500 Utilities Index is a market capitalization-weighted index that includes all utility stocks in the S&P 500. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 3. Source: Bureau of Labor Statistics. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 91. 40 | Semiannual Report home prices and a weaker job market. Volatile oil prices reached a historical high in March, topping $110 per barrel, before retreating somewhat to $102 by period-end. For the 12 months ended March 31, 2008, the core Consumer Price Index (CPI), which excludes food and energy costs, rose 2.4%, which was higher than its 10-year average rate.(3) Faced with a deepening housing contraction and stressed financial markets, the Federal Reserve Board made several cuts to the federal funds target rate during the period, including 200 basis points so far in 2008. Overall, the federal funds target rate fell 250 basis points from 4.75% to 2.25%. As investors fled riskier, poorer-performing assets, U.S. Treasuries rallied and the 10-year Treasury note yield fell from 4.59% at the beginning of the period to 3.45% on March 31, 2008. Stock markets were volatile during the period partly due to investor concerns about slowing economic growth. Overall, the blue chip stocks of the Dow Jones Industrial Average had a six-month total return of -10.64%, while the broader S&P 500 had a -12.46% return, and the technology-heavy NASDAQ Composite Index had a -15.32% return.(4) The consumer staples, materials and energy sectors performed relatively well. Large-capitalization stocks generally outperformed small caps, and growth stocks fared better than their value counterparts. 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 Many utilities companies increased distributions to shareholders, with significant dividend increases announced during the period by Fund holdings Exelon, Dominion Resources, FPL Group and Public Service Enterprise Group. In addition to higher dividends, many utilities may use capital for growth initiatives. The Edison Electric Institute forecasted higher capital spending by utilities companies in 2008, which continues a trend that has occurred over the past few years. An area where utilities increased spending was environmental emissions PORTFOLIO BREAKDOWN Franklin Utilities Fund Based on Total Net Assets as of 3/31/08 Electric Utilities 50.6% Multi-Utilities 35.9% Independent Power Producers & Energy Traders 3.6% Oil, Gas & Consumable Fuels 3.4% Gas Utilities 3.1% Diversified Telecommunication Services 3.0% Short-Term Investments & Other Net Assets 0.4% 4. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. Semiannual Report | 41 TOP 10 EQUITY HOLDINGS Franklin Utilities Fund 3/31/08 COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Entergy Corp. 7.3% Electric Utilities Exelon Corp. 6.8% Electric Utilities FirstEnergy Corp. 4.4% Electric Utilities FPL Group Inc. 4.1% Electric Utilities Edison International 3.9% Electric Utilities PPL Corp. 3.8% Electric Utilities Dominion Resources Inc. 3.6% Multi-Utilities The Southern Co. 3.5% Electric Utilities Public Service Enterprise Group Inc. 3.4% Multi-Utilities PG&E Corp. 3.4% Multi-Utilities control, as the industry was preparing for an uncertain future in regard to regulation and in terms of who will bear the costs of potential CO(2) and mercury emissions legislation. During the six months under review, Exelon and First Energy, which appeared well-positioned for future carbon initiatives, were leading contributors to the Fund's performance. Gaz de France, which operates Europe's second-largest distribution network and transports natural gas to all the region's suppliers, also helped the Fund's performance. Detractors during the period included PG&E, Edison International and National Grid. We could not identify any single issue related to these companies that contributed to their shares' weakness over the period. An area of possible concern related to increased cost inflation, such as for materials and labor, that the industry was experiencing. PG&E, Edison International and National Grid each have significant capital deployment programs, and there was some fear from investors that cost inflation may lead to slower earnings growth over the next few years as utilities need to file more frequent rate requests to try to recover such costs. Overall, we remained focused on a consistent investment strategy, and we look for opportunities within the utilities sector that we believe are best positioned to benefit from secular growth trends. Thank you for your continued participation in Franklin Utilities Fund. We look forward to serving your future investment needs. [PHOTO OF JOHN C. KOHLI] - -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, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 42 | Semiannual Report Performance Summary as of 3/31/08 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 that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION CLASS A (SYMBOL: FKUTX) CHANGE 3/31/08 9/30/07 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$1.46 $ 13.12 $ 14.58 DISTRIBUTIONS (10/1/07-3/31/08) Dividend Income $0.2020 Short-Term Capital Gain $0.0938 Long-Term Capital Gain $0.6413 TOTAL $0.9371 CLASS B (SYMBOL: FRUBX) CHANGE 3/31/08 9/30/07 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$1.45 $ 13.11 $ 14.56 DISTRIBUTIONS (10/1/07-3/31/08) Dividend Income $0.1640 Short-Term Capital Gain $0.0938 Long-Term Capital Gain $0.6413 TOTAL $0.8991 CLASS C (SYMBOL: FRUSX) CHANGE 3/31/08 9/30/07 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$1.45 $ 13.08 $ 14.53 DISTRIBUTIONS (10/1/07-3/31/08) Dividend Income $0.1646 Short-Term Capital Gain $0.0938 Long-Term Capital Gain $0.6413 TOTAL $0.8997 CLASS R (SYMBOL: FRURX) CHANGE 3/31/08 9/30/07 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$1.46 $ 13.08 $ 14.54 DISTRIBUTIONS (10/1/07-3/31/08) Dividend Income $0.1753 Short-Term Capital Gain $0.0938 Long-Term Capital Gain $0.6413 TOTAL $0.9104 ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 3/31/08 9/30/07 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) -$1.46 $ 13.18 $ 14.64 DISTRIBUTIONS (10/1/07-3/31/08) Dividend Income $0.2126 Short-Term Capital Gain $0.0938 Long-Term Capital Gain $0.6413 TOTAL $0.9477 Semiannual Report | 43 Performance Summary (continued) PERFORMANCE Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. CLASS A: 4.25% maximum initial sales charge; CLASS B: contingent deferred sales charge (CDSC) declining from 4% to 1% over six years, and eliminated thereafter; CLASS C: 1% CDSC in first year only; CLASS R/ADVISOR CLASS: no sales charges. The Fund may charge a 2% fee on redemptions made within seven days of purchase. CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- -------- ------- --------- --------- Cumulative Total Return (1) -4.18% -3.12% +117.98% +116.11% Average Annual Total Return (2) -8.27% -7.25% +15.85% +7.54% Value of $10,000 Investment (3) $ 9,173 $9,275 $ 20,871 $ 20,686 Distribution Rate (4) 2.95% 30-Day Standardized Yield (5) 2.84% Total Annual Operating Expenses (6) 0.75% CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - ------------------------------------- -------- ------- --------- ------------------ Cumulative Total Return (1) -4.37% -3.56% +112.59% +100.41% Average Annual Total Return (2) -7.97% -7.15% +16.06% +7.81% Value of $10,000 Investment (3) $ 9,203 $9,285 $ 21,059 $ 20,041 Distribution Rate (4) 2.56% 30-Day Standardized Yield (5) 2.46% Total Annual Operating Expenses (6) 1.26% CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- -------- ------- --------- --------- Cumulative Total Return (1) -4.38% -3.56% +112.53% +105.71% Average Annual Total Return (2) -5.28% -4.46% +16.27% +7.48% Value of $10,000 Investment (3) $ 9,472 $9,554 $ 21,253 $ 20,571 Distribution Rate (4) 2.58% 30-Day Standardized Yield (5) 2.46% Total Annual Operating Expenses (6) 1.26% CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------------------------------------- -------- ------- --------- ------------------ Cumulative Total Return (1) -4.37% -3.47% +113.98% +82.87% Average Annual Total Return (2) -4.37% -3.47% +16.43% +10.15% Value of $10,000 Investment (3) $ 9,563 $9,653 $ 21,398 $ 18,287 Distribution Rate (4) 2.74% 30-Day Standardized Yield (5) 2.61% Total Annual Operating Expenses (6) 1.11% ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- -------- ------- --------- --------- Cumulative Total Return (1) -4.09% -2.97% +119.51% +119.79% Average Annual Total Return (2) -4.09% -2.97% +17.03% +8.19% Value of $10,000 Investment (3) $ 9,591 $9,703 $ 21,951 $ 21,979 Distribution Rate (4) 3.21% 30-Day Standardized Yield (5) 3.12% Total Annual Operating Expenses (6) 0.61% Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, see "Funds and Performance" at FRANKLINTEMPLETON.COM or call 1-800/342-5236. 44 | Semiannual Report Performance Summary (continued) ENDNOTES IN ADDITION TO SENSITIVITY TO OTHER FACTORS, SECURITIES ISSUED BY UTILITY COMPANIES HAVE BEEN HISTORICALLY SENSITIVE TO INTEREST RATE CHANGES. WHEN INTEREST RATES FALL, UTILITY SECURITIES' PRICES, AND THUS A UTILITIES FUND'S SHARE PRICE, TEND TO RISE; WHEN INTEREST RATES RISE, THEIR PRICES GENERALLY FALL. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. 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. 4. Distribution rate is based on an annualization of the respective class's most recent quarterly dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 3/31/08. 5. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/08. 6. Figures are as stated in the Fund's prospectus current as of the date of this report. Semiannual Report | 45 Your Fund's Expenses FRANKLIN UTILITIES FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration: 1. Divide your account value by $1,000. If an account had an $8,600 value, then $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 46 | 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 VALUE 10/1/07 VALUE 3/31/08 PERIOD* 10/1/07-3/31/08 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $ 958.20 $3.57 Hypothetical (5% return before expenses) $1,000 $1,021.35 $3.69 CLASS B Actual $1,000 $ 956.30 $6.02 Hypothetical (5% return before expenses) $1,000 $1,018.85 $6.21 CLASS C Actual $1,000 $ 956.20 $6.02 Hypothetical (5% return before expenses) $1,000 $1,018.85 $6.21 CLASS R Actual $1,000 $ 956.30 $5.28 Hypothetical (5% return before expenses) $1,000 $1,019.60 $5.45 ADVISOR CLASS Actual $1,000 $ 959.10 $2.84 Hypothetical (5% return before expenses) $1,000 $1,022.10 $2.93 * Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.73%; B: 1.23%; C: 1.23%; R: 1.08%; and Advisor: 0.58%), multiplied by the average account value over the period, multiplied by 183/366 to reflect the one-half year period. Semiannual Report | 47 Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN DYNATECH FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 -------------------------------------------------------------------- CLASS A (UNAUDITED) 2007 2006 2005 2004 2003 ----------------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .... $ 32.33 $ 25.80 $ 24.98 $ 22.01 $ 20.17 $ 15.37 -------- -------- -------- -------- -------- -------- Income from investment operations (a): Net investment income (loss) (b) ...... (0.04) (0.08) (0.05) (0.01) (0.09) (0.06) Net realized and unrealized gains (losses) ...................... (3.80) 6.61 0.87 2.98 1.93 4.86 -------- -------- -------- -------- -------- -------- Total from investment operations ........ (3.84) 6.53 0.82 2.97 1.84 4.80 -------- -------- -------- -------- -------- -------- Less distributions from net realized gains ........................ (0.71) -- -- -- -- -- -------- -------- -------- -------- -------- -------- Redemption fees ......................... -- (e) -- (e) -- (e) -- (e) -- (e) -- -------- -------- -------- -------- -------- -------- Net asset value, end of period .......... 27.78 $ 32.33 $ 25.80 $ 24.98 $ 22.01 $ 20.17 ======== ======== ======== ======== ======== ======== Total return (c)......................... (12.16)% 25.31% 3.28% 13.49% 9.12% 31.23% RATIOS TO AVERAGE NET ASSETS (d) Expenses ................................ 0.97% (f) 0.99% (f) 0.97% (f) 1.00% (f) 0.97% (f) 1.04% Net investment income (loss) ............ (0.27)% (0.30)% (0.20)% (0.02)% (0.41)% (0.40)% SUPPLEMENTAL DATA Net assets, end of period (000's) ....... $458,190 $553,347 $590,633 $628,732 $640,120 $558,687 Portfolio turnover rate ................. 22.10% 18.03% 18.61% 17.26% 14.93% 13.68% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. 48 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN DYNATECH FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 --------------------------------------------------------------------- CLASS B (UNAUDITED) 2007 2006 2005 2004 2003 ---------------- -------- -------- -------- -------- --------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period..... $ 30.78 $ 24.75 $ 24.15 $ 21.43 $ 19.79 $ 15.20 -------- -------- -------- -------- -------- -------- Income from investment operations (a): Net investment income (loss) (b)...... (0.15) (0.28) (0.23) (0.18) (0.25) (0.25) Net realized and unrealized gains (losses)............................. (3.60) 6.31 0.83 2.90 1.89 4.84 -------- -------- -------- -------- -------- -------- Total from investment operations......... (3.75) 6.03 0.60 2.72 1.64 4.59 -------- -------- -------- -------- -------- -------- Less distributions from net realized gains.................................. (0.71) -- -- -- -- -- -------- -------- -------- -------- -------- -------- Redemption fees.......... ............... -- (e) -- (e) -- (e) -- (e) -- (e) -- -------- -------- -------- -------- -------- -------- Net asset value, end of period........... $ 26.32 $ 30.78 $ 24.75 $ 24.15 $ 21.43 $ 19.79 ======== ======== ======== ======== ======== ======== Total return (c)......................... (12.49)% 24.36% 2.48% 12.69% 8.29% 30.20% RATIOS TO AVERAGE NET ASSETS (d) Expenses................................. 1.73% (f) 1.75% (f) 1.72% (f) 1.74% (f) 1.72% (f) 1.79% Net investment income (loss)............. (1.03)% (1.06)% (0.95)% (0.76)% (1.16)% (1.15)% SUPPLEMENTAL DATA Net assets, end of period (000's)........ $ 13,743 $ 16,625 $ 18,718 $ 19,497 $ 18,824% $ 10,406 Portfolio turnover rate.................. 22.10% 18.03% 18.61% 17.26% 14.93% 13.68% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 49 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN DYNATECH FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 -------------------------------------------------------------------- CLASS C (UNAUDITED) 2007 2006 2005 2004 2003 ---------------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period...... $ 30.46 $ 24.50 $ 23.90 $ 21.21 $ 19.59 $ 15.04 -------- -------- -------- -------- -------- -------- Income from investment operations (a): Net investment income (loss) (b)........ (0.15) (0.28) (0.23) (0.17) (0.25) (0.25) Net realized and unrealized gains (losses)............................. (3.56) 6.24 0.83 2.86 1.87 4.80 -------- -------- -------- -------- -------- -------- Total from investment operations.......... (3.71) 5.96 0.60 2.69 1.62 4.55 -------- -------- -------- -------- -------- -------- Less distributions from net realized gains................................... (0.71) -- -- -- -- -- -------- -------- -------- -------- -------- -------- Redemption fees........................... -- (e) -- (e) -- (e) -- (e) -- (e) -- -------- -------- -------- -------- -------- -------- Net asset value, end of period............ $ 26.04 $ 30.46 $ 24.50 $ 23.90 $ 21.21 $ 19.59 ======== ======== ======== ======== ======== ======== Total return (c).......................... (12.49)% 24.33% 2.51% 12.68% 8.27% 30.25% RATIOS TO AVERAGE NET ASSETS (d) Expenses.................................. 1.73% (f) 1.74% (f) 1.71% (f) 1.74% (f) 1.72% (f) 1.79% Net investment income (loss).............. (1.03)% (1.05)% (0.94)% (0.76)% (1.16)% (1.15)% SUPPLEMENTAL DATA Net assets, end of period (000's)......... $ 61,431 $ 70,413 $ 69,069 $ 73,587 $ 75,642 $ 66,952 Portfolio turnover rate................... 22.10% 18.03% 18.61% 17.26% 14.93% 13.68% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. 50 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - ----------------------------------------------------- -------------- --------- -------------- COMMON STOCKS 97.4% AIR FREIGHT & LOGISTICS 1.5% C.H. Robinson Worldwide Inc...................... United States 150,000 $ 8,160,000 ------------- BIOTECHNOLOGY 9.6% (a) Celgene Corp..................................... United States 200,000 12,258,000 (a) Genentech Inc.................................... United States 250,000 20,295,000 (a) Gilead Sciences Inc.............................. United States 300,000 15,459,000 (a) Millennium Pharmaceuticals Inc................... United States 200,000 3,092,000 ------------- 51,104,000 ------------- CAPITAL MARKETS 0.8% The Goldman Sachs Group Inc...................... United States 25,000 4,134,750 ------------- CHEMICALS 6.2% Monsanto Co...................................... United States 100,000 11,150,000 (a) The Mosaic Co.................................... United States 40,000 4,104,000 Potash Corp. of Saskatchewan Inc................. Canada 20,000 3,104,200 Sigma-Aldrich Corp............................... United States 250,000 14,912,500 ------------- 33,270,700 ------------- COMMERCIAL SERVICES & SUPPLIES 0.8% (a) Stericycle Inc................................... United States 85,000 4,377,500 ------------- COMMUNICATIONS EQUIPMENT 6.1% (a) Cisco Systems Inc................................ United States 450,000 10,840,500 Nokia Corp., ADR................................. Finland 220,000 7,002,600 QUALCOMM Inc..................................... United States 200,000 8,200,000 (a) Research In Motion Ltd........................... Canada 60,000 6,733,800 ------------- 32,776,900 ------------- COMPUTERS & PERIPHERALS 7.4% (a) Apple Inc........................................ United States 165,000 23,677,500 Hewlett-Packard Co............................... United States 340,000 15,524,400 ------------- 39,201,900 ------------- DIVERSIFIED TELECOMMUNICATION SERVICES 1.1% AT&T Inc. ....................................... United States 150,000 5,745,000 ------------- ELECTRICAL EQUIPMENT 1.0% ABB Ltd., ADR.................................... Switzerland 200,000 5,384,000 ------------- ELECTRONIC EQUIPMENT & INSTRUMENTS 0.8% (a) Dolby Laboratories Inc., A ...................... United States 100,000 3,626,000 (a) FLIR Systems Inc. ............................... United States 20,000 601,800 ------------- 4,227,800 ------------- ENERGY EQUIPMENT & SERVICES 5.3% (a) FMC Technologies Inc............................. United States 200,000 11,378,000 Schlumberger Ltd................................. United States 150,000 13,050,000 ------------- (a) Weatherford International Ltd.................... United States 50,000 3,623,500 ------------- Semiannual Report | 51 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - ----------------------------------------------------- -------------- --------- -------------- COMMON STOCKS (CONTINUED) HEALTH CARE EQUIPMENT & SUPPLIES 7.1% Alcon Inc. ...................................... Switzerland 100,000 $ 14,225,000 (a) Intuitive Surgical Inc. ......................... United States 10,000 3,243,500 Medtronic Inc. .................................. United States 150,000 7,255,500 Stryker Corp. ................................... United States 200,000 13,010,000 ------------- 37,734,000 ------------- HEALTH CARE PROVIDERS & SERVICES 1.3% (a) Express Scripts Inc. ............................ United States 40,000 2,572,800 (a) VCA Antech Inc. ................................. United States 150,000 4,102,500 ------------- 6,675,300 ------------- HOTELS, RESTAURANTS & LEISURE 1.1% International Game Technology ................... United States 150,000 6,031,500 ------------- INTERNET & CATALOG RETAIL 1.5% (a) Amazon.com Inc. ................................. United States 60,000 4,278,000 (a) Priceline.com Inc. .............................. United States 30,000 3,625,800 ------------- 7,903,800 ------------- INTERNET SOFTWARE & SERVICES 5.3% (a) Baidu.com Inc., ADR ............................. China 10,000 2,396,300 (a) Google Inc., A .................................. United States 40,000 17,618,800 (a) Mercadolibre Inc. ............................... Argentina 50,000 1,988,000 (a) Omniture Inc. ................................... United States 150,000 3,481,500 (a) Sohu.com Inc. ................................... China 60,000 2,707,800 ------------- 28,192,400 ------------- IT SERVICES 4.5% MasterCard Inc., A .............................. United States 20,000 4,459,800 (a) Visa Inc., A .................................... United States 309,600 19,306,656 ------------- 23,766,456 ------------- LIFE SCIENCES TOOLS & SERVICES 3.7% (a) Covance Inc. .................................... United States 45,000 3,733,650 Pharmaceutical Product Development Inc. ......... United States 120,000 5,028,000 (a) Waters Corp. .................................... United States 200,000 11,140,000 ------------- 19,901,650 ------------- METALS & MINING 0.4% Nucor Corp. ..................................... United States 30,000 2,032,200 ------------- PHARMACEUTICALS 5.5% Allergan Inc. ................................... United States 80,000 4,511,200 Johnson & Johnson ............................... United States 100,000 6,487,000 Novo-Nordisk AS, ADR ............................ Denmark 100,000 6,924,000 Teva Pharmaceutical Industries Ltd., ADR......... Israel 250,000 11,547,500 ------------- 29,469,700 ------------- 52 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - ----------------------------------------------------------------------------------- ------------- ---------- ------------- COMMON STOCKS (CONTINUED) SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 9.4% (a) Hittite Microwave Corp. ....................................................... United States 60,000 $ 2,245,200 Intel Corp. ................................................................... United States 1,125,000 23,827,500 KLA-Tencor Corp. .............................................................. United States 100,000 3,710,000 (a) Lam Research Corp. ............................................................ United States 125,000 4,777,500 (a) MEMC Electronic Materials Inc. ................................................ United States 60,000 4,254,000 (a) NVIDIA Corp. .................................................................. United States 300,000 5,937,000 (a) Varian Semiconductor Equipment Associates Inc. ................................ United States 200,000 5,630,000 ------------- 50,381,200 ------------- SOFTWARE 11.7% (a) Activision Inc. ............................................................... United States 50,000 1,365,500 (a) Adobe Systems Inc. ............................................................ United States 350,000 12,456,500 (a) Autodesk Inc. ................................................................. United States 100,000 3,148,000 (a) Concur Technologies Inc. ...................................................... United States 135,000 4,191,750 (a) Electronic Arts Inc. .......................................................... United States 140,000 6,988,800 Microsoft Corp. ............................................................... United States 425,000 12,061,500 Nintendo Co. Ltd., ADR ........................................................ Japan 150,000 9,723,000 (a) Salesforce.com Inc. ........................................................... United States 100,000 5,787,000 (a) UbiSoft Entertainment SA ...................................................... France 75,000 6,459,587 ------------- 62,181,637 ------------- WIRELESS TELECOMMUNICATION SERVICES 5.3% America Movil SAB de CV, L, ADR ............................................... Mexico 140,000 8,916,600 (a) American Tower Corp., A ....................................................... United States 185,000 7,253,850 China Mobile (Hong Kong) Ltd., ADR ............................................ China 85,000 6,375,850 Mobile TeleSystems, ADR ....................................................... Russia 30,000 2,275,500 Vimpel-Communications, ADR .................................................... Russia 120,000 3,586,800 ------------- 28,408,600 ------------- TOTAL COMMON STOCKS (COST $284,157,558) ....................................... 519,112,493 ------------- SHORT TERM INVESTMENT (COST $15,195,393) 2.8% MONEY MARKET FUND 2.8% (b) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.50% .......... United States 15,195,393 15,195,393 ------------- TOTAL INVESTMENTS (COST $299,352,951) 100.2% .................................. 534,307,886 OTHER ASSETS, LESS LIABILITIES (0.2)% ......................................... (942,769) ------------- NET ASSETS 100.0% ............................................................. $ 533,365,117 ============= See Selected Portfolio Abbreviations on page 94. (a) Non-income producing for the twelve months ended March 31, 2008. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 53 Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN GROWTH FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 ------------------------------------------------------------------------------ CLASS A (UNAUDITED) 2007 2006 2005 2004 2003 ---------------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................... $ 46.36 $ 39.10 $ 34.83 $ 30.58 $ 26.87 $ 22.02 ----------- ---------- ---------- ---------- ---------- ---------- Income from investment operations (a): Net investment income (b)...... 0.10 0.16 0.12 0.13 0.06 0.08 Net realized and unrealized gains (losses) .............. (5.93) 7.21 4.21 4.20 3.68 4.81 ----------- ---------- ---------- ---------- ---------- ---------- Total from investment operations. ................... (5.83) 7.37 4.33 4.33 3.74 4.89 ----------- ---------- ---------- ---------- ---------- ---------- Less distributions from net investment income ............. (0.13) (0.11) (0.06) (0.08) (0.03) (0.04) ----------- ---------- ---------- ---------- ---------- ---------- Redemption fees ................. -- (e ) -- (e) -- (e) -- (e) -- (e) -- ----------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period ........................ $ 40.40 $ 46.36 $ 39.10 $ 34.83 $ 30.58 $ 26.87 =========== ========== ========== ========== ========== ========== Total return (c) ................ (12.61)% 18.87% 12.46% 14.17% 13.92% 22.27% RATIOS TO AVERAGE NET ASSETS (d) Expenses ........................ 0.91% (f) 0.93% (f) 0.91% (f) 0.94% (f) 0.98% (f) 1.06% Net investment income ........... 0.46% 0.37% 0.34% 0.40% 0.20% 0.31% SUPPLEMENTAL DATA Net assets, end of period (000's). ............... $ 1,883,485 $2,123,419 $1,695,802 $1,567,675 $1,531,871 $1,433,742 Portfolio turnover rate ......... 4.14% 0.37% 2.21% 1.16% 1.56% 5.12% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. 54 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN GROWTH FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 -------------------------------------------------------------------- CLASS B (UNAUDITED) 2007 2006 2005 2004 2003 ---------------- ------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..... $ 44.42 $ 37.65 $ 33.73 $ 29.77 $ 26.32 $ 21.70 -------- -------- -------- -------- -------- -------- Income from investment operations (a): Net investment income (loss) (b)........ (0.06) (0.16) (0.15) (0.11) (0.16) (0.11) Net realized and unrealized gains (losses) ....................... (5.70) 6.93 4.07 4.07 3.61 4.73 -------- -------- -------- -------- -------- -------- Total from investment operations ......... (5.76) 6.77 3.92 3.96 3.45 4.62 -------- -------- -------- -------- -------- -------- Redemption fees .......................... -- (e) -- (e) -- (e) -- (e) -- (e) -- -------- -------- -------- -------- -------- -------- Net asset value, end of period ........... $ 38.66 $ 44.42 $ 37.65 $ 33.73 $ 29.77 $ 26.32 ======== ======== ======== ======== ======== ======== Total return (c) ......................... (12.97)% 17.98% 11.62% 13.30% 13.11% 21.29% RATIOS TO AVERAGE NET ASSETS (d) Expenses ................................. 1.67% (f) 1.69% (f) 1.67% (f) 1.69% (f) 1.73% (f) 1.81% Net investment income (loss) ............. (0.30)% (0.39)% (0.42)% (0.35)% (0.55)% (0.44)% SUPPLEMENTAL DATA Net assets, end of period (000's) ........ $109,614 $138,640 $122,871 $123,926 $121,986 $103,499 Portfolio turnover rate .................. 4.14% 0.37% 2.21% 1.16% 1.56% 5.12% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 55 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN GROWTH FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 -------------------------------------------------------------------- CLASS C (UNAUDITED) 2007 2006 2005 2004 2003 ---------------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period..... $ 44.03 $ 37.32 $ 33.43 $ 29.51 $ 26.09 $ 21.51 --------- -------- -------- -------- -------- -------- Income from investment operations (a): Net investment income (loss) (b)....... (0.06) (0.16) (0.15) (0.11) (0.16) (0.11) Net realized and unrealized gains (losses). ..................... (5.64) 6.87 4.04 4.03 3.58 4.69 --------- -------- -------- -------- -------- -------- Total from investment operations......... (5.70) 6.71 3.89 3.92 3.42 4.58 --------- -------- -------- -------- -------- -------- Redemption fees ......................... -- (e) -- (e) -- (e) -- (e) -- (e) -- --------- -------- -------- -------- -------- -------- Net asset value, end of period........... $ 38.33 $ 44.03 $ 37.32 $ 33.43 $ 29.51 $ 26.09 ========= ======== ======== ======== ======== ======== Total return (c)......................... (12.95)% 17.98% 11.60% 13.32% 13.11% 21.29% RATIOS TO AVERAGE NET ASSETS (d) Expenses................................. 1.67% (f) 1.69% (f) 1.66% (f) 1.69% (f) 1.73% (f) 1.82% Net investment income (loss)............. (0.30)% (0.39)% (0.41)% (0.35)% (0.55)% (0.45)% SUPPLEMENTAL DATA Net assets, end of period (000's)........ $ 290,535 $340,671 $273,512 $270,538 $270,131 $259,169 Portfolio turnover rate ................. 4.14% 0.37% 2.21% 1.16% 1.56% 5.12% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. 56 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN GROWTH FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 -------------------------------------------------------------------- CLASS R (UNAUDITED) 2007 2006 2005 2004 2003 ---------------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ...................... $ 45.99 $ 38.80 $ 34.59 $ 30.39 $ 26.74 $ 21.98 ---------------- -------- -------- -------- -------- -------- Income from investment operations (a): Net investment income (loss) (b) ................ 0.05 0.04 0.02 0.05 (0.02) -- (e) Net realized and unrealized gains (losses). ........... (5.90) 7.16 4.19 4.16 3.67 4.81 ---------------- -------- -------- -------- -------- -------- Total from investment operations .................. (5.85) 7.20 4.21 4.21 3.65 4.81 ---------------- -------- -------- -------- -------- -------- Less distributions from net investment income ....... (0.03) (0.01) -- (e) (0.01) -- (0.05) ---------------- -------- -------- -------- -------- -------- Redemption fees ............... -- (e) -- (e) -- (e) -- (e) -- (e) -- ---------------- -------- -------- -------- -------- -------- Net asset value, end of period ........................ $ 40.11 $ 45.99 $ 38.80 $ 34.59 $ 30.39 $ 26.74 ================ ======== ======== ======== ======== ======== Total return (c)............... (12.73)% 18.55% 12.18% 13.87% 13.65% 21.92% RATIOS TO AVERAGE NET ASSETS (d) Expenses ...................... 1.17% (f) 1.19% (f) 1.17% (f) 1.19% (f) 1.23% (f) 1.31% Net investment income (loss) .. 0.20% 0.11% 0.08% 0.15% (0.05)% 0.06% SUPPLEMENTAL DATA Net assets, end of period (000's) ..................... $ 53,200 $ 53,134 $ 37,804 $ 27,818 $ 20,060 $ 14,755 Portfolio turnover rate ....... 4.14% 0.37% 2.21% 1.16% 1.56% 5.12% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 57 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN GROWTH FUND SIX MONTHS ENDED MARCH 31, 2008 YEAR ENDED SEPTEMBER 30, ---------------- -------------------------------------------------------------------- ADVISOR CLASS (UNAUDITED) 2007 2006 2005 2004 2003 ---------------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ...................... $ 46.45 $ 39.17 $ 34.89 $ 30.63 $ 26.91 $ 22.06 ---------------- -------- -------- -------- -------- -------- Income from investment operations (a): Net investment income (b).... 0.15 0.27 0.22 0.21 0.14 0.14 Net realized and unrealized gains (losses). ........... (5.94) 7.21 4.21 4.21 3.67 4.82 ---------------- -------- -------- -------- -------- -------- Total from investment operations .................. (5.79) 7.48 4.43 4.42 3.81 4.96 ---------------- -------- -------- -------- -------- -------- Less distributions from net investment income ........... (0.23) (0.20) (0.15) (0.16) (0.09) (0.11) ---------------- -------- -------- -------- -------- -------- Redemption fees ............... -- (e) -- (e) -- (e) -- (e) -- (e) -- ---------------- -------- -------- -------- -------- -------- Net asset value, end of period ...................... $ 40.43 $ 46.45 $ 39.17 $ 34.89 $ 30.63 $ 26.91 ================ ======== ======== ======== ======== ======== Total return (c)............... (12.51)% 19.16% 12.73% 14.45% 14.19% 22.58% RATIOS TO AVERAGE NET ASSETS (d) Expenses ...................... 0.67% (f) 0.69% (f) 0.67% (f) 0.69% (f) 0.73% (f) 0.81% Net investment income ......... 0.70% 0.61% 0.58% 0.65% 0.45% 0.56% SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 295,749 $363,221 $274,603 $221,752 $133,332 $ 41,216 Portfolio turnover rate ....... 4.14% 0.37% 2.21% 1.16% 1.56% 5.12% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. 58 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) FRANKLIN GROWTH FUND SHARES VALUE - --------------------------------------------- ----------- ------------ COMMON STOCKS 100.0% CONSUMER DISCRETIONARY 9.0% Carnival Corp. .......................... 565,000 $ 22,871,200 Clear Channel Communications Inc. ....... 500,000 14,610,000 (a) Expedia Inc. ............................ 300,100 6,569,189 (a) Ford Motor Co. .......................... 1,100,000 6,292,000 General Motors Corp. .................... 400,000 7,620,000 Genuine Parts Co. ....................... 375,400 15,098,588 Harley-Davidson Inc. .................... 500,000 18,750,000 (a) IAC/InterActiveCorp. ................ ... 300,100 6,230,076 Johnson Controls Inc. ................... 1,200,000 40,560,000 Time Warner Inc. ........................ 1,350,000 18,927,000 VF Corp. ................................ 500,000 38,755,000 (a) Viacom Inc., A .......................... 100,000 3,963,000 (a) Viacom Inc., B .......................... 50,000 1,981,000 The Walt Disney Co. ..................... 1,130,000 35,459,400 ------------ 237,686,453 ------------ CONSUMER STAPLES 0.9% CVS Caremark Corp. ...................... 126,293 5,116,129 The Hershey Co. ......................... 400,000 15,068,000 The Procter & Gamble Co. ................ 35,000 2,452,450 ------------ 22,636,579 ------------ ENERGY 2.3% BP PLC, ADR ............................. 350,200 21,239,630 ConocoPhillips .......................... 35,000 2,667,350 Devon Energy Corp. ...................... 50,000 5,216,500 Exxon Mobil Corp. ....................... 70,000 5,920,600 Royal Dutch Shell PLC, A, ADR ........... 280,000 19,314,400 Schlumberger Ltd. ....................... 40,000 3,480,000 (a) Transocean Inc. ......................... 15,222 2,058,014 ------------ 59,896,494 ------------ FINANCIALS 0.9% AFLAC Inc. .............................. 85,000 5,520,750 Moody's Corp. ........................... 538,000 18,738,540 ------------ 24,259,290 ------------ HEALTH CARE 21.4% Abbott Laboratories ..................... 400,000 22,060,000 (a) Advanced Medical Optics Inc. ............ 88,888 1,804,427 Allergan Inc. ........................... 800,000 45,112,000 (a) Amgen Inc. .............................. 932,000 38,938,960 Baxter International Inc. ............... 400,000 23,128,000 (a) Biogen Idec Inc. ........................ 400,000 24,676,000 Cardinal Health Inc. .................... 300,000 15,753,000 (a) Celgene Corp. ........................... 25,000 1,532,250 (a) Dionex Corp. ............................ 250,000 19,247,500 (a) Edwards Lifesciences Corp. .............. 50,000 2,227,500 Semiannual Report | 59 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN GROWTH FUND SHARES VALUE - --------------------------------------------- ----------- ------------ COMMON STOCKS (CONTINUED) HEALTH CARE (CONTINUED) Eli Lilly and Co. ....................... 400,000 $ 20,636,000 (a) Genentech Inc. .......................... 1,000,000 81,180,000 (a) Hospira Inc. ........................... 40,000 1,710,800 IMS Health Inc. ......................... 500,000 10,505,000 (a) Intuitive Surgical Inc. ................. 1,000 324,350 Johnson & Johnson ....................... 1,081,000 70,124,470 (a) Medco Health Solutions Inc. ............. 96,480 4,224,859 Medtronic Inc. .......................... 60,000 2,902,200 Merck & Co. Inc. ........................ 500,000 18,975,000 (a) Millipore Corp. ......................... 400,000 26,964,000 Pfizer Inc. ............................. 2,170,000 45,418,100 Quest Diagnostics Inc. .................. 500,000 22,635,000 Roche Holding AG, ADR ................... 40,000 3,779,000 Schering-Plough Corp. ................... 120,000 1,729,200 (a) Waters Corp. ............................ 500,000 27,850,000 Wyeth ................................... 600,000 25,056,000 (a) Zimmer Holdings Inc. .................... 64,000 4,983,040 ------------ 563,476,656 ------------ INDUSTRIALS 41.2% 3M Co. .................................. 855,000 67,673,250 Air France-KLM, ADR . ................. 550,000 15,482,500 (a) Alaska Air Group Inc. ................... 500,000 9,810,000 (a) AMR Corp. ............................... 2,000,000 18,040,000 Arkansas Best Corp. ..................... 500,000 15,930,000 Avery Dennison Corp. .................... 462,000 22,753,500 The Boeing Co. .......................... 1,045,000 77,716,650 (a) British Airways PLC, ADR ............... 500,000 23,175,000 Canadian National Railway Co. ........... 500,000 24,160,000 Canadian Pacific Railway Ltd. ........... 500,000 32,145,000 (a) Continental Airlines Inc., B ............ 1,000,000 19,230,000 Dun & Bradstreet Corp. .................. 122,000 9,928,360 Emerson Electric Co. .................... 1,000,000 51,460,000 Equifax Inc. ............................ 400,000 13,792,000 Expeditors International of Washington Inc. ....................... 80,000 3,614,400 FedEx Corp. ............................. 40,000 3,706,800 Forward Air Corp. ....................... 500,000 17,720,000 General Dynamics Corp. .................. 1,000,000 83,370,000 General Electric Co. .................... 70,000 2,590,700 Heartland Express Inc. . ................ 500,000 7,130,000 Illinois Tool Works Inc. ................ 1,000,000 48,230,000 Ingersoll-Rand Co. Ltd., A .............. 1,002,000 44,669,160 Lockheed Martin Corp. ................... 500,000 49,650,000 Northrop Grumman Corp. .................. 1,000,000 77,810,000 Pall Corp. .............................. 500,000 17,535,000 Raytheon Co. ............................ 600,000 38,766,000 Robert Half International Inc. .......... 300,000 7,722,000 Rockwell Collins Inc. ................... 100,000 5,715,000 60 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN GROWTH FUND SHARES VALUE - --------------------------------------------- ----------- -------------- COMMON STOCKS (CONTINUED) INDUSTRIALS (CONTINUED) Southwest Airlines Co. .................. 65,200 $ 808,480 (a) SunPower Corp., A ....................... 2,000 149,020 Teleflex Inc. ........................... 500,000 23,855,000 Textron Inc. ............................ 1,050,000 58,191,000 (a) Thomas & Betts Corp. .................... 500,000 18,185,000 Tyco International Ltd. ................. 387,513 17,069,948 Union Pacific Corp. ..................... 300,000 37,614,000 United Technologies Corp. ............... 850,000 58,497,000 W.W. Grainger Inc. ...................... 550,000 42,014,500 Werner Enterprises Inc. ................. 500,000 9,280,000 (a) YRC Worldwide Inc. ...................... 700,000 9,184,000 -------------- 1,084,373,268 -------------- INFORMATION TECHNOLOGY 21.2% (a) Agilent Technologies Inc. ............... 400,000 11,932,000 (a) Apple Inc. .............................. 800,000 114,800,000 Automatic Data Processing Inc. .......... 700,000 29,673,000 (a) Cisco Systems Inc. ...................... 1,545,000 37,219,050 (a) Computer Sciences Corp. ................. 1,000,000 40,790,000 (a) Dell Inc. ............................... 500,000 9,960,000 (a) EMC Corp. ............................... 1,000,000 14,340,000 (a) Google Inc., A .......................... 27,000 11,892,690 Hewlett-Packard Co. ..................... 1,156,250 52,794,375 Intel Corp. ............................. 970,000 20,544,600 International Business Machines Corp..... 580,000 66,781,200 KLA-Tencor Corp. ........................ 35,000 1,298,500 (a) Logitech International SA ............. 150,000 3,816,000 (a) Mettler-Toledo International Inc. ....... 50,000 4,856,000 Microsoft Corp. ......................... 1,175,000 33,346,500 Molex Inc. .............................. 146,483 3,392,546 Molex Inc., A ........................... 146,483 3,202,119 (a) Oracle Corp. ............................ 500,000 9,780,000 Paychex Inc. ............................ 50,000 1,713,000 QUALCOMM Inc. ........................... 110,000 4,510,000 (a) Sun Microsystems Inc. ................... 400,000 6,212,000 Texas Instruments Inc. .................. 515,000 14,559,050 Tyco Electronics Ltd..................... 387,513 13,299,446 (a) Verigy Ltd............................... 48,974 922,670 (a) Yahoo! Inc. ............................. 1,600,000 46,288,000 -------------- 557,922,746 -------------- MATERIALS 2.6% Air Products and Chemicals Inc. ......... 500,000 46,000,000 Sigma-Aldrich Corp. ..................... 400,000 23,860,000 -------------- 69,860,000 -------------- TELECOMMUNICATION SERVICES 0.2% (a) American Tower Corp., A ................. 115,000 4,509,150 -------------- Semiannual Report | 61 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN GROWTH FUND SHARES VALUE - ----------------------------------------------------------------------------- ---------- -------------- COMMON STOCKS (CONTINUED) UTILITIES 0.3% Exelon Corp. ............................................................ 50,000 $ 4,063,500 Public Service Enterprise Group Inc...................................... 100,000 4,019,000 -------------- 8,082,500 -------------- TOTAL COMMON STOCKS (COST $1,125,153,369) ............................... 2,632,703,136 -------------- SHORT TERM INVESTMENT (COST $2,357,461) 0.1% MONEY MARKET FUND 0.1% (b) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.50% .... 2,357,461 2,357,461 -------------- TOTAL INVESTMENTS (COST $1,127,510,830) 100.1% .......................... 2,635,060,597 OTHER ASSETS, LESS LIABILITIES (0.1)% ................................... (2,477,648) -------------- NET ASSETS 100.0% ....................................................... $2,632,582,949 ============== See Selected Portfolio abbreviations list on page 94. (a) Non-income producing for the twelve months ended March 31, 2008. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. 62 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN INCOME FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 ------------------------------------------------------------------------------------ CLASS A (UNAUDITED) 2007 2006 2005 2004 2003 ---------------- ------------ ------------ ------------ ------------ ----------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ... $ 2.74 $ 2.57 $ 2.50 $ 2.42 $ 2.25 $ 1.90 ------------ ------------ ------------ ------------ ------------ ----------- Income from investment operations (a): Net investment income (b)........... 0.08 0.14 0.14 0.14 0.12 0.14 Net realized and unrealized gains (losses) ..... (0.27) 0.21 0.09 0.10 0.22 0.38 ------------ ------------ ------------ ------------ ------------ ----------- Total from investment operations ........... (0.19) 0.35 0.23 0.24 0.34 0.52 ------------ ------------ ------------ ------------ ------------ ----------- Less distributions from: Net investment income .............. (0.08) (0.14) (0.15) (0.15) (0.16) (0.16) Net realized gains .... (0.06) (0.04) (0.01) (0.01) (0.01) (0.01) ------------ ------------ ------------ ------------ ------------ ----------- Total distributions ..... (0.14) (0.18) (0.16) (0.16) (0.17) (0.17) ------------ ------------ ------------ ------------ ------------ ----------- Redemption fees ........ -- (e) -- (e) -- (e) -- (e) -- (e) -- ------------ ------------ ------------ ------------ ------------ ----------- Net asset value, end of period ......... $ 2.41 $ 2.74 $ 2.57 $ 2.50 $ 2.42 $ 2.25 ============ ============ ============ ============ ============ =========== Total return (c) (7.22)% 14.14% 9.73% 10.45% 15.50% 28.12% RATIOS TO AVERAGE NET ASSETS (d) Expenses ............... 0.62% (f) 0.63% (f) 0.64% (g) 0.65% (g) 0.68% (f) 0.73% Net investment income ... 6.25% 5.31% 5.61% 5.54% 5.11% 6.63% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $ 32,595,956 $ 35,476,603 $ 26,641,398 $ 21,934,575 $ 14,743,190 $ 9,640,156 Portfolio turnover rate .................. 22.44% 25.45% 28.35% 28.51% 31.90% 48.36% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 63 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN INCOME FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 -------------------------------------------------------------------------------- CLASS B (UNAUDITED) 2007 2006 2005 2004 2003 ---------------- ----------- ----------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................ $ 2.73 $ 2.56 $ 2.49 $ 2.41 $ 2.24 $ 1.90 ------------ ----------- ----------- ---------- ---------- ---------- Income from investment operations (a): Net investment income (b)... 0.07 0.12 0.12 0.11 0.10 0.12 Net realized and unrealized gains (losses) ............... (0.27) 0.21 0.08 0.11 0.22 0.37 ------------ ----------- ----------- ---------- ---------- ---------- Total from investment operations ................ (0.20) 0.33 0.20 0.22 0.32 0.49 ------------ ----------- ----------- ---------- ---------- ---------- Less distributions from: Net investment income ..... (0.07) (0.12) (0.12) (0.13) (0.14) (0.14) Net realized gains ........ (0.06) (0.04) (0.01) (0.01) (0.01) (0.01) ------------ ----------- ----------- ---------- ---------- ---------- Total distributions ......... (0.13) (0.16) (0.13) (0.14) (0.15) (0.15) ------------ ----------- ----------- ---------- ---------- ---------- Redemption fees ............. -- (e) -- (e) -- (e) -- (e) -- (e) -- ------------ ----------- ----------- ---------- ---------- ---------- Net asset value, end of period ................. $ 2.40 $ 2.73 $ 2.56 $ 2.49 $ 2.41 $ 2.24 ============ =========== =========== ========== ========== ========== Total return (c).............. (7.67)% 13.23% 8.83% 9.57% 14.59% 26.58% RATIOS TO AVERAGE NET ASSETS (d) Expenses .................... 1.47% (f) 1.48% (f) 1.49% (g) 1.50% (g) 1.53% (f) 1.58% Net investment income ....... 5.40% 4.46% 4.76% 4.69% 4.26% 5.78% SUPPLEMENTAL DATA Net assets, end of period (000's) ................... $ 3,179,241 $ 3,745,636 $ 3,743,374 $3,922,396 $3,486,880 $2,083,783 Portfolio turnover rate ..... 22.44% 25.45% 28.35% 28.51% 31.90% 48.36% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. 64 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN INCOME FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 ----------------------------------------------------------------------- CLASS B1 (UNAUDITED) 2007 2006 2005 2004 2003 ---------------- --------- --------- --------- --------- --------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................... $ 2.74 $ 2.57 $ 2.50 $ 2.42 $ 2.25 $ 1.90 --------- --------- --------- --------- --------- --------- Income from investment operations (a): Net investment income (b)........... 0.07 0.13 0.13 0.12 0.11 0.13 Net realized and unrealized gains (losses) ................... (0.27) 0.21 0.08 0.11 0.21 0.38 --------- --------- --------- --------- --------- --------- Total from investment operations ..... (0.20) 0.34 0.21 0.23 0.32 0.51 --------- --------- --------- --------- --------- --------- Less distributions from: Net investment income ............. (0.07) (0.13) (0.13) (0.14) (0.14) (0.15) Net realized gains ................ (0.06) (0.04) (0.01) (0.01) (0.01) (0.01) --------- --------- --------- --------- --------- --------- Total distributions .................. (0.13) (0.17) (0.14) (0.15) (0.15) (0.16) --------- --------- --------- --------- --------- --------- Redemption fees ...................... -- (e) -- (e) -- (e) -- (e) -- (e) -- --------- --------- --------- --------- --------- --------- Net asset value, end of period ....... $ 2.41 $ 2.74 $ 2.57 $ 2.50 $ 2.42 $ 2.25 ========= ========= ========= ========= ========= ========= Total return (c)...................... (7.48)% 13.57% 9.17% 9.90% 14.90% 27.51% RATIOS TO AVERAGE NET ASSETS (d) Expenses ............................. 1.12% (f) 1.13% (f) 1.14% (g) 1.15% (g) 1.18% (f) 1.23% Net investment income ................ 5.75% 4.81% 5.11% 5.04% 4.61% 6.13% SUPPLEMENTAL DATA Net assets, end of period (000's) .... $ 312,529 $ 397,224 $ 459,302 $ 493,063 $ 511,471 $ 495,004 Portfolio turnover rate .............. 22.44% 25.45% 28.35% 28.51% 31.90% 48.36% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 65 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN INCOME FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 ------------------------------------------------------------------------------------ CLASS C (UNAUDITED) 2007 2006 2005 2004 2003 ------------ ------------ ------------ ------------ ---------- ----------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .... $ 2.76 $ 2.59 $ 2.51 $ 2.43 $ 2.26 $ 1.91 ------------ ------------ ------------ ------------ ---------- ----------- Income from investment operations (a): Net investment income (b) 0.07 0.13 0.13 0.13 0.11 0.13 Net realized and unrealized gains (losses) ............ (0.28) 0.21 0.09 0.10 0.21 0.38 ------------ ------------ ------------ ------------ ---------- ----------- Total from investment operations ............ (0.21) 0.34 0.22 0.23 0.32 0.51 ------------ ------------ ------------ ------------ ---------- ----------- Less distributions from: Net investment income . (0.07) (0.13) (0.13) (0.14) (0.14) (0.15) Net realized gains .... (0.06) (0.04) (0.01) (0.01) (0.01) (0.01) ------------ ------------ ------------ ------------ ---------- ----------- Total distributions ...... (0.13) (0.17) (0.14) (0.15) (0.15) (0.16) ------------ ------------ ------------ ------------ ---------- ----------- Redemption fees .......... -- (e) -- (e) -- (e) -- (e) -- (e) -- ------------ ------------ ------------ ------------ ---------- ----------- Net asset value, end of period .......... $ 2.42 $ 2.76 $ 2.59 $ 2.51 $ 2.43 $ 2.26 ============ ============ ============ ============ ========== =========== Total return (c) ......... (7.79)% 13.47% 9.56% 9.84% 14.85% 27.37% RATIOS TO AVERAGE NET ASSETS (d) Expenses ................. 1.11% (f) 1.13% (f) 1.14% (g) 1.15% (g) 1.18% (f) 1.24% Net investment income .... 5.76% 4.81% 5.11% 5.04% 4.61% 6.12% SUPPLEMENTAL DATA Net assets, end of period (000's) ...... $ 14,892,036 $ 16,203,796 $ 12,138,969 $ 10,113,365 $6,616,891 $ 3,764,372 Portfolio turnover rate ................... 22.44% 25.45% 28.35% 28.51% 31.90% 48.36% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. 66 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN INCOME FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 ------------------------------------------------------------------------- CLASS R (UNAUDITED) 2007 2006 2005 2004 2003 ---------------- --------- --------- --------- --------- --------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ...................... $ 2.71 $ 2.55 $ 2.48 $ 2.40 $ 2.23 $ 1.89 --------- --------- --------- ---------- --------- --------- Income from investment operations (a): Net investment income (b)....... 0.07 0.13 0.13 0.13 0.11 0.13 Net realized and unrealized gains (losses) .............. (0.27) 0.20 0.09 0.10 0.22 0.37 --------- --------- --------- ---------- --------- --------- Total from investment operations ..................... (0.20) 0.33 0.22 0.23 0.33 0.50 --------- --------- --------- ---------- --------- --------- Less distributions from: Net investment income ......... (0.07) (0.13) (0.14) (0.14) (0.15) (0.15) Net realized gains ............ (0.06) (0.04) (0.01) (0.01) (0.01) (0.01) --------- --------- --------- ---------- --------- --------- Total distributions .............. (0.13) (0.17) (0.15) (0.15) (0.16) (0.16) --------- --------- --------- ---------- --------- --------- Redemption fees .................. -- (e) -- (e) -- (e) -- (e) -- (e) -- --------- --------- --------- ---------- --------- --------- Net asset value, end of period ...................... $ 2.38 $ 2.71 $ 2.55 $ 2.48 $ 2.40 $ 2.23 ========= ========= ========= ========== ========= ========= Total return (c) ................. (7.49)% 13.47% 9.43% 10.15% 15.25% 27.31% RATIOS TO AVERAGE NET ASSETS (d) Expenses ......................... 0.97% (f) 0.98% (f) 0.99% (g) 1.00% (g) 1.03% (f) 1.08% Net investment income ............ 5.90% 4.96% 5.26% 5.19% 4.76% 6.28% SUPPLEMENTAL DATA Net assets, end of period (000's) ........................ $ 290,023 $ 286,670 $ 183,609 $ 122,222 $ 73,165 $ 36,417 Portfolio turnover rate .......... 22.44% 25.45% 28.35% 28.51% 31.90% 48.36% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 67 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN INCOME FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 -------------------------------------------------------------------------- ADVISOR CLASS (UNAUDITED) 2007 2006 2005 2004 2003 ---------------- ---------- ---------- ---------- --------- --------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................ $ 2.73 $ 2.56 $ 2.49 $ 2.41 $ 2.24 $ 1.89 ----------- ---------- ---------- ---------- --------- -------- Income from investment operations (a): Net investment income (b)....... 0.08 0.15 0.14 0.14 0.12 0.14 Net realized and unrealized gains (losses) ................ (0.28) 0.21 0.09 0.11 0.22 0.38 ----------- ---------- ---------- ---------- --------- -------- Total from investment operations ...................... (0.20) 0.36 0.23 0.25 0.34 0.52 ----------- ---------- ---------- ---------- --------- -------- Less distributions from: Net investment income .......... (0.08) (0.15) (0.15) (0.16) (0.16) (0.16) Net realized gains ............. (0.06) (0.04) (0.01) (0.01) (0.01) (0.01) ----------- ---------- ---------- ---------- --------- -------- Total distributions ............... (0.14) (0.19) (0.16) (0.17) (0.17) (0.17) ----------- ---------- ---------- ---------- --------- -------- Redemption fees ................... -- (e) -- (e) -- (e) -- (e) -- (e) -- ----------- ---------- ---------- ---------- --------- -------- Net asset value, end of period .... $ 2.39 $ 2.73 $ 2.56 $ 2.49 $ 2.41 $ 2.24 =========== ========== ========== ========== ========= ======== Total return (c)................... (7.57)% 14.36% 9.94% 10.65% 15.74% 28.47% RATIOS TO AVERAGE NET ASSETS (d) Expenses .......................... 0.47% (f) 0.48% (f) 0.49% (g) 0.50% (g) 0.53% (f) 0.58% Net investment income ............. 6.40% 5.46% 5.76% 5.69% 5.26% 6.78% SUPPLEMENTAL DATA Net assets, end of period (000's) ......................... $ 5,430,862 $6,195,966 $3,786,643 $2,280,318 $ 901,149 $95,009 Portfolio turnover rate ........... 22.44% 25.45% 28.35% 28.51% 31.90% 48.36% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. 68 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) FRANKLIN INCOME FUND COUNTRY SHARES VALUE - -------------------------------------------------- ----------------- ---------------- --------------- LONG TERM INVESTMENTS 95.1% COMMON STOCKS 36.2% ENERGY 5.1% BP PLC, ADR................................... United Kingdom 6,500,000 $ 394,225,000 (a) Canadian Oil Sands Trust ..................... Canada 25,000,000 1,010,814,496 Chevron Corp. ................................ United States 4,500,000 384,120,000 ConocoPhillips ............................... United States 5,750,000 438,207,500 Royal Dutch Shell PLC, A, ADR ................ Netherlands 4,000,000 275,920,000 Spectra Energy Corp. ......................... United States 17,100,000 389,025,000 --------------- 2,892,311,996 --------------- FINANCIALS 5.1% Bank of America Corp.......................... United States 26,000,000 985,660,000 Duke Realty Corp.............................. United States 1,150,000 26,231,500 HSBC Holdings PLC ............................ United Kingdom 35,000,000 576,497,212 iStar Financial Inc. ......................... United States 5,213,500 73,145,405 JPMorgan Chase & Co. ......................... United States 8,000,000 343,600,000 Merrill Lynch & Co. Inc. ..................... United States 4,500,000 183,330,000 Wachovia Corp. ............................... United States 3,750,000 101,250,000 Washington Mutual Inc. ....................... United States 20,000,000 206,000,000 Wells Fargo & Co. ............................ United States 13,900,000 404,490,000 --------------- 2,900,204,117 --------------- HEALTH CARE 5.5% (b) Amgen Inc. ................................... United States 3,521,000 147,107,380 Bristol-Myers Squibb Co....................... United States 14,000,000 298,200,000 Johnson & Johnson............................. United States 12,000,000 778,440,000 Merck & Co. Inc. ............................. United States 13,000,000 493,350,000 Pfizer Inc. .................................. United States 60,867,506 1,273,956,900 Wyeth......................................... United States 4,000,000 167,040,000 --------------- 3,158,094,280 --------------- INDUSTRIALS 1.0% 3M Co. ....................................... Uited States 7,000,000 554,050,000 --------------- Information Technology 2.0% Intel Corp. .................................. Uited States 45,000,000 953,100,000 Microchip Technology Inc...................... United States 5,000,000 163,650,000 --------------- 1,116,750,000 --------------- MATERIALS 0.6% AngloGold Ashanti Ltd., ADR................... South Africa 2,250,000 76,410,000 The Dow Chemical Co........................... United States 7,181,222 264,628,031 --------------- 341,038,031 --------------- TELECOMMUNICATION SERVICES 3.2% AT&T Inc. .................................... United States 36,900,000 1,413,270,000 Verizon Communications Inc ................... United States 11,000,000 399,084,664 --------------- 1,812,354,664 --------------- UTILITIES 13.7% AGL Resources Inc. ........................... United States 1,500,000 51,480,000 (a) Ameren Cor ................................... United States 12,500,000 550,500,000 American Electric Power Co. Inc. ............. United States 8,633,800 359,425,094 Semiannual Report | 69 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN INCOME FUND COUNTRY SHARES VALUE - ------------------------------------------------- ----------------- -------------- --------------- LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) UTILITIES (CONTINUED) Atmos Energy Corp. .......................... United States 4,000,000 $ 102,000,000 CenterPoint Energy Inc. ..................... United States 6,000,000 85,620,000 Consolidated Edison Inc. .................... United States 12,000,000 476,400,000 Dominion Resources Inc. ..................... United States 20,000,000 816,800,000 DTE Energy Co. .............................. United States 5,270,400 204,965,856 Duke Energy Corp. ........................... United States 32,500,000 580,125,000 FirstEnergy Corp. ........................... United States 10,000,000 686,200,000 FPL Group Inc. .............................. United States 5,500,000 345,070,000 Hawaiian Electric IndustriesInc. ............ United States 1,720,000 41,056,400 NiSource Inc. ............................... United States 4,500,000 77,580,000 (a) PG&E Corp. .................................. United States 19,000,000 699,580,000 (a) Pinnacle West Capital Corp................... United States 5,500,000 192,940,000 Portland General Electric Co. ............... United States 3,100,000 69,905,000 Progress Energy Inc. ........................ United States 9,000,000 375,300,000 Public Service Enterprise Group Inc. ........ United States 20,000,000 803,800,000 (a) Puget Energy Inc. ........................... United States 7,500,000 194,025,000 The Southern Co. ............................ United States 25,000,000 890,250,000 TECO Energy Inc. ............................ United States 9,500,000 151,525,000 --------------- 7,754,547,350 --------------- TOTAL COMMON STOCKS (COST $ 18,221,113,916) . 20,529,350,438 --------------- CONVERTIBLE PREFERRED STOCKS 8.6% CONSUMER DISCRETIONARY 1.6% Citigroup into Comcast Corp., 8.50%, cvt. pfd. ............................ United States 15,000,000 295,147,500 General Motors Corp., 6.25%, cvt. pfd. ...... United States 10,000,000 165,000,000 (c) The Goldman Sachs Group Inc. into Comcast Corp., 5.00%, cvt. pfd., 144A........ United States 2,800,000 53,306,400 (c) Lehman Brothers into Target Corp., 7.50%, cvt. pfd., 144A ..................... United States 4,800,000 246,528,000 (c) Merrill Lynch & Co. Inc. into Home Depot Inc., 9.00%, cvt. pfd., 144A ......... United States 6,000,000 172,410,000 --------------- 932,391,900 --------------- ENERGY 2.1% (c) Deutsche Bank AG into Chevron Corp., 8.00%, cvt. pfd., 144A ..................... United States 5,000,000 425,450,000 (c) Morgan Stanley into ConocoPhillips, 7.00%, cvt. pfd., 144A ..................... United States 6,000,000 454,650,000 (c) Morgan Stanley into Halliburton Co., 8.00%, cvt. pfd., 144A ...................... United States 9,000,000 324,585,000 --------------- 1,204,685,000 --------------- FINANCIALS 2.2% Bank of America Corp., 7.25%, cvt. pfd., L ........................ United States 399,000 412,167,000 Citigroup Inc., 6.50%, cvt.pfd. ............. United States 3,800,000 180,766,000 E*TRADE Financial Corp., 6.125%, cvt. pfd. ......................... United States 2,302,200 13,122,540 Fannie Mae, 5.375%, cvt. pfd. .............. United States 4,700 336,469,945 Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A ........................ United States 3,000,000 59,220,000 Washington Mutual Inc., 7.75%, cvt. pfd., R ......................... United States 363,500 258,085,000 --------------- 1,259,830,485 --------------- 70| Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN INCOME FUND COUNTRY SHARES VALUE - ------------------------------------------------- ----------------- -------------- --------------- Long Term Investments (continued) Convertible Preferred Stocks (continued) Health Care 0.5% (c) Lehman Brothers Holdings into Schering-Plough Corp., 8.00%, cvt. pfd., 144A........................................... United States 12,327,000 $ 192,547,740 Schering-Plough Corp., 6.00%, cvt. pfd............................. United States 500,000 76,596,352 --------------- 269,144,092 --------------- INDUSTRIALS 0.7% Lehman Brothers Holdings into General Electric Co., 7.50%, cvt. pfd ................................................. United States 11,500,000 417,450,000 --------------- INFORMATION TECHNOLOGY 0.6% (c) Morgan Stanley into Texas Instruments Inc., 7.50%, cvt. pfd., 144A .......................................... United States 11,250,000 332,156,250 --------------- Materials 0.7% (c) The Goldman Sachs Group Inc. into Barrick Gold Corp., 10.00%, cvt. pfd., 144A.......................................... United States 8,600,000 391,532,200 --------------- UTILITIES 0.2 CMS Energy Trust I, 7.75%, cvt. pfd................................ United States 1,711,000 84,514,845 --------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $5,407,520,325)........... 4,891,704,772 --------------- PREFERRED STOCKS 1.4% FINANCIALS 1.4% FHLMC, 8.375%, pfd................................................. United States 16,108,000 393,035,200 FNMA, 6.75%, pfd................................................... United States 3,000,000 67,770,000 FNMA, 7.625%, pfd., R.............................................. United States 2,399,400 56,865,780 FNMA, 8.25%, pfd................................................... United States 11,284,000 271,380,200 --------------- TOTAL PREFERRED STOCKS (COST $819,785,000) 789,051,180 --------------- PRINCIPAL AMOUNT (f) ------------------- (D,E) SENIOR FLOATING RATE INTERESTS 3.3% CONSUMER DISCRETIONARY 0.4% Allison Transmission, Term Loan B, 5.74% - 5.75%, 8/07/14........ United States 164,687,500 145,160,338 Jarden Corp., Term Loan B-3, 7.698%, 1/24/12..................... United States 124,375,000 118,531,863 --------------- 263,692,201 --------------- HEALTH CARE 0.1% Bausch and Lomb Inc., (g) Delayed Draw Term Loan, 5.946%, 4/28/15................... United States 4,390,000 4,272,765 Parent Term Loan B, 5.946%, 4/28/15....................... United States 35,032,200 34,096,665 --------------- 38,369,430 --------------- INDUSTRIALS 0.5% Ceva Group PLC, Dollar Pre-Refunded L/C Commitment, 5.696%, 8/01/12......... United States 13,684,211 12,362,042 EGL Term Loans, 5.818%, 8/01/12. ........................... United States 115,443,421 104,822,626 (h) Rexnord Holdings Inc., PIK Interest Facility, 10.058%, 2/20/13... 84,930,127 59,451,089 U.S. Investigations Services Inc., Term Loan B, 5.599%, 4/01/15.. United States 109,448,622 93,781,051 --------------- 270,416,808 --------------- Semiannual Report | 71 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(F) VALUE - -------------------------------------------------------------------------- -------------- ------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) (d,e) SENIOR FLOATING RATE INTERESTS (CONTINUED) INFORMATION TECHNOLOGY 0.9% First Data Corp., (i) Term Loan B-2, 5.349% - 5.446%, 9/24/14 United States 248,775,000 $ 224,462,966 Term Loan B-3, 5.349% - 5.446%, 9/24/14 United States 333,474,624 300,223,869 --------------- 524,686,835 --------------- MATERIALS 0.2% (h) Berry Plastics Holding Corp., Senior Unsecured Term Loan, PIK, 11.646%, 6/15/14 United States 140,792,671 99,258,833 --------------- TELECOMMUNICATION SERVICES 0.1% (i) Intelsat Subsidiary Holding Co. Ltd., Bridge Term Loan, 5.25%, 1/15/15 Bermuda 85,000,000 74,834,000 --------------- UTILITIES 1.1% Texas Competitive Electric Holdings Co. LLC, Term Loan B-1, 5.25%, 10/10/14 United States 150,000,000 136,562,550 Term Loan B-2, 6.478% - 6.596%, 10/10/14 United States 249,375,000 227,696,333 Term Loan B-3, 6.478% - 6.596%, 10/10/14 United States 274,312,500 249,761,531 --------------- 614,020,414 --------------- TOTAL SENIOR FLOATING RATE INTERESTS (COST $ 2,053,307,802) 1,885,278,521 --------------- CORPORATE BONDS 40.5% CONSUMER DISCRETIONARY 13.6% Beazer Homes USA Inc., senior note, 6.875%, 7/15/15 United States 59,000,000 42,480,000 8.125%, 6/15/16 United States 32,100,000 23,834,250 Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 United States 490,000,000 478,975,000 CCH I Holdings LLC, senior note, 13.50%, 1/15/14 United States 375,000,000 238,125,000 9.92%, 4/01/14 . United States 117,380,000 56,342,400 11.75%, 5/15/14 United States 342,000,000 174,420,000 CCH I LLC, senior secured note, 11.00%, 10/01/15 United States 755,000,000 528,500,000 CCH II LLC, senior note, 10.25%, 9/15/10 United States 180,000,000 164,700,000 CSC Holdings Inc., senior note, B, 7.625%, 4/01/11 United States 152,900,000 151,944,375 D.R. Horton Inc., 5.625%, 1/15/16 United States 35,000,000 29,400,000 senior note, 6.50%, 4/15/16 United States 50,000,000 44,750,000 Dex Media Inc., B, 8.00%, 11/15/13 United States 20,000,000 14,700,000 senior disc. note, zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 United States 60,000,000 43,500,000 zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 United States 220,000,000 159,500,000 Dish Network Corp., senior note, 7.125%, 2/01/16 United States 250,000,000 234,375,000 Dollar General Corp., (j) senior note, 10.625%, 7/15/15 United States 625,000,000 606,250,000 (h) senior sub. note, PIK, 11.875%, 7/15/17 United States 220,000,000 193,600,000 Ford Motor Co., 7.45%, 7/16/31 United States 600,000,000 399,000,000 72 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(F) VALUE - -------------------------------------------------------------------------- -------------- ------------------- --------------- LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) CONSUMER DISCRETIONARY (CONTINUED) Ford Motor Credit Co. LLC, 7.375%, 10/28/09 United States 760,000,000 $ 693,149,640 7.875%, 6/15/10 United States 550,000,000 480,016,350 7.375%, 2/01/11 United States 450,000,000 375,795,450 7.00%, 10/01/13 United States 100,000,000 78,101,400 senior note, 9.75%, 9/15/10 United States 145,000,000 129,306,795 senior note, 9.875%, 8/10/11 United States 75,000,000 66,986,700 senior note, 7.25%, 10/25/11 United States 155,000,000 127,517,725 General Motors Corp., senior deb., 8.375%, 7/15/33 United States 510,000,000 362,100,000 Hertz Corp., senior note, 8.875%, 1/01/14 United States 210,000,000 200,025,000 K. Hovnanian Enterprises Inc., senior note, 7.50%, 5/15/16 United States 45,600,000 31,920,000 KB Home, senior note, 6.375%, 8/15/11 United States 40,000,000 37,800,000 5.75%, 2/01/14 United States 75,000,000 64,875,000 (j) 6.25%, 6/15/15 United States 90,000,000 80,212,500 7.25%, 6/15/18 United States 70,500,000 63,450,000 Liberty Media Corp., senior note, 5.70%, 5/15/13 United States 130,400,000 114,871,837 MGM MIRAGE, senior note, 6.75%, 4/01/13 United States 70,000,000 64,750,000 6.625%, 7/15/15 United States 120,000,000 105,000,000 7.625%, 1/15/17 United States 250,000,000 228,750,000 R.H. Donnelley Corp., 6.875%, 1/15/13 United States 36,300,000 22,324,500 senior discount note, 6.875%, 1/15/13 United States 134,400,000 82,656,000 senior note, 6.875%, 1/15/13 United States 20,000,000 12,300,000 senior note, 8.875%, 1/15/16 United States 82,000,000 52,275,000 (c) senior note, 144A, 8.875%, 10/15/17 United States 360,000,000 226,800,000 Seagate Technology HDD Holdings, senior note, 6.80%, 10/01/16 United States 40,000,000 38,300,000 (c) TRW Automotive Inc., senior note, 144A, 7.25%, 3/15/17 United States 28,000,000 25,620,000 (c,h) Univision Communications Inc., senior note, 144A, PIK, 9.75%, 3/15/15 United States 357,000,000 217,770,000 Visant Holding Corp., senior note, 8.75%, 12/01/13 United States 50,000,000 47,000,000 XM Satellite Radio Inc., senior note, 9.75%, 5/01/14 United States 127,000,000 123,190,000 --------------- 7,737,259,922 --------------- ENERGY 4.2% Callon Petroleum Co., senior note, 9.75%, 12/08/10 United States 110,000,000 105,050,000 Chesapeake Energy Corp., senior note, 6.50%, 8/15/17 United States 138,000,000 133,860,000 6.25%, 1/15/18 United States 150,000,000 144,000,000 6.875%, 11/15/20 . United States 135,000,000 131,625,000 El Paso Corp., senior note, MTN, 7.75%, 1/15/32 United States 250,000,000 258,065,000 Mariner Energy Inc., senior note, 7.50%, 4/15/13 United States 45,000,000 43,425,000 8.00%, 5/15/17 . United States 25,000,000 24,000,000 Nalco Finance Holdings, senior note, zero cpn. to 8/01/09, 9.00% thereafter, 2/01/14 United States 380,000,000 343,900,000 Newfield Exploration Co., senior sub. note, 6.625%, 4/15/16 United States 110,000,000 108,350,000 Semiannual Report | 73 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(F) VALUE - -------------------------------------------------------------------------- -------------- ------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) ENERGY (CONTINUED) OPTI Canada Inc., senior note, 7.875%, 12/15/14 Canada 220,000,000 $ 216,150,000 Pioneer Natural Resources Co., senior bond, 6.875%, 5/01/18 United States 110,000,000 104,810,750 Plains Exploration & Production Co., senior note, 7.75%, 6/15/15 United States 75,000,000 75,187,500 Sabine Pass LNG LP, senior secured note, 7.25%, 11/30/13 United States 92,000,000 89,240,000 7.50%, 11/30/16 United States 390,000,000 378,300,000 Sesi LLC, senior note, 6.875%, 6/01/14 United States 110,000,000 105,600,000 (c) W&T Offshore Inc., senior note, 144A, 8.25%, 6/15/14 United States 100,000,000 93,250,000 -------------- 2,354,813,250 -------------- FINANCIALS 5.4% American Express Co., senior note, 7.00%, 3/19/18 United States 120,300,000 126,611,179 E*TRADE Financial Corp., senior note, 7.375%, 9/15/13 United States 220,000,000 157,300,000 GMAC LLC, 5.625%, 5/15/09 United States 225,000,000 205,121,700 7.75%, 1/19/10 United States 600,000,000 519,443,400 7.25%, 3/02/11 United States 175,000,000 138,002,200 6.875%, 9/15/11 United States 800,000,000 613,266,400 6.875%, 8/28/12 United States 300,400,000 228,564,747 6.75%, 12/01/14 United States 125,000,000 88,599,500 Host Hotels & Resorts LP, senior note, 6.875%, 11/01/14 United States 87,600,000 83,877,000 Host Marriott LP, senior note, K, 7.125%, 11/01/13 United States 50,000,000 49,250,000 O, 6.375%, 3/15/15 United States 215,000,000 201,025,000 Q, 6.75%, 6/01/16 United States 160,000,000 150,400,000 iStar Financial Inc., senior note, 5.95%, 10/15/13 United States 13,800,000 10,085,012 Lehman Brothers Holdings Inc., senior note, 6.20%, 9/26/14 United States 326,000,000 322,047,250 7.00%, 9/27/27 United States 100,000,000 92,668,600 Residential Capital LLC, senior note, 6.50%, 6/01/12 United States 125,000,000 61,875,000 -------------- 3,048,136,988 -------------- HEALTH CARE 4.2% Community Health Systems Inc., senior sub. note, 8.875%, 7/15/15 United States 350,000,000 353,062,500 DaVita Inc., senior note, 6.625%, 3/15/13 United States 228,100,000 222,397,500 senior sub. note, 7.25%, 3/15/15 United States 80,000,000 78,400,000 HCA Inc., 6.375%, 1/15/15 United States 125,000,000 106,406,250 senior note, 6.95%, 5/01/12 United States 10,988,000 10,383,660 senior note, 6.50%, 2/15/16 United States 150,000,000 127,125,000 senior secured note, 9.25%, 11/15/16 United States 107,000,000 111,280,000 Tenet Healthcare Corp., senior note, 6.375%, 12/01/11 United States 540,000,000 490,050,000 6.50%, 6/01/12 United States 265,000,000 235,187,500 7.375%, 2/01/13 United States 360,000,000 323,100,000 (d) FRN, 9.25%, 2/01/15 United States 250,000,000 235,000,000 74 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(F) VALUE - --------------------------------------------------------------------------- -------------- ------------------- -------------- LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) HEALTH CARE (CONTINUED) (d,h) U.S. Oncology Holdings Inc., senior note, FRN, PIK, 10.759%, 3/15/12 United States 73,755,000 $ 57,160,125 Vanguard Health Holding Co. I LLC, senior disc. note, zero cpn. to 10/01/09, 11.25% thereafter, 10/01/15 United States 23,900,000 18,403,000 -------------- 2,367,955,535 -------------- INDUSTRIALS 3.0% Allied Waste North America Inc., senior note, 7.25%, 3/15/15 United States 75,000,000 75,281,250 senior note, B, 7.375%, 4/15/14 United States 200,000,000 197,750,000 senior note, B, 7.125%, 5/15/16 United States 150,000,000 150,375,000 senior secured note, 6.125%, 2/15/14 United States 207,000,000 200,790,000 senior secured note, 6.875%, 6/01/17 United States 170,000,000 167,450,000 Browning-Ferris Industries Inc., 7.40%, 9/15/35 United States 72,500,000 66,337,500 (c) Ceva Group PLC, senior note, 144A, 10.00%, 9/01/14 United Kingdom 100,000,000 97,250,000 DRS Technologies Inc., senior note, 6.625%, 2/01/16 United States 34,600,000 33,994,500 JohnsonDiversey Holdings Inc., senior disc. note, 10.67%, 5/15/13 United States 158,000,000 152,470,000 JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 United States 125,000,000 123,750,000 L-3 Communications Corp., senior sub. note, 5.875%, 1/15/15 United States 38,000,000 36,575,000 6.375%, 10/15/15 United States 38,900,000 38,219,250 RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 United States 80,000,000 75,200,000 senior sub. note, 11.75%, 8/01/16 United States 65,000,000 56,550,000 Terex Corp., senior sub. note, 8.00%, 11/15/17 United States 180,000,000 180,000,000 (c) U.S. Investigations Services Inc., senior note, 144A, 10.50%, 11/01/15 United States 50,000,000 41,000,000 -------------- 1,692,992,500 -------------- INFORMATION TECHNOLOGY 3.8% (c) Ceridian Corp., senior note, 144A, 11.25%, 11/15/15 United States 80,000,000 68,600,000 (c) First Data Corp., senior note, 144A, 9.875%, 9/24/15 United States 275,000,000 226,531,250 Fiserv Inc., senior note, 6.125%, 11/20/12 United States 100,000,000 103,196,000 6.80%, 11/20/17 United States 80,000,000 82,876,560 Flextronics International Ltd., senior sub. note, 6.25%, 11/15/14 Singapore 110,000,000 101,750,000 Freescale Semiconductor Inc., senior note, 8.875%, 12/15/14 United States 435,000,000 342,562,500 (j) 10.125%, 12/15/16 United States 630,000,000 428,400,000 Lucent Technologies Inc., 6.45%, 3/15/29 United States 180,000,000 129,600,000 NXP BV/NXP Funding LLC, senior note, 9.50%, 10/15/15 Netherlands 50,000,000 41,250,000 Qwest Capital Funding Inc., 7.25%, 2/15/11 United States 269,500,000 257,372,500 Sanmina-SCI Corp., senior sub. note, 6.75%, 3/01/13 United States 150,000,000 130,875,000 8.125%, 3/01/16 United States 100,000,000 89,000,000 Semiannual Report | 75 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(F) VALUE - ----------------------------------------------------------------------- -------------- ------------------- --------------- LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) INFORMATION TECHNOLOGY (CONTINUED) SunGard Data Systems Inc., senior note, 9.125%, 8/15/13 United States 59,300,000 $ 60,189,500 senior sub. note, 10.25%, 8/15/15 United States 100,000,000 101,000,000 -------------- 2,163,203,310 -------------- MATERIALS 1.1% Freeport-McMoRan Copper & Gold Inc., senior note, 8.25%, 4/01/15 United States 34,600,000 36,589,500 (c) Ineos Group Holdings PLC, senior sub. note, 144A, 7.875%, 2/15/16 United Kingdom 150,000,000 EUR 172,823,852 Jefferson Smurfit Corp., senior note, 8.25%, 10/01/12 United States 200,000,000 181,250,000 Novelis Inc., senior note, 7.25%, 2/15/15 Canada 190,000,000 169,100,000 Stone Container Corp., senior note, 8.00%, 3/15/17 United States 68,000,000 57,460,000 -------------- 617,223,352 -------------- TELECOMMUNICATION SERVICES 0.2% (c) Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 Jamaica 140,000,000 117,250,000 -------------- UTILITIES 5.0% Aquila Inc., senior note, 14.875%, 7/01/12 United States 72,650,000 89,904,375 Dynegy Holdings Inc., senior note, 6.875%, 4/01/11 United States 310,000,000 306,125,000 8.75%, 2/15/12 United States 260,000,000 268,450,000 8.375%, 5/01/16 United States 210,000,000 208,950,000 7.75%, 6/01/19 United States 90,000,000 84,600,000 Energy Future Holdings Corp., senior note, (c) 144A, 10.875%, 11/01/17 United States 187,500,000 190,312,500 (c,h) 144A, PIK, 11.25%, 11/01/17 United States 243,700,000 242,481,500 P, 5.55%, 11/15/14 United States 346,300,000 272,207,384 (c) Intergen NV, senior secured note, 144A, 9.00%, 6/30/17 Netherlands 140,000,000 147,000,000 Reliant Energy Inc., senior note, 7.625%, 6/15/14 United States 175,000,000 174,562,500 7.875%, 6/15/17 United States 153,100,000 153,100,000 (c) Texas Competitive Electric Holdings Co. LLC, senior note, 144A, 10.25%, 11/01/15 United States 353,025,000 353,466,281 (h) 144A, PIK, 10.50%, 11/01/16 United States 150,000,000 147,750,000 B, 144A, 10.25%, 11/01/15 United States 186,900,000 187,133,625 -------------- 2,826,043,165 -------------- TOTAL CORPORATE BONDS (COST $ 25,078,821,458) 22,924,878,022 -------------- CONVERTIBLE BONDS 0.7% FINANCIALS 0.3% (d) iStar Financial Inc., cvt., senior note, FRN, 5.229%, 10/01/12 United States 250,000,000 177,125,000 -------------- INFORMATION TECHNOLOGY 0.4% (c) Advanced Micro Devices Inc., cvt., senior note, 144A, 5.75%, 8/15/12 United States 325,000,000 230,750,000 -------------- TOTAL CONVERTIBLE BONDS (COST $558,661,166) 407,875,000 -------------- 76 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT (f) VALUE - ---------------------------------------------------------------- ------------- ------------------- --------------- LONG TERM INVESTMENTS (CONTINUED) MORTGAGE-BACKED SECURITIES 4.4% FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 1.7% FHLMC Gold 30 Year, 5.00%, 5/01/33 - 8/01/34 United States 409,621,460 $ 406,695,089 FHLMC Gold 30 Year, 5.50%, 8/01/35 - 11/01/35 United States 282,739,248 286,090,865 FHLMC Gold 30 Year, 6.00%, 8/01/35 - 6/01/36 United States 241,845,098 248,342,113 --------------- 941,128,067 --------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 2.3% FNMA 30 Year, 5.50%, 2/01/35 - 3/01/38 United States 710,282,084 718,047,433 FNMA 30 Year, 6.00%, 5/01/37 - 8/01/37 United States 584,208,250 599,085,973 --------------- 1,317,133,406 --------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 0.4% GNMA I SF 30 YEAR, 5.00%, 4/14/33 - 5/15/34 United States 208,888,552 209,285,428 --------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $ 2,393,001,682) 2,467,546,901 --------------- TOTAL LONG TERM INVESTMENTS (COST $ 54,532,211,349) 53,895,684,834 --------------- SHARES --------------- SHORT TERM INVESTMENTS 4.1% MONEY MARKET FUND (COST $210,085,740) 0.4% (k) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.50% United States 210,085,740 210,085,740 INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.1% MONEY MARKET FUND (COST $95,063,000) 0.1% (l) Bank of New York Institutional Cash Reserve Fund, 2.92% United States 95,063,000 95,063,000 PRINCIPAL AMOUNT (f) REPURCHASE AGREEMENT (COST $2,038,394,816) 3.6% (m) Joint Repurchase Agreement, 2.022%, 4/01/08 (Maturity Value $2,038,509,322) 2,038,394,816 2,038,394,816 ABN AMRO BankNV, New York Branch (Maturity Value $221,606,348) Banc of America Securities LLC (Maturity Value $ 221,606,348) Barclays Capital Inc. (Maturity Value $ 288,714,078) BNP Paribas Securities Corp. (Maturity Value $ 221,606,348) Deutsche Bank Securities Inc. (Maturity Value $ 221,606,348) Goldman, Sachs & Co. (Maturity Value $ 221,606,348) Lehman Brothers Inc. (Maturity Value $ 114,604,994) Merrill Lynch Government Securities Inc. (Maturity Value $ 221,606,348) Morgan Stanley & Co. Incorporated (Maturity Value $ 83,945,814) UBS Securities LLC (Maturity Value $ 221,606,348) Collateralized by U.S. Government Agency Securities, 2.21% - 6.25%, 4/11/08 - 10/03/12; nU.S. Government Agency (n) Discount Notes, 5/14/08 - 8/01/12; U.S. Treasury Bill, 7/24/08; and U.S. Treasury Notes, 3.375% - 4.875%, 8/31/08 - 9/15/09 ---------------- TOTAL INVESTMENTS (COST $56,875,754,905) 99.2% 56,239,228,390 OTHER ASSETS, LESS LIABILITIES 0.8% 461,417,822 ---------------- NET ASSETS 100.0% $ 56,700,646,212 ================ Semiannual Report | 77 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN INCOME FUND See Currency and Selected Portfolio Abbreviations on page 94. (a) See Note 10 regarding holdings of 5% voting securities. (b) Non-income producing for the twelve months ended March 31, 2008. (c) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Fund's Board of Trustees. At March 31, 2008, the aggregate value of these securities were $5,378,954,598, representing 9.49% of net assets. (d) The coupon rate shown represents the rate at period end. (e) See Note 1(g) regarding senior floating rate interests. (f) The principal amount is stated in U.S. dollars unless otherwise indicated. (g) See Note 9 regarding unfunded loan commitments. (h) Income may be received in additional securities and/or cash. (i) A portion or all of the security purchased on a when-issued or delayed delivery basis. See Note 1(d). (j) A portion or all of the security is on loan as of March 31, 2008. See Note 1(f). (k) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (l) The rate shown is the annualized seven-day yield at period end. (m) See Note 1(c) regarding joint repurchase agreement. (n) The security is traded on a discount basis with no stated coupon rate. 78 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN U.S. GOVERNMENT SECURITIES FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 ----------------------------------------------------------------------------------- CLASS A (UNAUDITED) 2007 2006 2005 2004 2003 - ---------------------------- ---------------- ----------- ----------- ----------- ----------- ----------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................ $ 6.39 $ 6.43 $ 6.53 $ 6.68 $ 6.81 $ 6.99 ----------- ----------- ----------- ----------- ----------- ----------- Income from investment operations (a): Net investment income (b) ............. 0.15 0.31 0.30 0.28 0.27 0.28 Net realized and unrealized gains (losses) .............. 0.19 (0.02) (0.09) (0.11) (0.04) (0.10) ----------- ----------- ----------- ----------- ----------- ----------- Total from investment operations ............... 0.34 0.29 0.21 0.17 0.23 0.18 ----------- ----------- ----------- ----------- ----------- ----------- Less distributions from net investment income .... (0.16) (0.33) (0.31) (0.32) (0.36) (0.36) ----------- ----------- ----------- ----------- ----------- ----------- Redemption fees ............ -- (e) -- (e) -- (e) -- (e) -- (e) ----------- ----------- ----------- ----------- ----------- ----------- Net asset value, end of period ................... $ 6.57 $ 6.39 $ 6.43 $ 6.53 $ 6.68 $ 6.81 =========== =========== =========== =========== =========== =========== Total return (c) ........... 5.40% 4.63% 3.40% 2.67% 3.46% 2.66% RATIOS TO AVERAGE NET ASSETS (d) Expenses ................... 0.72% (f) 0.72% (f) 0.72% (f) 0.72% (f) 0.70% (f) 0.70% Net investment income ...... 4.66% 4.78% 4.64% 4.29% 4.09% 4.11% SUPPLEMENTAL DATA Net assets, end of period (000's) ........... $ 5,350,470 $ 5,073,449 $ 5,291,117 $ 5,901,449 $ 6,420,381 $ 7,286,317 Portfolio turnover rate .... 8.27% 12.34% 20.54% 29.14% 41.45% 66.96% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 79 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN U.S. GOVERNMENT SECURITIES FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 -------------------------------------------------------------------------- CLASS B (UNAUDITED) 2007 2006 2005 2004 2003 - ------------------------------------ ---------------- --------- --------- --------- --------- --------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................ $ 6.38 $ 6.42 $ 6.52 $ 6.67 $ 6.80 $ 6.98 --------- --------- --------- --------- --------- --------- Income from investment operations (a): Net investment income (b) ....... 0.13 0.27 0.26 0.25 0.24 0.25 Net realized and unrealized gains (losses) ................ 0.19 (0.01) (0.08) (0.11) (0.05) (0.10) --------- --------- --------- --------- --------- --------- Total from investment operations ... 0.32 0.26 0.18 0.14 0.19 0.15 --------- --------- --------- --------- --------- --------- Less distributions from net investment income ................ (0.14) (0.30) (0.28) (0.29) (0.32) (0.33) --------- --------- --------- --------- --------- --------- Redemption fees .................... -- (e) -- (e) -- (e) -- (e) -- (e) -- --------- --------- --------- --------- --------- --------- Net asset value, end of period ..... $ 6.56 $ 6.38 $ 6.42 $ 6.52 $ 6.67 $ 6.80 ========= ========= ========= ========= ========= ========= Total return (c) ................... 5.13% 4.10% 2.87% 2.13% 2.92% 2.13% RATIOS TO AVERAGE NET ASSETS (d) Expenses ........................... 1.24% (f) 1.25% (f) 1.24% (f) 1.25% (f) 1.23% (f) 1.23% Net investment income .............. 4.14% 4.25% 4.12% 3.76% 3.56% 3.58% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $ 305,606 $ 316,720 $ 388,807 $ 478,788 $ 568,276 $ 678,814 Portfolio turnover rate ............ 8.27% 12.34% 20.54% 29.14% 41.45% 66.96% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. 80| The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN U.S. GOVERNMENT SECURITIES FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 ------------------------------------------------------------------------- CLASS C (UNAUDITED) 2007 2006 2005 2004 2003 - ------------------------------- --------------- --------- --------- --------- --------- --------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ...................... $ 6.36 $ 6.40 $ 6.50 $ 6.65 $ 6.78 $ 6.97 --------- --------- --------- --------- --------- --------- Income from investment operations (a): Net investment income (b) ... 0.13 0.27 0.26 0.25 0.24 0.25 Net realized and unrealized gains (losses) ... 0.19 (0.01) (0.08) (0.11) (0.05) (0.11) --------- --------- --------- --------- --------- --------- Total from investment operations ..................... 0.32 0.26 0.18 0.14 0.19 0.14 --------- --------- --------- --------- --------- --------- Less distributions from net investment income .............. (0.14) (0.30) (0.28) (0.29) (0.32) (0.33) --------- --------- --------- --------- --------- --------- Redemption fees ................ -- (e) -- (e) -- (e) -- (e) -- (e) -- --------- --------- --------- --------- --------- --------- Net asset value, end of period ...................... $ 6.54 $ 6.36 $ 6.40 $ 6.50 $ 6.65 $ 6.78 ========= ========= ========= ========= ========= ========= Total return (c) ............... 5.15% 4.12% 2.88% 2.14% 2.91 2.00% RATIOS TO AVERAGE NET ASSETS (d) Expenses ....................... 1.24% (f) 1.25% (f) 1.23% (f) 1.25% (f) 1.23% (f) 1.23% (f) Net investment income .......... 4.14% 4.25% 4.13% 3.76% 3.56 3.58% SUPPLEMENTAL DATA Net assets, end of period (000's) ................. $ 524,267 $ 418,951 $ 424,462 $ 508,539 $ 597,451 $ 814,635 Portfolio turnover rate ........ 8.27% 12.34% 20.54% 29.14% 41.45 66.96% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 81 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN U.S. GOVERNMENT SECURITIES FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 -------------------------------------------------------------------- CLASS R (UNAUDITED) 2007 2006 2005 2004 2003 - ------------------------------- --------------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................... $ 6.39 $ 6.43 $ 6.53 $ 6.68 $ 6.81 $ 6.99 -------- -------- -------- -------- -------- -------- Income from investment operations (a): Net investment income (b) .. 0.14 0.28 0.27 0.26 0.25 0.25 Net realized and unrealized gains (losses) .. 0.18 (0.01) (0.08) (0.11) (0.05) (0.09) -------- -------- -------- -------- -------- -------- Total from investment operations .................... 0.32 0.27 0.19 0.15 0.20 0.16 -------- -------- -------- -------- -------- -------- Less distributions from net investment income ............. (0.15) (0.31) (0.29) (0.30) (0.33) (0.34) -------- -------- -------- -------- -------- -------- Redemption fees ............... -- (e) -- (e) -- (e) -- (e) -- (e) -- -------- -------- -------- -------- -------- -------- Net asset value, end of period ................. $ 6.56 $ 6.39 $ 6.43 $ 6.53 $ 6.68 $ 6.81 ======== ======== ======== ======== ======== ======== Total return (c)............... 5.05% 4.25% 3.01% 2.29% 3.08% 2.29% RATIOS TO AVERAGE NET ASSETS (d) Expenses ...................... 1.09% (f) 1.10% (f) 1.09% (f) 1.10% (f) 1.08% (f) 1.08% Net investment income ......... 4.29% 4.40% 4.27% 3.91% 3.71% 3.73% SUPPLEMENTAL DATA Net assets, end of period (000's) $ 84,631 $ 74,537 $ 71,104 $ 65,790 $ 59,431 $ 54,042 Portfolio turnover rate ....... 8.27% 12.34% 20.54% 29.14% 41.45% 66.96% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. 82 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN U.S. GOVERNMENT SECURITIES FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 ------------------------------------------------------------------------- ADVISOR CLASS (UNAUDITED) 2007 2006 2005 2004 2003 - ------------------------------- ---------------- --------- -------- --------- --------- --------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................... $ 6.41 $ 6.45 $ 6.55 $ 6.69 $ 6.83 $ 7.01 --------- --------- -------- --------- --------- --------- Income from investment operations (a): Net investment income (b) .. 0.16 0.31 0.31 0.29 0.28 0.29 Net realized and unrealized gains (losses) .. 0.19 (0.01) (0.09) (0.10) (0.06) (0.10) --------- --------- -------- --------- --------- --------- Total from investment operations .................... 0.35 0.30 0.22 0.19 0.22 0.19 --------- --------- -------- --------- --------- --------- Less distributions from net investment income ............. (0.17) (0.34) (0.32) (0.33) (0.36) (0.37) --------- --------- -------- --------- --------- --------- Redemption fees ............... -- (e) -- (e) -- (e) -- (e) -- (e) -- --------- --------- -------- --------- --------- --------- Net asset value, end of period ................. $ 6.59 $ 6.41 $ 6.45 $ 6.55 $ 6.69 $ 6.83 ========= ========= ======== ========= ========= ========= Total return (c) .............. 5.45% 4.75% 3.53% 2.95% 3.42% 2.79% RATIOS TO AVERAGE NET ASSETS (d) Expenses ...................... 0.59% (f) 0.60% (f) 0.59% (f) 0.60% (f) 0.58% (f) 0.58% Net investment income ......... 4.79% 4.90% 4.77% 4.41% 4.21% 4.23% SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 552,705 $ 470,751 $387,239 $ 334,681 $ 340,279 $ 308,411 Portfolio turnover rate ....... 8.27% 12.34% 20.54% 29.14% 41.45% 66.96% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 83 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - ---------------------------------------------------------------- ---------------- --------------- MORTGAGE-BACKED SECURITIES 96.5% GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 96.5% GNMA GP 30 Year, 8.25%, 3/15/17 - 10/15/17 ..................... $ 110,652 $ 120,619 GNMA GP 30 Year, 9.25%, 5/15/16 - 12/15/16 ..................... 277,486 305,076 GNMA GP 30 Year, 10.00%, 11/15/09 - 1/15/10 .................... 115,325 122,739 GNMA GP 30 Year, 10.25%, 5/15/20 ............................... 10,430 12,567 GNMA GP 30 Year, 11.00%, 1/15/10 - 12/15/10 .................... 291,898 318,664 GNMA GP 30 Year, 11.25%, 7/15/13 - 1/15/16 ..................... 228,354 270,313 GNMA GP 30 Year, 11.50%, 2/15/13 - 5/15/13 ..................... 35,523 41,705 GNMA GP 30 Year, 11.75%, 7/15/13 - 8/15/13 ..................... 34,494 40,690 GNMA GP 30 Year, 12.00%, 3/15/11 - 12/15/12 .................... 13,048 14,882 GNMA GP 30 Year, 12.50%, 5/15/10 - 6/15/10 ..................... 23,502 26,023 GNMA GP 30 Year, 12.75%, 5/15/14 ............................... 5,146 6,122 GNMA I SF 15 Year, 6.50%, 5/15/18 .............................. 1,653,199 1,726,292 GNMA I SF 15 Year, 7.00%, 10/15/09 ............................. 215,549 216,256 GNMA I SF 30 Year, 5.00%, 2/15/33 - 9/15/36 .................... 618,624,283 619,787,552 GNMA I SF 30 Year, 5.50%, 5/15/28 - 2/15/38 .................... 1,085,394,331 1,109,526,291 GNMA I SF 30 Year, 6.00%, 10/15/23 - 2/15/38 ................... 1,437,859,841 1,487,784,367 GNMA I SF 30 Year, 6.00%, 1/15/36 .............................. 69,075,696 71,430,777 GNMA I SF 30 Year, 6.00%, 3/15/38 .............................. 74,323,650 76,826,284 GNMA I SF 30 Year, 6.50%, 5/15/23 - 2/15/38 .................... 431,926,568 450,846,641 GNMA I SF 30 Year, 6.75%, 3/15/26 - 4/15/26 .................... 70,186 74,704 GNMA I SF 30 Year, 7.00%, 4/15/16 - 9/15/32 .................... 193,296,282 206,840,267 GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 ................... 596,045 639,472 GNMA I SF 30 Year, 7.50%, 7/15/16 - 8/15/32 .................... 52,116,673 56,153,234 GNMA I SF 30 Year, 7.70%, 1/15/21 - 1/15/22 .................... 476,363 517,384 GNMA I SF 30 Year, 8.00%, 11/15/15 - 9/15/30 ................... 40,505,442 44,266,747 GNMA I SF 30 Year, 8.25%, 3/15/27 - 11/15/27 ................... 142,907 156,659 GNMA I SF 30 Year, 8.50%, 12/15/09 - 6/15/25 ................... 8,864,833 9,774,836 GNMA I SF 30 Year, 9.00%, 12/15/08 - 7/15/23 ................... 11,032,570 12,101,548 GNMA I SF 30 Year, 9.50%, 5/15/09 - 1/15/23 .................... 6,879,931 7,656,338 GNMA I SF 30 Year, 10.00%, 4/15/12 - 3/15/25 ................... 8,746,228 10,495,767 GNMA I SF 30 Year, 10.50%, 12/15/09 - 10/15/21 ................. 6,565,465 7,898,396 GNMA I SF 30 Year, 11.00%, 12/15/09 - 5/15/21 .................. 5,432,086 6,351,707 GNMA I SF 30 Year, 11.50%, 3/15/13 - 2/15/16 ................... 1,416,286 1,680,781 GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 ................... 6,747,909 8,103,263 GNMA I SF 30 Year, 12.50%, 4/15/10 - 8/15/18 ................... 5,573,748 6,519,521 GNMA I SF 30 Year, 13.00%, 7/15/10 - 1/15/16 ................... 6,105,492 7,216,411 GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 ................... 63,102 68,542 GNMA II GP 30 Year, 11.50%, 8/20/13 ............................ 14,220 16,641 GNMA II SF 30 Year, 4.50%, 5/20/33 - 10/20/34 .................. 39,611,572 38,300,737 GNMA II SF 30 Year, 5.00%, 7/20/33 - 3/20/36 ................... 304,614,305 303,877,288 GNMA II SF 30 Year, 5.00%, 9/20/33 ............................. 261,881,405 261,398,443 GNMA II SF 30 Year, 5.50%, 6/20/34 ............................. 67,978,629 69,336,063 GNMA II SF 30 Year, 5.50%, 7/20/34 - 8/20/37 ................... 518,847,914 529,092,189 GNMA II SF 30 Year, 5.50%, 12/20/34 ............................ 205,866,146 209,976,994 GNMA II SF 30 Year, 5.50%, 1/20/35 ............................. 83,732,608 85,399,500 84 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - ---------------------------------------------------------------------- ---------------- --------------- MORTGAGE-BACKED SECURITIES (CONTINUED) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE (CONTINUED) GNMA II SF 30 Year, 5.50%, 2/20/35 ................................... $ 103,361,646 $ 105,419,299 GNMA II SF 30 Year, 6.00%, 10/20/23 - 10/20/37 ....................... 535,282,495 553,134,217 GNMA II SF 30 Year, 6.00%, 1/20/38 ................................... 79,295,608 81,878,911 GNMA II SF 30 Year, 6.50%, 6/20/24 - 3/20/34 ......................... 72,266,817 75,593,858 GNMA II SF 30 Year, 7.00%, 2/20/28 - 7/20/33 ......................... 38,504,241 41,101,123 GNMA II SF 30 Year, 7.50%, 10/20/22 - 4/20/32 ........................ 6,953,136 7,469,922 GNMA II SF 30 Year, 8.00%, 8/20/16 - 6/20/30 ......................... 3,372,805 3,680,080 GNMA II SF 30 Year, 8.50%, 4/20/16 - 6/20/25 ......................... 1,742,025 1,912,869 GNMA II SF 30 Year, 9.00%, 8/20/16 - 11/20/21 ........................ 524,037 573,327 GNMA II SF 30 Year, 9.50%, 3/20/18 - 4/20/25 ......................... 315,472 352,102 GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 ........................ 664,433 796,469 GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 ........................ 1,947,932 2,330,292 GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 ........................ 306,337 367,508 GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 ........................ 146,907 175,344 GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 ........................ 322,481 386,322 GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 ...................... 225,866 269,169 GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 ....................... 230,644 276,529 --------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $6,471,919,097) ............... 6,579,054,633 --------------- SHARES ----------- SHORT TERM INVESTMENT 3.1% MONEY MARKET FUND (COST $210,084,798) 3.1% (a) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.50% .......... 210,084,798 210,084,798 --------------- TOTAL INVESTMENTS (COST $6,682,003,895) 99.6% ................................. 6,789,139,431 OTHER ASSETS, LESS LIABILITIES 0.4% ........................................... 28,540,481 --------------- NET ASSETS 100.0% ............................................................. $ 6,817,679,912 =============== See Selected Portfolio Abbreviations on page 94. (a) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 85 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN UTILITIES FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 ---------------------------------------------------------------------------- CLASS A (UNAUDITED) 2007 2006 2005 2004 2003 - ------------------------------- ---------------- --------------- ------------- -------------- -------------- ----------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......... $ 14.58 $ 12.89 $ 12.59 $ 10.16 $ 8.80 $ 7.96 ---------- ---------- --------- ---------- ---------- ---------- Income from investment operations (a): Net investment income (b) ..... 0.19 0.40 0.43 0.45 0.43 0.42 Net realized and unrealized gains (losses) ........... (0.71) 2.16 0.37 2.42 1.33 0.85 ---------- ---------- --------- ---------- ---------- ---------- Total from investment operations ......... (0.52) 2.56 0.80 2.87 1.76 1.27 ---------- ---------- --------- ---------- ---------- ---------- Less distributions from: Net investment income .................... (0.20) (0.40) (0.41) (0.44) (0.40) (0.43) Net realized gains ............ (0.74) (0.47) (0.09) -- -- -- ---------- ---------- --------- ---------- ---------- ---------- Total distributions ........... (0.94) (0.87) (0.50) (0.44) (0.40) (0.43) ---------- ---------- --------- ---------- ---------- ---------- Redemption fees -- (e) -- (e) -- (e) -- (e) -- (e) -- ---------- ---------- --------- ---------- ---------- ---------- Net asset value, end of period ......... $ 13.12 $ 14.58 $ 12.89 $ 12.59 $ 10.16 $ 8.80 ========== ========== ========== ========== ========== ========== Total return (c) ............... (4.18)% 20.32% 6.69% 28.81% 20.40% 16.38% RATIOS TO AVERAGE NET ASSETS (d) Expenses ...................... 0.73% (f) 0.75% (f) 0.76% (f) 0.78% (f) 0.80% 0.83% Net investment income ......... 2.61% 2.83% 3.54% 3.92% 4.49% 5.00% SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $2,003,088 $2,157,614 $1,926,732 $1,986,034 $1,450,832 $1,259,886 Portfolio turnover rate ................ 5.76% 10.84% 7.97% 13.53% 16.13% 25.81% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. 86 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN UTILITIES FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 ------------------------------------------------------------------- CLASS B (UNAUDITED) 2007 2006 2005 2004 2003 - ------------------------------------ ---------------- ------------- ------------- ------------- ------------ -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............... $ 14.56 $ 12.88 $ 12.57 $ 10.15 $ 8.80 $ 7.97 -------- -------- -------- -------- -------- ------- Income from investment operations (a): Net investment income (b) ........ 0.15 0.33 0.37 0.39 0.38 0.37 Net realized and unrealized gains (losses) .. (0.70) 2.15 0.38 2.42 1.33 0.85 -------- -------- -------- -------- -------- ------- Total from investment operations ........................ (0.55) 2.48 0.75 2.81 1.71 1.22 -------- -------- -------- -------- -------- ------- Less distributions from: Net investment income ........... (0.16) (0.33) (0.35) (0.39) (0.36) (0.39) Net realized gains .............. (0.74) (0.47) (0.09) -- -- -- -------- -------- -------- -------- -------- ------- Total distributions . .............. (0.90) (0.80) (0.44) (0.39) (0.36) (0.39) -------- -------- -------- -------- -------- ------- Redemption fees .................... -- (e) -- (e) -- (e) -- (e) -- (e) -- -------- -------- -------- -------- -------- ------- Net asset value, end of period ..... $ 13.11 $ 14.56 $ 12.88 $ 12.57 $ 10.15 $ 8.80 ======== ======== ======== ======== ======== ======= Total return (c) .................... (4.37)% 19.66% 6.25% 28.11% 19.71% 15.88% RATIOS TO AVERAGE NET ASSETS (d) Expenses ........................... 1.23% (f) 1.26% (f) 1.26% (f) 1.28% (f) 1.30% 1.34% Net investment income . ............ 2.11% 2.32% 3.04% 3.42% 3.99% 4.49% SUPPLEMENTAL DATA Net assets, end of period (000's) ................. $112,595 $127,587 $133,824 $154,277 $127,105 $95,321 Portfolio turnover rate .............................. 5.76% 10.84% 7.97% 13.53% 16.13% 25.81% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 87 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN UTILITIES FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 ------------------------------------------------------------------- CLASS C (UNAUDITED) 2007 2006 2005 2004 2003 - ----------------------------------------- ---------------- ------------- ------------- ------------- ----------- --------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................... $ 14.53 $ 12.85 $ 12.55 $ 10.13 $ 8.78 $ 7.95 -------- -------- -------- -------- -------- -------- Income from investment operations (a): Net investment income (b) ............. 0.15 0.33 0.37 0.39 0.38 0.36 Net realized and unrealized gains (losses) ........... (0.70) 2.15 0.37 2.42 1.33 0.86 -------- -------- -------- -------- -------- -------- Total from investment operations ........ (0.55) 2.48 0.74 2.81 1.71 1.22 -------- -------- -------- -------- -------- -------- Less distributions from: Net investment income ................ (0.16) (0.33) (0.35) (0.39) (0.36) (0.39) Net realized gains ................... (0.74) (0.47) (0.09) -- -- -- -------- -------- -------- -------- -------- -------- Total distributions . ................... (0.90) (0.80) (0.44) (0.39) (0.36) (0.39) -------- -------- -------- -------- -------- -------- Redemption fees ......................... -- (e) -- (e) -- (e) -- (e) -- (e) -- -------- -------- -------- -------- -------- -------- Net asset value, end of period .......... $ 13.08 $ 14.53 $ 12.85 $ 12.55 $ 10.13 $ 8.78 ======== ======== ======== ======== ======== ======== Total return (c)......................... (4.38)% 19.72% 6.19% 28.16% 19.76% 15.77% RATIOS TO AVERAGE NET ASSETS (d) Expenses ................................ 1.23% (f) 1.26% (f) 1.25% (f) 1.28% (f) 1.30% 1.34% Net investment income . ................. 2.11% 2.32% 3.05% 3.42% 3.99% 4.49% SUPPLEMENTAL DATA Net assets, end of period (000's) ....... $391,180 $424,977 $391,509 $435,714 $283,747 $222,030 Portfolio turnover rate ................. 5.76% 10.84% 7.97% 13.53% 16.13% 25.81% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. 88 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN UTILITIES FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 ------------------------------------------------------------- CLASS R (UNAUDITED) 2007 2006 2005 2004 2003 - ----------------------------------------- ---------------- ------------ ------------ ------------ ---------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period . .................. $ 14.54 $ 12.86 $ 12.57 $ 10.15 $ 8.79 $ 7.96 ------- ------- ------- ------- ------ ------ Income from investment operations (a): Net investment income (b) ............. 0.16 0.35 0.39 0.43 0.39 0.37 Net realized and unrealized gains (losses) ...................... (0.70) 2.16 0.36 2.40 1.34 0.86 ------- ------- ------- ------- ------ ------ Total from investment operations ........ (0.54) 2.51 0.75 2.83 1.73 1.23 ------- ------- ------- ------- ------ ------ Less distributions from: Net investment income ................ (0.18) (0.36) (0.37) (0.41) (0.37) (0.40) Net realized gains ................... (0.74) (0.47) (0.09) -- -- -- ------- ------- ------- ------- ------ ------ Total distributions . ................... (0.92) (0.83) (0.46) (0.41) (0.37) (0.40) ------- ------- ------- ------- ------ ------ Redemption fees ......................... -- (e) -- (e) -- (e) -- (e) -- (e) -- ------- ------- ------- ------- ------ ------ Net asset value, end of period .......... $ 13.08 $ 14.54 $ 12.86 $ 12.57 $10.15 $ 8.79 ======= ======= ======= ======= ====== ====== Total return (c) ........................ (4.37)% 19.92% 6.29% 28.35% 20.02% 15.96% RATIOS TO AVERAGE NET ASSETS (d) Expenses ................................ 1.08% (f) 1.11% (f) 1.11% (f) 1.13% (f) 1.15% 1.19% Net investment income . ................. 2.26% 2.47% 3.19% 3.57% 4.14% 4.64% SUPPLEMENTAL DATA Net assets, end of period (000's) ....... $40,899 $41,845 $27,736 $14,649 $1,590 $1,142 Portfolio turnover rate ................. 5.76% 10.84% 7.97% 13.53% 16.13% 25.81% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 89 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (continued) FRANKLIN UTILITIES FUND SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2008 ------------------------------------------------------------------ ADVISOR CLASS (UNAUDITED) 2007 2006 2005 2004 2003 - --------------------------------------- ---------------- ------------ ------------- ------------- ----------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period . ................ $ 14.64 $ 12.95 $ 12.64 $ 10.20 $ 8.84 $ 7.99 ------- ------- -------- -------- ------- ------- Income from investment operations (a): Net investment income (b) ........... 0.20 0.42 0.45 0.48 0.44 0.42 Net realized and unrealized gains (losses) .................... (0.71) 2.17 0.38 2.42 1.34 0.87 ------- ------- -------- -------- ------- ------- Total from investment operations ........................... (0.51) 2.59 0.83 2.90 1.78 1.29 ------- ------- -------- -------- ------- ------- Less distributions from: Net investment income .............. (0.21) (0.43) (0.43) (0.46) (0.42) (0.44) Net realized gains ................. (0.74) (0.47) (0.09) -- -- -- ------- ------- -------- -------- ------- ------- Total distributions . ................. (0.95) (0.90) (0.52) (0.46) (0.42) (0.44) ------- ------- -------- -------- ------- ------- Redemption fees ....................... -- (e) -- (e) -- (e) -- (e) -- (e) -- ------- ------- -------- -------- ------- ------- Net asset value, end of period ........ $ 13.18 $ 14.64 $ 12.95 $ 12.64 $ 10.20 $ 8.84 ======= ======= ======== ======== ======= ======= Total return (c) ....................... (4.09)% 20.43% 6.88% 29.00% 20.48% 16.61% RATIOS TO AVERAGE NET ASSETS (d) Expenses .............................. 0.58% (f) 0.61% (f) 0.61% (f) 0.63% (f) 0.65% 0.69% Net investment income . ............... 2.76% 2.97% 3.69% 4.07% 4.64% 5.14% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $78,120 $86,823 $103,041 $110,249 $51,586 $47,167 Portfolio turnover rate ............... 5.76% 10.84% 7.97% 13.53% 16.13% 25.81% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Total return is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Amount rounds to less than $0.01 per share. (f) Benefit of expense reduction rounds to less than 0.01%. 90 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE ------------------------ ------------- ----------- --------------- LONG TERM INVESTMENTS 99.6% COMMON STOCKS 95.7% DIVERSIFIED TELECOMMUNICATION SERVICES 3.0% AT&T Inc. ....................................... United States 1,200,000 $ 45,960,000 Verizon Communications Inc. ..................... United States 900,000 32,805,000 --------------- 78,765,000 --------------- ELECTRIC UTILITIES 48.7% American Electric Power Co. Inc. ................ United States 1,300,000 54,119,000 Cleco Corp. ..................................... United States 1,000,000 22,180,000 Duke Energy Corp. ............................... United States 3,800,000 67,830,000 Edison International ............................ United States 2,100,000 102,942,000 Entergy Corp. ................................... United States 1,750,000 190,890,000 Exelon Corp. .................................... United States 2,200,000 178,794,000 FirstEnergy Corp. ............................... United States 1,700,000 116,654,000 FPL Group Inc. .................................. United States 1,700,000 106,658,000 Hawaiian Electric Industries Inc. ............... United States 500,000 11,935,000 Northeast Utilities ............................. United States 1,000,000 24,540,000 Pepco Holdings Inc. ............................. United States 1,300,000 32,136,000 Pinnacle West Capital Corp. .................... United States 800,000 28,064,000 Portland General Electric Co. ................... United States 1,200,000 27,060,000 PPL Corp. ....................................... United States 2,200,000 101,024,000 Progress Energy Inc. ............................ United States 1,400,000 58,380,000 Sierra Pacific Resources ........................ United States 3,000,000 37,890,000 The Southern Co. ................................ United States 2,600,000 92,586,000 UIL Holdings Corp. .............................. United States 230,400 6,941,952 Westar Energy Inc. .............................. United States 807,900 18,395,883 --------------- 1,279,019,835 --------------- GAS UTILITIES 3.1% AGL Resources Inc. .............................. United States 800,000 27,456,000 Gaz de France. .................................. France 700,000 42,247,935 Southwest Gas Corp. ............................. United States 400,000 11,184,000 --------------- 80,887,935 --------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 2.5% Constellation Energy Group ...................... United States 600,000 52,962,000 (a,b) Iberdrola Renovables, 144A ...................... Spain 1,979,200 13,775,832 --------------- 66,737,832 --------------- MULTI-UTILITIES 35.0% Alliant Energy Corp. ............................ United States 1,400,000 49,014,000 Ameren Corp. .................................... United States 1,300,000 57,252,000 CenterPoint Energy Inc. ......................... United States 1,700,000 24,259,000 Consolidated Edison Inc. ........................ United States 800,000 31,760,000 Dominion Resources Inc. ......................... United States 2,300,000 93,932,000 DTE Energy Co. .................................. United States 600,000 23,334,000 Integrys Energy Group Inc. ...................... United States 800,000 37,312,000 National Grid PLC ............................... United Kingdom 4,987,755 68,495,538 PG&E Corp. ...................................... United States 2,400,000 88,368,000 Public Service Enterprise Group Inc. ............ United States 2,200,000 88,418,000 Semiannual Report | 91 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - ----------------------- -------------- ------------ -------------- LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) MULTI-UTILITIES (CONTINUED) Puget Energy Inc. ..................................... United States 1,725,000 $ 44,625,750 RWE AG ................................................ Germany 300,000 37,045,858 SCANA Corp. ........................................... United States 1,200,000 43,896,000 Sempra Energy ......................................... United States 1,500,000 79,920,000 TECO Energy Inc. ...................................... United States 269,800 4,303,310 United Utilities PLC .................................. United Kingdom 2,777,892 38,065,375 Vectren Corp. ......................................... United States 600,000 16,098,000 Wisconsin Energy Corp. ................................ United States 1,000,000 43,990,000 Xcel Energy Inc. ...................................... United States 2,400,000 47,880,000 -------------- 917,968,831 -------------- OIL, GAS & CONSUMABLE FUELS 3.4% Spectra Energy Corp. .................................. United States 2,195,700 49,952,175 TransCanada Corp. ..................................... Canada 350,000 13,486,457 The Williams Cos. Inc. ................................ United States 800,000 26,384,000 -------------- 89,822,632 -------------- TOTAL COMMON STOCKS (COST $ 1,624,825,890) ............ 2,513,202,065 -------------- CONVERTIBLE PREFERRED STOCKS 0.9% ELECTRIC UTILITIES 0.5% CMS Energy Trust I, 7.75%, cvt. pfd. .................. United States 270,050 13,339,120 -------------- MULTI-UTILITIES 0.4% PNM Resources Inc., 6.75%, cvt. pfd. .................. United States 450,000 10,603,125 -------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $36,440,245) .................................... 23,942,245 -------------- PRINCIPAL AMOUNT (c) CORPORATE BONDS 3.0% ELECTRIC UTILITIES 1.4% MidAmerican Energy Holdings Co., senior note, 8.48%, 9/15/28 ............................................... United States $ 25,000,000 30,053,700 Northeast Generation Co., senior secured note, B-1, 8.812%, 10/15/26 ...................................... United States 7,417,969 8,252,490 -------------- 38,306,190 -------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 1.1% Energy Future Holdings Corp., senior note, P, 5.55%, 11/15/14 ................................. United States 32,300,000 25,389,253 R, 6.55%, 11/15/34 ................................. United States 5,700,000 4,053,390 -------------- 29,442,643 -------------- MULTI-UTILITIES 0.5% Aquila Inc., senior note, 9.95%, 2/01/11 ..................................... United States 6,000,000 6,349,260 8.27%, 11/15/21 .................................... United States 6,100,000 6,470,008 -------------- 12,819,268 -------------- TOTAL CORPORATE BONDS (COST $ 76,687,361) ............. 80,568,101 -------------- TOTAL LONG TERM INVESTMENTS (COST $ 1,737,953,496) .... 2,617,712,411 -------------- 92 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued) FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - --------------------------- ------------- ------------ --------------- SHORT TERM INVESTMENT (COST $6,731,962) 0.3% MONEY MARKET FUND 0.3% (d) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.50% ........................... United States 6,731,962 $ 6,731,962 --------------- TOTAL INVESTMENTS (COST $1,744,685,458) 99.9% ..... 2,624,444,373 OTHER ASSETS, LESS LIABILITIES 0.1% ............... 1,437,600 --------------- NET ASSETS 100.0% ................................. $ 2,625,881,973 =============== (a) Non-income producing for the twelve months ended March 31, 2008. (b) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Fund's Board of Trustees. At March 31, 2008, the value of this security was $13,775,832, representing 0.52% of net assets. (c) The principal amount is stated in U.S. dollars unless otherwise indicated. (d) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 93 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) CURRENCY ABBREVIATIONS SELECTED PORTFOLIO ABBREVIATIONS EUR - Euro ADR - American Depository Receipt FHLMC - Federal Home Loan Mortgage Corp. FNMA - Federal National Mortgage Association FRN - Floating Rate Note GNMA - Government National Mortgage Association GP - Graduated Payment MTN - Medium Term Note PIK - Payment-In-Kind SF - Single Family 94 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES March 31, 2008 (unaudited) FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND -------------- ---------------- ---------------- Assets: Investments in securities: Cost - Unaffiliated issuers ................................ $ 284,157,558 $ 1,125,153,369 $ 52,935,435,532 Cost - Non-controlled affiliated issuers (Note 10) ......... -- -- 1,691,838,817 Cost - Sweep Money Fund (Note 7) ........................... 15,195,393 2,357,461 210,085,740 Cost - Repurchase agreements ............................... -- -- 2,038,394,816 ------------- --------------- ---------------- Total cost of investments .................................. $ 299,352,951 $ 1,127,510,830 $ 56,875,754,905 ============= =============== ================ Value - Unaffiliated issuers ............................... $ 519,112,493 $ 2,632,703,136 $ 51,342,888,338 Value - Non-controlled affiliated issuers (Note 10) ........ -- -- 2,647,859,496 Value - Sweep Money Fund (Note 7) .......................... 15,195,393 2,357,461 210,085,740 Value - Repurchase agreements .............................. -- -- 2,038,394,816 ------------- --------------- ---------------- Total value of investments (a) .............................. 534,307,886 2,635,060,597 56,239,228,390 Cash -- 94,986 11,048,590 Receivables: Investment securities sold ................................. 5,050,354 -- 54,711,495 Capital shares sold ........................................ 397,538 3,032,762 106,304,081 Dividends and interest ..................................... 130,405 2,268,007 648,496,700 ------------- --------------- ---------------- Total assets ............................................ 539,886,183 2,640,456,352 57,059,789,256 ------------- --------------- ---------------- Liabilities: Payables: Investment securities purchased ............................ 4,953,090 -- 101,162,416 Capital shares redeemed .................................... 813,228 3,831,461 106,323,321 Affiliates ................................................. 571,433 2,659,501 47,505,331 Unaffiliated transfer agent fees ........................... 105,015 983,271 5,396,262 Payable upon return of securities loaned ..................... -- -- 95,063,000 Unrealized loss on unfunded loan commitments (Note 9) ........ -- -- 106,623 Accrued expenses and other liabilities ....................... 78,300 399,170 3,586,091 ------------- --------------- ---------------- Total liabilities ....................................... 6,521,066 7,873,403 359,143,044 ------------- --------------- ---------------- Net assets, at value .................................. $ 533,365,117 $ 2,632,582,949 $ 56,700,646,212 ============= =============== ================ Net assets consist of: Paid-in capital .............................................. $ 277,282,269 $ 1,166,416,110 $ 56,952,047,718 Undistributed net investment income (loss) ................... (1,104,421) 2,376,137 45,418,996 Net unrealized appreciation (depreciation) ................... 234,954,935 1,507,549,767 (636,697,655) Accumulated net realized gain (loss) ......................... 22,232,334 (43,759,065) 339,877,153 ------------- --------------- ---------------- Net assets, at value .................................. $ 533,365,117 $ 2,632,582,949 $ 56,700,646,212 ============= =============== ================ (a) The Franklin Income Fund includes $91,068,414 of securities loaned. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 95 Franklin Custodian Funds FINANCIAL STATEMENTS (continued) STATEMENTS OF ASSETS AND LIABILITIES (continued) March 31, 2008 (unaudited) FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------- --------------- ---------------- CLASS A: Net assets, at value ......................................... $ 458,190,481 $ 1,883,484,984 $ 32,595,956,279 ------------- --------------- ---------------- Shares outstanding ........................................... 16,491,655 46,625,948 13,551,697,882 ------------- --------------- ---------------- Net asset value per share(a) ................................. $ 27.78 $ 40.40 $ 2.41 ------------- --------------- ---------------- Maximum offering price per share (net asset value per share / 94.25%, 94.25% and 95.75%, respectively) ........... $ 29.47 $ 42.86 $ 2.52 ------------- --------------- ---------------- CLASS B: Net assets, at value ......................................... $ 13,743,446 $ 109,614,344 $ 3,179,240,958 ------------- --------------- ---------------- Shares outstanding ........................................... 522,156 2,835,069 1,326,788,428 ------------- --------------- ---------------- Net asset value and maximum offering price per share(a) ...... $ 26.32 $ 38.66 $ 2.40 ------------- --------------- ---------------- CLASS B1: Net assets, at value ......................................... -- -- $ 312,528,879 ------------- --------------- ---------------- Shares outstanding ........................................... -- -- 129,835,401 ------------- --------------- ---------------- Net asset value and maximum offering price per share(a) ...... -- -- $ 2.41 ------------- --------------- ---------------- CLASS C: Net assets, at value ......................................... $ 61,431,190 $ 290,534,717 $ 14,892,035,582 ------------- --------------- ---------------- Shares outstanding ........................................... 2,358,990 7,579,372 6,149,796,630 ------------- --------------- ---------------- Net asset value and maximum offering price per share(a) ...... $ 26.04 $ 38.33 $ 2.42 ------------- --------------- ---------------- CLASS R: Net assets, at value ......................................... -- $ 53,200,071 $ 290,022,515 ------------- --------------- ---------------- Shares outstanding ........................................... -- 1,326,322 121,829,203 ------------- --------------- ---------------- Net asset value and maximum offering price per share(a) ...... -- $ 40.11 $ 2.38 ------------- --------------- ---------------- ADVISOR CLASS: Net assets, at value ......................................... -- $ 295,748,833 $ 5,430,861,999 ------------- --------------- ---------------- Shares outstanding ........................................... -- 7,314,366 2,268,983,566 ------------- --------------- ---------------- Net asset value and maximum offering price per share(a) ...... -- $ 40.43 $ 2.39 ------------- --------------- ---------------- (a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. 96 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL STATEMENTS (continued) STATEMENTS OF ASSETS AND LIABILITIES (continued) March 31, 2008 (unaudited) FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------- --------------- Assets: Investments in securities: Cost - Unaffiliated issuers .......................... $ 6,471,919,097 $ 1,737,953,496 Cost - Sweep Money Fund (Note 7) ..................... 210,084,798 6,731,962 --------------- --------------- Total cost of investments ............................ $ 6,682,003,895 $ 1,744,685,458 =============== =============== Value - Unaffiliated issuers ......................... $ 6,579,054,633 $ 2,617,712,411 Value - Sweep Money Fund (Note 7) .................... 210,084,798 6,731,962 --------------- --------------- Total value of investments ........................... 6,789,139,431 2,624,444,373 Cash ................................................... 1,517,169 -- Receivables: ........................................... Investment securities sold ........................... 22,119 -- Capital shares sold .................................. 14,579,133 1,905,608 Dividends and interest ............................... 29,912,704 7,004,481 --------------- --------------- Total assets ...................................... 6,835,170,556 2,633,354,462 --------------- --------------- Liabilities: Payables: Capital shares redeemed .............................. 11,467,844 4,789,344 Affiliates 4,822,002 2,172,031 Accrued expenses and other liabilities ................. 1,200,798 511,114 --------------- --------------- Total liabilities ................................. 17,490,644 7,472,489 --------------- --------------- Net assets, at value ............................ $ 6,817,679,912 $ 2,625,881,973 =============== =============== Net assets consist of: Paid-in capital ........................................ $ 7,126,263,050 $ 1,732,233,433 Undistributed net investment income (distributions in excess of net investment income) ...................... (4,781,871) 2,681,117 Net unrealized appreciation (depreciation) ............. 107,135,536 879,758,232 Accumulated net realized gain (loss) ................... (410,936,803) 11,209,191 --------------- --------------- Net assets, at value ............................ $ 6,817,679,912 $ 2,625,881,973 =============== =============== Semiannual Report | The accompanying notes are an integral part of these financial statements. | 97 Franklin Custodian Funds FINANCIAL STATEMENTS (continued) STATEMENTS OF ASSETS AND LIABILITIES (continued) March 31, 2008 (unaudited) FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------- --------------- CLASS A: Net assets, at value ................................... $ 5,350,470,104 $ 2,003,087,511 =============== =============== Shares outstanding ..................................... 814,367,650 152,675,109 =============== =============== Net asset value per share (a) .......................... $ 6.57 $ 13.12 =============== =============== Maximum offering price per share (net asset value per share / 95.75%) ....................................... $ 6.86 $ 13.70 =============== =============== CLASS B: Net assets, at value ................................... $ 305,606,347 $ 112,595,364 =============== =============== Shares outstanding ..................................... 46,588,652 8,589,546 =============== =============== Net asset value and maximum offering price per share (a) $ 6.56 $ 13.11 =============== =============== CLASS C: Net assets, at value ................................... $ 524,267,144 $ 391,180,083 =============== =============== Shares outstanding ..................................... 80,201,538 29,916,091 =============== =============== Net asset value and maximum offering price per share (a) $ 6.54 $ 13.08 =============== =============== CLASS R: Net assets, at value ................................... $ 84,631,294 $ 40,898,921 =============== =============== Shares outstanding ..................................... 12,892,253 3,126,031 =============== =============== Net asset value and maximum offering price per share (a) $ 6.56 $ 13.08 =============== =============== ADVISOR CLASS: Net assets, at value ................................... $ 552,705,023 $ 78,120,094 =============== =============== Shares outstanding ..................................... 83,923,158 5,926,304 =============== =============== Net asset value and maximum offering price per share (a) $ 6.59 $ 13.18 =============== =============== (a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. 98 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL STATEMENTS (continued) STATEMENTS OF OPERATIONS for the six months ended March 31, 2008 (unaudited) FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND -------------- -------------- ---------------- Investment income: Dividends: Unaffiliated issuers ............................................... $ 1,802,456 $ 18,975,530 $ 548,831,595 Non-controlled affiliated issuers (Note 10) ........................ -- -- 78,163,216 Sweep Money Fund (Note 7) .......................................... 228,981 703,360 4,054,735 Interest ............................................................. 546 -- 1,427,162,820 Income from securities loaned ........................................ 42,842 -- 2,352,229 -------------- -------------- ---------------- Total investment income ....................................... 2,074,825 19,678,890 2,060,564,595 -------------- -------------- ---------------- Expenses: Management fees (Note 3a) ............................................ 1,429,570 6,505,066 113,764,108 Distribution fees: (Note 3c) Class A ............................................................ 605,633 2,476,073 25,760,405 Class B ............................................................ 78,162 627,643 17,359,693 Class B1 ........................................................... -- -- 1,146,362 Class C ............................................................ 333,827 1,600,757 50,463,713 Class R ............................................................ -- 137,348 732,580 Transfer agent fees (Note 3e) ........................................ 599,759 2,656,579 20,699,754 Custodian fees (Note 4) .............................................. 4,917 27,532 561,320 Reports to shareholders .............................................. 70,432 271,058 2,693,312 Registration and filing fees ......................................... 26,926 69,532 1,159,665 Professional fees..................................................... 17,608 44,161 351,737 Trustees' fees and expenses .......................................... 1,210 8,414 112,830 Other ................................................................ 11,206 34,194 632,091 -------------- -------------- ---------------- Total expenses ................................................ 3,179,250 14,458,357 235,437,570 Expense reductions (Note 4) ................................... (4) (72) (315,744) -------------- -------------- ---------------- Net expenses ............................................... 3,179,246 14,458,285 235,121,826 -------------- -------------- ---------------- Net investment income (loss) ............................. (1,104,421) 5,220,605 1,825,442,769 -------------- -------------- ---------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments: Unaffiliated Issuers ............................................ 37,814,600 66,034,334 279,792,053 Non-controlled affiliated issuers (Note 10) ..................... -- -- 130,903,235 Foreign currency transactions ...................................... (21,026) -- (305,316) -------------- -------------- ---------------- Net realized gain (loss) ................................. 37,793,574 66,034,334 410,389,972 -------------- -------------- ---------------- Net change in unrealized appreciation (depreciation) on: Investments ........................................................ (112,695,471) (460,354,148) (6,852,784,940) Translation of assets and liabilities denominated in foreign currencies......................................................... -- -- (249,736) -------------- -------------- ---------------- Net change in unrealized appreciation (depreciation)...... (112,695,471) (460,354,148) (6,853,034,676) -------------- -------------- ---------------- Net realized and unrealized gain (loss).................................. (74,901,897) (394,319,814) (6,442,644,704) -------------- -------------- ---------------- Net increase (decrease) in net assets resulting from operations ......... $ (76,006,318) $ (389,099,209) $ (4,617,201,935) ============== ============== ================ Semiannual Report | The accompanying notes are an integral part of these financial statements. | 99 Franklin Custodian Funds FINANCIAL STATEMENTS (continued) STATEMENTS OF OPERATIONS (continued) for the six months ended March 31, 2008 (unaudited) FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------- -------------- Investment income: Dividends: Unaffiliated issuers ...................................................... $ -- $ 43,587,905 Sweep Money Fund (Note 7) ................................................. 4,053,494 690,844 Interest .................................................................... 172,700,100 3,420,851 ------------- -------------- Total investment income ................................................ 176,753,594 47,699,600 ------------- -------------- Expenses: Management fees (Note 3a) ................................................... 14,669,547 6,456,575 Distribution fees: (Note 3c) Class A ................................................................... 3,317,316 1,585,326 Class B ................................................................... 1,006,587 405,833 Class C ................................................................... 1,483,538 1,380,433 Class R ................................................................... 198,159 109,284 Transfer agent fees (Note 3e) ............................................... 4,173,925 1,534,943 Custodian fees (Note 4) ..................................................... 58,599 40,172 Reports to shareholders ..................................................... 292,893 178,739 Registration and filing fees ................................................ 77,470 55,355 Professional fees ........................................................... 43,585 39,977 Trustees' fees and expenses ................................................. 16,147 5,637 Other ....................................................................... 89,741 18,124 ------------- -------------- Total expenses ......................................................... 25,427,507 11,810,398 Expense reductions (Note 4) ............................................ (32) (11,807) ------------- -------------- Net expenses ......................................................... 25,427,475 11,798,591 ------------- -------------- Net investment income ............................................. 151,326,119 35,901,009 ------------- -------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ............................................................... (1,239,380) 50,711,004 Foreign currency transactions ............................................. -- 353,522 ------------- -------------- Net realized gain (loss) .......................................... (1,239,380) 51,064,526 ------------- -------------- Net change in unrealized appreciation (depreciation) on: Investments ............................................................... 186,828,421 (206,259,160) Translation of assets and liabilities denominated in foreign currencies ... -- (1,385) ------------- -------------- Net change in unrealized appreciation (depreciation) .............. 186,828,421 (206,260,545) ------------- -------------- Net realized and unrealized gain (loss) ........................................ 185,589,041 (155,196,019) ------------- -------------- Net increase (decrease) in net assets resulting from operations ................ $ 336,915,160 $ (119,295,010) ============= ============== 100 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL STATEMENTS (continued) STATEMENTS OF CHANGES IN NET ASSETS FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ------------------------------------- ------------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED MARCH 31, 2008 YEAR ENDED MARCH 31, 2008 YEAR ENDED (UNAUDITED) SEPTEMBER 30, 2007 (UNAUDITED) SEPTEMBER 30, 2007 ---------------- ------------------ ---------------- ------------------ Increase (decrease) in net assets: Operations: Net investment income (loss) ........... $ (1,104,421) $ (2,484,227) $ 5,220,605 $ 7,383,921 Net realized gain (loss) from investments and foreign currency transactions ........................ 37,793,574 54,267,988 66,034,334 8,027,309 Net change in unrealized appreciation (depreciation) on investments ....... (112,695,471) 88,303,700 (460,354,148) 436,966,418 -------------- -------------- --------------- --------------- Net increase (decrease) in net assets resulting from operations ........... (76,006,318) 140,087,461 (389,099,209) 452,377,648 -------------- -------------- --------------- --------------- Distributions to shareholders from: Net investment income: Class A ............................. -- -- (6,070,929) (4,596,420) Class R ............................. -- -- (37,603) (7,075) Advisor Class ....................... -- -- (1,821,203) (1,417,769) Net realized gains: Class A ............................. (11,692,400) -- -- -- Class B ............................. (381,099) -- -- -- Class C ............................. (1,631,083) -- -- -- -------------- -------------- --------------- --------------- Total distributions to shareholders ...... (13,704,582) -- (7,929,735) (6,021,264) -------------- -------------- --------------- --------------- Capital share transactions: (Note 2) Class A ............................. (18,564,975) (159,197,616) 40,573,296 111,946,191 Class B ............................. (400,680) (5,690,695) (11,720,639) (5,331,820) Class C ............................. 1,654,294 (13,236,699) (5,888,967) 18,194,989 Class R ............................. -- -- 7,948,327 8,345,533 Advisor Class ....................... -- -- (20,390,727) 34,972,750 -------------- -------------- --------------- --------------- Total capital share transactions ......... (17,311,361) (178,125,010) 10,521,290 168,127,643 -------------- -------------- --------------- --------------- Redemption fees .......................... 1,597 3,893 5,567 8,351 -------------- -------------- --------------- --------------- Net increase (decrease) in net assets ..................... (107,020,664) (38,033,656) (386,502,087) 614,492,378 Net assets: Beginning of period ...................... 640,385,781 678,419,437 3,019,085,036 2,404,592,658 -------------- -------------- --------------- --------------- End of period ............................ $ 533,365,117 $ 640,385,781 $ 2,632,582,949 $ 3,019,085,036 ============== ============== =============== =============== Undistributed net investment income (loss) included in net assets: End of period .......................... $ (1,104,421) $ -- $ 2,376,137 $ 5,085,267 ============== ============== =============== =============== Semiannual Report | The accompanying notes are an integral part of these financial statements. | 101 Franklin Custodian Funds FINANCIAL STATEMENTS (continued) STATEMENTS OF CHANGES IN NET ASSETS (continued) FRANKLIN FRANKLIN INCOME FUND U.S. GOVERNMENT SECURITIES FUND ------------------------------------- ------------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED MARCH 31, 2008 YEAR ENDED MARCH 31, 2008 YEAR ENDED (UNAUDITED) SEPTEMBER 30, 2007 (UNAUDITED) SEPTEMBER 30, 2007 ---------------- ------------------ ---------------- ------------------ Increase (decrease) in net assets: Operations: Net investment income .................... $ 1,825,442,769 $ 2,885,381,172 $ 151,326,119 $ 301,720,105 Net realized gain (loss) from investments and foreign currency transactions .......................... 410,389,972 1,473,778,958 (1,239,380) (2,097,105) Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ..... (6,853,034,676) 2,517,987,350 186,828,421 (10,362,317) ---------------- ---------------- --------------- --------------- Net increase (decrease) in net assets resulting from operations ............. (4,617,201,935) 6,877,147,480 336,915,160 289,260,683 ---------------- ---------------- --------------- --------------- Distributions to shareholders from: Net investment income: Class A ............................... (1,041,525,880) (1,687,207,815) (129,036,486) (264,748,989) Class B ............................... (91,145,298) (173,469,301) (6,905,714) (16,375,700) Class B1 .............................. (9,928,483) (21,754,097) -- -- Class C ............................... (431,708,619) (694,869,015) (10,040,978) (19,237,012) Class R ............................... (8,368,676) (11,742,767) (1,804,703) (3,515,272) Advisor Class ......................... (187,447,999) (280,791,335) (12,982,588) (22,110,321) Net realized gains: Class A ............................... (800,136,963) (420,454,280) -- -- Class B ............................... (82,518,087) (56,272,957) -- -- Class B1 .............................. (8,423,685) (6,844,643) -- -- Class C ............................... (363,091,783) (190,856,659) -- -- Class R ............................... (6,753,237) (2,957,517) -- -- Advisor Class ......................... (142,671,038) (62,928,530) -- -- ---------------- ---------------- --------------- --------------- Total distributions to shareholders ........ (3,173,719,748) (3,610,148,916) (160,770,469) (325,987,294) ---------------- ---------------- --------------- --------------- Capital share transactions: (Note 2) Class A ............................... 1,566,751,573 6,982,490,371 137,272,309 (188,222,491) Class B ............................... (114,864,068) (237,976,392) (19,487,189) (69,804,640) Class B1 .............................. (38,778,836) (91,477,067) -- -- Class C ............................... 712,367,957 3,211,521,930 93,428,987 (3,037,771) Class R 41,477,703 89,672,613 7,951,143 3,854,638 Advisor Class ......................... 18,598,793 2,131,138,371 67,903,965 85,580,325 ---------------- ---------------- --------------- --------------- Total capital share transactions ........... 2,185,553,122 12,085,369,826 287,069,215 (171,629,939) ---------------- ---------------- --------------- --------------- Redemption fees ............................ 119,652 231,167 58,438 35,787 ---------------- ---------------- --------------- --------------- Net increase (decrease) in net assets ....................... (5,605,248,909) 15,352,599,557 463,272,344 (208,320,763) Net assets: Beginning of period ........................ 62,305,895,121 46,953,295,564 6,354,407,568 6,562,728,331 ---------------- ---------------- --------------- --------------- End of period .............................. $ 56,700,646,212 $ 62,305,895,121 $ 6,817,679,912 $ 6,354,407,568 ================ ================ =============== =============== Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of period ............................ $ 45,418,996 $ (9,898,818) $ (4,781,871) $ 4,662,479 ================ ================ =============== =============== 102 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL STATEMENTS (continued) STATEMENTS OF CHANGES IN NET ASSETS (continued) FRANKLIN UTILITIES FUND ------------------------------------- SIX MONTHS ENDED MARCH 31, 2008 YEAR ENDED (UNAUDITED) SEPTEMBER 30, 2007 ---------------- ------------------ Increase (decrease) in net assets: Operations: Net investment income ......................................................... $ 35,901,009 $ 77,162,851 Net realized gain (loss) from investments and foreign currency transactions ... 51,064,526 122,861,109 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies .... (206,260,545) 304,461,563 --------------- --------------- Net increase (decrease) in net assets resulting from operations .......... (119,295,010) 504,485,523 --------------- --------------- Distributions to shareholders from: Net investment income: Class A .................................................................... (30,266,972) (60,045,625) Class B .................................................................... (1,408,762) (3,213,589) Class C .................................................................... (4,859,621) (10,097,373) Class R .................................................................... (530,797) (958,675) Advisor Class .............................................................. (1,417,207) (2,754,192) Net realized gains: Class A .................................................................... (107,496,310) (68,750,277) Class B .................................................................... (6,261,449) (4,691,564) Class C .................................................................... (21,133,601) (14,079,324) Class R .................................................................... (2,175,474) (1,073,396) Advisor Class .............................................................. (4,410,835) (2,861,866) --------------- --------------- Total distributions to shareholders ............................................. (179,961,028) (168,525,881) --------------- --------------- Capital share transactions: (Note 2) Class A .................................................................... 71,176,151 (21,840,975) Class B .................................................................... (2,249,310) (23,358,533) Class C .................................................................... 10,561,626 (17,678,674) Class R .................................................................... 3,585,368 10,467,103 Advisor Class .............................................................. 3,215,675 (27,554,529) --------------- --------------- Total capital share transactions ................................................ 86,289,510 (79,965,608) --------------- --------------- Redemption fees ................................................................. 3,040 10,165 --------------- --------------- Net increase (decrease) in net assets .................................... (212,963,488) 256,004,199 Net assets: Beginning of period ............................................................. 2,838,845,461 2,582,841,262 --------------- --------------- End of period ................................................................... $ 2,625,881,973 $ 2,838,845,461 =============== =============== Undistributed net investment income included in net assets: End of period ................................................................... $ 2,681,117 $ 5,263,467 =============== =============== Semiannual Report | The accompanying notes are an integral part of these financial statements. | 103 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Custodian Funds (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as a diversified, open-end investment company, consisting of five funds (Funds). The classes of shares offered within each of the Funds are indicated below. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege. CLASS A, CLASS B CLASS A, CLASS B, CLASS C, CLASS A, CLASS B, CLASS B1, & CLASS C CLASS R & ADVISOR CLASS CLASS C, CLASS R & ADVISOR CLASS - ---------------------- ---------------------------------------- -------------------------------- Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund The following summarizes the Funds' significant accounting policies. a. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Corporate debt securities, government securities, mortgage pass-through securities, other mortgage-backed securities, collateralized mortgage obligations and asset-backed securities generally trade in the over-the-counter market rather than on a securities exchange. The Trust may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Trusts' 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 Trust has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on 104 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) a. SECURITY VALUATION (continued) the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Trust's Board of Trustees. b. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Trust's Board of Trustees. The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. c. JOINT REPURCHASE AGREEMENT The Funds may enter into a joint repurchase agreement whereby their uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the fund to the Semiannual Report | 105 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) c. JOINT REPURCHASE AGREEMENT (continued) seller, collateralized by securities which are delivered to the fund's custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. The joint repurchase agreement held by the Funds at period end had been entered into on March 31, 2008. The joint repurchase agreement is valued at cost. d. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS The Funds may purchase securities on a when-issued or delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Funds will generally purchase these securities with the intention of holding the securities, they may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. e. FOREIGN CURRENCY CONTRACTS When the Funds purchase or sell foreign securities they may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate at a future date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. f. SECURITIES LENDING Certain funds may loan securities to certain brokers through a securities lending agent for which they receive initial cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the market value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the fund on the next business day. The collateral is invested in short-term instruments as noted in the Statement of Investments. The fund receives interest income from the investment of cash collateral, adjusted by lender fees and broker rebates. The fund bears the risk of loss with respect to the investment of the collateral and the securities loaned. The securities lending agent has agreed to indemnify the fund in the case of default of any securities borrower. 106 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) g. SENIOR FLOATING RATE INTERESTS Senior secured corporate loans pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the fund invests are generally readily marketable, but may be subject to some restrictions on resale. h. INCOME TAXES No provision has been made for U.S. income taxes because it is each fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. i. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Facility fees are recognized as income over the expected term of the loan. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. Semiannual Report | 107 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) j. 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. k. REDEMPTION FEES A short term trading redemption fee will be imposed, with some exceptions, on any fund shares that are redeemed or exchanged within seven calendar days following their purchase date. The redemption fee is 2% of the amount redeemed. Such fees are retained by the funds and accounted for as an addition to paid-in capital. l. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST At March 31, 2008, there were an unlimited number of shares authorized (without par value). 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, 2008 Shares sold ......................... 1,460,277 $ 45,012,936 4,939,148 $ 217,784,595 Shares issued in reinvestment of distributions .................... 327,827 10,398,722 122,947 5,584,242 Shares redeemed ..................... (2,413,271) (73,976,633) (4,236,581) (182,795,541) ------------ ------------- ---------- ------------- Net increase (decrease) ............. (625,167) $ (18,564,975) 825,514 $ 40,573,296 ============ ============= ========== ============= Year ended September 30, 2007 Shares sold ......................... 2,290,315 $ 65,251,876 7,116,058 $ 308,077,143 Shares issued on merger (Note 11) ... -- -- 3,043,797 137,823,135 Shares issued in reinvestment of distributions .................. -- -- 101,412 4,209,599 Shares redeemed ..................... (8,062,352) (224,449,492) (7,830,995) (338,163,686) ------------ ------------- ---------- ------------- Net increase (decrease) ............. (5,772,037) $(159,197,616) 2,430,272 $ 111,946,191 ============ ============= ========== ============= 108 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 2. SHARES OF BENEFICIAL INTEREST (continued) FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ------------------------ -------------------------- SHARES AMOUNT SHARES AMOUNT -------- ------------ ---------- ------------ CLASS B SHARES: Six Months ended March 31, 2008 Shares sold ........................ 33,917 $ 1,024,650 73,164 $ 3,066,992 Shares issued in reinvestment of distributions ................. 11,458 345,223 -- -- Shares redeemed .................... (63,369) (1,770,553) (359,502) (14,787,631) -------- ------------ ---------- ------------ Net increase (decrease) ............ (17,994) $ (400,680) (286,338) $(11,720,639) ======== ============ ========== ============ Year ended September 30, 2007 Shares sold ........................ 35,535 $ 983,338 126,580 $ 5,254,130 Shares issued on merger (Note 11)... -- -- 417,038 18,128,654 Shares redeemed .................... (251,520) (6,674,033) (685,999) (28,714,604) -------- ------------ ---------- ------------ Net increase (decrease) ............ (215,985) $ (5,690,695) (142,381) $ (5,331,820) ======== ============ ========== ============ CLASS C SHARES: Six Months ended March 31, 2008 Shares sold ........................ 244,033 $ 7,062,208 593,969 $ 24,857,211 Shares issued in reinvestment of distributions ................. 49,809 1,484,796 -- -- Shares redeemed .................... (246,492) (6,892,710) (751,286) (30,746,178) -------- ------------ ---------- ------------ Net increase (decrease) ............ 47,350 $ 1,654,294 (157,317) $ (5,888,967) ======== ============ ========== ============ Year ended September 30, 2007 Shares sold ........................ 309,370 $ 8,310,379 908,813 $ 37,554,639 Shares issued on merger (Note 11)... -- -- 716,864 30,896,850 Shares redeemed .................... (816,939) (21,547,078) (1,217,586) (50,256,500) -------- ------------ ---------- ------------ Net increase (decrease) ............ (507,569) $(13,236,699) 408,091 $ 18,194,989 ======== ============ ========== ============ CLASS R SHARES: Six Months ended March 31, 2008 Shares sold ........................ 643,608 $ 28,782,159 Shares issued in reinvestment of distributions ................. 831 37,532 Shares redeemed .................... (473,386) (20,871,364) ---------- ------------ Net increase (decrease) ............ 171,053 $ 7,948,327 ========== ============ Year ended September 30, 2007 Shares sold ........................ 673,616 $ 29,574,369 Shares issued on merger (Note 11)... 111,203 4,998,560 Shares issued in reinvestment of distributions ................. 170 7,025 Shares redeemed ................... (604,060) (26,234,421) ---------- ------------ Net increase (decrease) ............ 180,929 $ 8,345,533 ========== ============ Semiannual Report | 109 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 2. SHARES OF BENEFICIAL INTEREST (continued) FRANKLIN GROWTH FUND ------------------------- SHARES AMOUNT --------- ------------ ADVISOR CLASS SHARES: Six Months ended March 31, 2008 Shares sold ........................................ 248,880 $ 10,985,188 Shares issued in reinvestment of distributions ..... 35,629 1,618,617 Shares redeemed .................................... (789,205) (32,994,532) --------- ------------ Net increase (decrease) ............................ (504,696) $(20,390,727) ========= ============ Year ended September 30, 2007 Shares sold .................... 1,295,736 $ 56,171,819 Shares issued in reinvestment of distributions ..... 30,693 1,273,761 Shares redeemed .................................... (517,639) (22,472,830) --------- ------------ Net increase (decrease) ............................ 808,790 $ 34,972,750 ========= ============ FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND --------------------------------- ------------------------------- SHARES AMOUNT SHARES AMOUNT -------------- --------------- ------------ --------------- CLASS A SHARES: Six Months ended March 31, 2008 Shares sold ................. 1,307,405,021 $ 3,356,355,172 76,371,257 $ 497,093,915 Shares issued in reinvestment of distributions .......... 549,467,229 1,421,869,331 13,335,041 86,501,262 Shares redeemed ............. (1,261,406,414) (3,211,472,930) (68,770,392) (446,322,868) -------------- --------------- ------------ --------------- Net increase (decrease) ..... 595,465,836 $ 1,566,751,573 20,935,906 $ 137,272,309 ============== =============== ============ =============== Year ended September 30, 2007 Shares sold ................. 3,628,482,534 $ 9,782,378,082 89,570,006 $ 572,054,399 Shares issued in reinvestment of distributions .......... 571,568,447 1,528,060,841 27,176,503 173,586,391 Shares redeemed ............. (1,607,011,948) (4,327,948,552) (146,074,856) (933,863,281) -------------- --------------- ------------ --------------- Net increase (decrease) ..... 2,593,039,033 $ 6,982,490,371 (29,328,347) $ (188,222,491) ============== =============== ============ =============== CLASS B SHARES: Six Months ended March 31, 2008 Shares sold ................. 16,983,803 $ 43,238,360 2,350,680 $ 15,315,884 Shares issued in reinvestment of distributions .......... 47,166,569 121,967,553 751,851 4,869,357 Shares redeemed ............. (110,604,417) (280,069,981) (6,123,294) (39,672,430) -------------- --------------- ------------ --------------- Net increase (decrease) ..... (46,454,045) $ (114,864,068) (3,020,763) $ (19,487,189) ============== =============== ============ =============== Year ended September 30, 2007 Shares sold ................. 26,283,586 $ 70,278,655 3,616,339 $ 23,020,104 Shares issued in reinvestment of distributions .......... 57,504,745 152,858,061 1,811,967 11,565,622 Shares redeemed ............. (171,972,882) (461,113,108) (16,362,133) (104,390,366) -------------- --------------- ------------ --------------- Net increase (decrease) ..... (88,184,551) $ (237,976,392) (10,933,827) $ (69,804,640) ============== =============== ============ =============== 110 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 2. SHARES OF BENEFICIAL INTEREST (continued) FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND -------------------------------- ------------------------------- SHARES AMOUNT SHARES AMOUNT ------------- --------------- ----------- -------------- CLASS B1 SHARES: Six Months ended March 31, 2008 Shares sold .................... 540,917 $ 1,372,916 Shares issued in reinvestment of distributions ............. 4,624,249 12,012,780 Shares redeemed ................ (20,327,641) (52,164,532) ------------- --------------- Net increase (decrease) ........ (15,162,475) $ (38,778,836) ============= =============== Year ended September 30, 2007 Shares sold .................... 899,431 $ 2,413,953 Shares issued in reinvestment of distributions ............. 6,473,282 17,262,644 Shares redeemed ................ (40,982,281) (111,153,664) ------------- --------------- Net increase (decrease) ........ (33,609,568) $ (91,477,067) ============= =============== CLASS C SHARES: Six Months ended March 31, 2008 Shares sold .................... 608,430,975 $ 1,572,451,061 21,576,634 $ 140,092,145 Shares issued in reinvestment of distributions ............. 215,565,586 562,151,212 1,112,246 7,184,513 Shares redeemed ................ (555,200,461) (1,422,234,316) (8,330,694) (53,847,671) ------------- --------------- ----------- -------------- Net increase (decrease) ........ 268,796,100 $ 712,367,957 14,358,186 $ 93,428,987 ============= =============== =========== ============== Year ended September 30, 2007 Shares sold .................... 1,644,870,588 $ 4,457,040,035 15,412,013 $ 97,975,806 Shares issued in reinvestment of distributions ............. 222,758,383 598,767,427 2,096,225 13,330,712 Shares redeemed ................ (680,795,624) (1,844,285,532) (17,971,749) (114,344,289) ------------- --------------- ----------- -------------- Net increase (decrease) ........ 1,186,833,347 $ 3,211,521,930 (463,511) $ (3,037,771) ============= =============== =========== ============== CLASS R SHARES: Six Months ended March 31, 2008 Shares sold .................... 29,234,086 $ 74,590,735 3,941,843 $ 25,610,444 Shares issued in reinvestment of distributions ............. 5,459,532 13,996,516 270,191 1,750,951 Shares redeemed ................ (18,603,678) (47,109,548) (2,985,416) (19,410,252) ------------- --------------- ----------- -------------- Net increase (decrease) ........ 16,089,940 $ 41,477,703 1,226,618 $ 7,951,143 ============= =============== =========== ============== Year ended September 30, 2007 Shares sold .................... 53,585,214 $ 142,909,679 4,541,307 $ 28,992,426 Shares issued in reinvestment of distributions ............. 5,151,276 13,638,691 540,550 3,451,439 Shares redeemed ................ (25,079,906) (66,875,757) (4,480,075) (28,589,227) ------------- --------------- ----------- -------------- Net increase (decrease) ........ 33,656,584 $ 89,672,613 601,782 $ 3,854,638 ============= =============== =========== ============== Semiannual Report | 111 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 2. SHARES OF BENEFICIAL INTEREST (continued) FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND ------------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ------------ --------------- ---------- ------------- ADVISOR CLASS SHARES: Six Months ended March 31, 2008 Shares sold ................. 100,009,835 $ 263,950,995 10,240,394 $ 66,415,404 Shares issued in reinvestment of distributions .......... 125,308,119 323,028,064 1,894,915 12,320,169 Shares redeemed ............. (229,823,600) (568,380,266) (1,663,520) (10,831,608) ------------ --------------- ---------- ------------- Net increase (decrease) ..... (4,505,646) $ 18,598,793 10,471,789 $ 67,903,965 ============ =============== ========== ============= Year ended September 30, 2007 Shares sold ................. 769,652,986 $ 2,071,994,710 12,993,585 $ 83,208,714 Shares issued in reinvestment of distributions .......... 125,446,877 334,084,120 3,251,900 20,807,294 Shares redeemed ............. (101,321,041) (274,940,459) (2,877,041) (18,435,683) ------------ --------------- ---------- ------------- Net increase (decrease) ..... 793,778,822 $ 2,131,138,371 13,368,444 $ 85,580,325 ============ =============== ========== ============= FRANKLIN UTILITIES FUND ---------------------------- SHARES AMOUNT ----------- ------------- CLASS A SHARES: Six Months ended March 31, 2008 Shares sold ................................................... 10,226,291 $ 147,385,057 Shares issued in reinvestment of distributions ................ 7,788,221 113,367,285 Shares redeemed ............................................... (13,336,049) (189,576,191) ----------- ------------- Net increase (decrease) ....................................... 4,678,463 $ 71,176,151 =========== ============= Year ended September 30, 2007 Shares sold ................................................... 16,452,979 $ 234,790,574 Shares issued in reinvestment of distributions ................ 7,413,021 102,543,663 Shares redeemed ............................................... (25,346,996) (359,175,212) ----------- ------------- Net increase (decrease) ....................................... (1,480,996) $ (21,840,975) =========== ============= CLASS B SHARES: Six Months ended March 31, 2008 Shares sold ................................................... 347,688 $ 5,023,143 Shares issued in reinvestment of distributions ................ 326,338 4,757,365 Shares redeemed ............................................... (844,659) (12,029,818) ----------- ------------- Net increase (decrease) ....................................... (170,633) $ (2,249,310) =========== ============= Year ended September 30, 2007 Shares sold ................................................... 350,265 $ 4,952,986 Shares issued in reinvestment of distributions ................ 336,830 4,638,541 Shares redeemed ............................................... (2,318,432) (32,950,060) ----------- ------------- Net increase (decrease) ....................................... (1,631,337) $ (23,358,533) =========== ============= CLASS C SHARES: Six Months ended March 31, 2008 Shares sold .................... 2,841,918 $ 40,725,798 Shares issued in reinvestment of distributions ................ 1,053,316 15,319,573 Shares redeemed ............................................... (3,225,118) (45,483,745) ----------- ------------- Net increase (decrease) ....................................... 670,116 $ 10,561,626 =========== ============= 112 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 2. SHARES OF BENEFICIAL INTEREST (continued) <Table> <Caption> FRANKLIN UTILITIES FUND ---------------------------- SHARES AMOUNT ----------- -------------- CLASS C SHARES: (continued) Year ended September 30, 2007 Shares sold ............................................. 4,165,031 $ 59,095,738 Shares issued in reinvestment of distributions .......... 944,817 12,995,547 Shares redeemed ......................................... (6,325,289) (89,769,959) ----------- -------------- Net increase (decrease).................................. (1,215,441) $ (17,678,674) =========== ============== CLASS R SHARES: Six Months ended March 31, 2008 Shares sold ............................................. 918,548 $ 13,173,516 Shares issued in reinvestment of distributions........... 183,342 2,663,151 Shares redeemed ......................................... (854,028) (12,251,299) ----------- -------------- Net increase (decrease) ................................. 247,862 $ 3,585,368 =========== ============== Year ended September 30, 2007 Shares sold ............................................. 1,804,789 $ 25,896,475 Shares issued in reinvestment of distributions .......... 144,680 2,003,404 Shares redeemed ......................................... (1,227,664) (17,432,776) ----------- -------------- Net increase (decrease) ................................. 721,805 $ 10,467,103 =========== ============== ADVISOR CLASS SHARES: Six Months ended March 31, 2008 Shares sold ............................................. 2,381,829 $ 35,219,994 Shares issued in reinvestment of distributions........... 327,428 4,784,952 Shares redeemed ......................................... (2,713,278) (36,789,271) ----------- -------------- Net increase (decrease) ................................. (4,021) $ 3,215,675 =========== ============== Year ended September 30, 2007 Shares sold ............................................. 2,917,605 $ 42,109,228 Shares issued in reinvestment of distributions........... 339,912 4,731,472 Shares redeemed ......................................... (5,286,535) (74,395,229) ----------- -------------- Net increase (decrease) ................................. (2,029,018) $ (27,554,529) =========== ============== </Table> 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries: <Table> SUBSIDIARY AFFILIATION - ---------------------------------------------------------------- ---------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Investment Advisory Services, LLC (Investment Advisory) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent </Table> Semiannual Report | 113 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 3. TRANSACTIONS WITH AFFILIATES (continued) a. MANAGEMENT FEES Effective January 1, 2008, the Franklin Income Fund and the Franklin Utilities Fund pay an investment management fee to Advisers based on the month-end net assets of each of the funds as follows: ANNUALIZED FEE RATE NET ASSETS - ------------------- ----------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $7.5 billion 0.440% Over $7.5 billion, up to and including $10 billion 0.430% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20 billion 0.360% Over $20 billion, up to and including $35 billion 0.355% Over $35 billion, up to and including $50 billion 0.350% Over $50 billion, up to and including $65 billion 0.345% Over $65 billion, up to and including $80 billion 0.340% In excess of $80 billion Effective January 1, 2008, the Franklin DynaTech Fund and the Franklin U.S. Government Securities 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 each of the funds as follows: <Table> <Caption> ANNUALIZED FEE RATE NET ASSETS - ------------------- ----------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $7.5 billion 0.440% Over $7.5 billion, up to and including $10 billion 0.430% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20 billion 0.360% Over $20 billion, up to and including $35 billion 0.355% Over $35 billion, up to and including $50 billion 0.350% In excess of $50 billion </Table> 114 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 3. TRANSACTIONS WITH AFFILIATES (continued) a. MANAGEMENT FEES (continued) Prior to January 1, 2008, the Funds, except Franklin Growth Fund, paid fees to Advisers, and the Franklin Growth Fund paid fees to Investment Advisory, based on the month-end net assets of each of the funds as follows: ANNUALIZED FEE RATE NET ASSETS - ------------------- ----------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $7.5 billion 0.440% Over $7.5 billion, up to and including $10 billion 0.430% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20 billion 0.360% Over $20 billion, up to and including $35 billion 0.355% Over $35 billion, up to and including $50 billion 0.350% In excess of $50 billion 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 Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds' Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Funds' compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. The maximum annual plan rates, based on the average daily net assets, for each class, are as follows: <Table> <Caption> FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND -------- -------- -------- --------------- --------- Reimbursement Plans: Class A ......... 0.25% 0.25% 0.15% 0.15% 0.15% </Table> Semiannual Report | 115 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 3. TRANSACTIONS WITH AFFILIATES (continued) c. DISTRIBUTION FEES (continued) <Table> <Caption> FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND -------- -------- -------- --------------- --------- Compensation Plans: 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% </Table> 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: <Table> <Caption> FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND -------- --------- ----------- Sales charges retained net of commissions paid to unaffiliated broker/dealers....... $ 40,655 $ 495,154 $ 8,464,347 Contingent deferred sales charges retained.... $ 9,267 $ 54,621 $ 3,541,545 </Table> <Table> <Caption> FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------- --------- Sales charges retained net of commissions paid to unaffiliated broker/dealers....... $ 490,655 $ 222,623 Contingent deferred sales charges retained.... $ 180,511 $ 54,008 </Table> e. TRANSFER AGENT FEES For the period ended March 31, 2008, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services: <Table> <Caption> FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND --------- ----------- ------------- Transfer agent fees....... $ 420,535 $ 1,693,220 $ 11,300,322 </Table> <Table> <Caption> FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND --------------- --------- Transfer agent fees....... $ 2,704,352 $ 971,478 </Table> 116 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 4. EXPENSE OFFSET ARRANGEMENT The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds' custodian expenses. During the period ended March 31, 2008, the custodian fees were reduced as noted in the Statements of Operations. 5. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At September 30, 2007, the capital loss carryforwards were as follows: <Table> <Caption> FRANKLIN FRANKLIN U.S. GOVERNMENT DYNATECH FRANKLIN SECURITIES FUND GROWTH FUND FUND ----------- --------------- --------------- Capital loss carryforwards expiring in: 2008................................ $ -- $ -- $ 21,105,846 2009................................ -- -- 46,256,951 2010................................ -- -- 11,768,551 2011................................ -- 70,730,110 33,556,845 2012................................ -- 39,052,129 129,102,166 2013................................ 1,854,237 -- 74,283,298 2014................................ -- -- 47,763,112 2015................................ -- -- 28,034,940 ----------- ------------- ------------- $ 1,854,237 $ 109,782,239 $ 391,871,709 =========== ============= ============= </Table> For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At September 30, 2007, the Franklin U.S. Government Securities Fund deferred realized capital losses of $17,825,714. At September 30, 2007, the Franklin DynaTech Fund, Franklin Growth Fund and Franklin Income Fund deferred realized currency losses of $2,421, $11,158, and $73,767, respectively. At March 31, 2008, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows: <Table> <Caption> FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------- --------------- ----------------- Cost of investments............................ $ 299,352,951 $ 1,130,127,816 $ 56,878,754,746 ------------- --------------- ----------------- Unrealized appreciation........................ $ 241,245,345 $ 1,552,289,402 $ 4,237,575,363 Unrealized depreciation........................ (6,290,410) (47,356,621) (4,877,101,719) ------------- --------------- ----------------- Net unrealized appreciation (depreciation)..... $ 234,954,935 $ 1,504,932,781 $ (639,526,356) ============= =============== ================= </Table> Semiannual Report | 117 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 5. INCOME TAXES (continued) <Table> <Caption> FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND --------------- ---------------- Cost of investments............................ $ 6,682,003,895 $ 1,741,182,648 --------------- --------------- Unrealized appreciation........................ $ 113,647,631 $ 922,574,735 Unrealized depreciation........................ (6,512,095) (39,313,010) --------------- --------------- Net unrealized appreciation (depreciation)..... $ 107,135,536 $ 883,261,725 =============== =============== </Table> Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, paydown losses, payments-in-kind and bond discounts and premiums. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, paydown losses and bond discounts and premiums. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the period ended March 31, 2008, were as follows: <Table> <Caption> FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------- ------------- ---------------- Purchases............. $ 129,005,183 $ 149,410,771 $ 14,770,611,578 Sales................. $ 176,448,117 $ 118,196,320 $ 12,798,447,901 </Table> <Table> <Caption> FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------- -------------- Purchases............. $ 820,055,484 $ 161,932,870 Sales................. $ 516,876,658 $ 194,319,180 </Table> 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 118 | Semiannual Report FRANKLIN CUSTODIAN FUNDS NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 8. CREDIT RISK The Franklin Income Fund has 43.5% 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. 9. UNFUNDED LOAN COMMITMENTS The Franklin Income Fund may enter into certain credit agreements, all or a portion of which may be unfunded. The fund is obligated to fund these loan commitments at the borrowers' discretion. Funded portions of credit agreements are presented on the Statement of Investments. At March 31, 2008, unfunded commitments were as follows: <Table> <Caption> UNFUNDED COMMITMENT ----------- BORROWER Bausch and Lomb Inc., ....... $ 4,390,000 </Table> Unfunded loan commitments and funded portions of credit agreements are marked to market daily and any unrealized gain or loss is included in the Statement of Assets and Liabilities and Statement of Operations. 10. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The 1940 Act defines "affiliated companies" to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" for the Franklin Income Fund for the period ended March 31, 2008, were as shown below. <Table> <Caption> NUMBER OF NUMBER OF SHARES SHARES REALIZED HELD AT HELD AT VALUE CAPITAL BEGINNING GROSS GROSS END AT END INVESTMENT GAIN NAME OF ISSUER OF PERIOD ADDITIONS REDUCTIONS OF PERIOD OF PERIOD INCOME (LOSS) - ---------------------------- ----------- --------- ---------- ----------- ----------------- ------------ ------------ FRANKLIN INCOME FUND NON-CONTROLLED AFFILIATES Ameren Corp. ............... 12,500,000 -- -- 12,500,000 $ 550,500,000 $ 15,875,000 $ -- Canadian Oil Sands Trust ... 25,770,600 -- 770,600 25,000,000 1,010,814,496 28,733,216 29,211,741 PG&E Corp. ................. 12,000,000 7,000,000 -- 19,000,000 699,580,000 11,730,000 -- Pinnacle West Capital Corp. .................. 5,500,000 -- -- 5,500,000 192,940,000 5,775,000 -- Public Service Enterprise Group Inc. ............. 13,500,000 -- 3,500,000 20,000,000 (a) -- (b) 12,300,000 101,691,494 Puget Energy Inc. .......... 7,500,000 -- -- 7,500,000 194,025,000 3,750,000 -- --------------- ------------ ------------ TOTAL AFFILIATED SECURITIES (4.67%of Net Assets) ....................... $ 2,647,859,496 $ 78,163,216 $130,903,235 =============== ============ ============ </Table> (a) Reflects a 2:1 stock split during the period. (b) As of March 31, 2008, no longer an affiliate. Semiannual Report | 119 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 11. MERGER On June 15, 2007, the Franklin Growth Fund acquired the net assets of the Franklin Blue Chip Fund pursuant to a plan of reorganization approved by the Franklin Blue Chip Fund's shareholders. The merger was accomplished by a tax-free exchange of 3,043,797 shares of Class A, 417,038 shares of Class B, 716,864 shares of Class C and 111,203 shares of Class R of the Franklin Growth Fund (valued at $45.28, $43.47, $43.10 and $44.95, respectively) for the net assets of the Franklin Blue Chip Fund which aggregated $191,847,199, and includes $49,120,531 of unrealized appreciation (depreciation). The combined net assets of the Franklin Growth Fund immediately after the merger were $2,955,373,004. 12. REORGANIZATION TO A DELAWARE STATUTORY TRUST On October 17, 2006, the Board of Directors approved an Agreement and Plan of Reorganization (Agreement) whereby the Franklin Custodian Funds, Inc. would be reorganized and its domicile changed from a Maryland corporation to a Delaware statutory trust. In connection with these changes, the Trust's name was also changed to Franklin Custodian Funds, formerly known as the Franklin Custodian Funds, Inc. On April 11, 2007, shareholders of the Franklin Custodian Funds approved the agreement. The reorganization became effective on February 1, 2008. 13. REGULATORY AND LITIGATION MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, including the U.S. Securities and Exchange Commission (SEC), 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 (marketing support), Franklin Resources, Inc. and certain of its subsidiaries (collectively, the Company), entered into settlements with certain of those regulators and governmental entities. Specifically, the Company entered into settlements with the SEC, among others, concerning market timing and marketing support. On May 9, 2008, the SEC approved a final plan of distribution for the Company's market timing settlement. Disbursements of settlement monies will be made promptly to individuals who were shareholders of the designated funds during the relevant period, in accordance with the terms and conditions of the settlement and plan. In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, Company directors, fund directors, and employees, have been named in private lawsuits (styled as shareholder class actions, or as derivative actions on behalf of either the named funds or Franklin Resources, Inc.). The lawsuits relate to the industry practices referenced above. 120 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued) 13. REGULATORY AND LITIGATION MATTERS (continued) The Company and fund management believe that the claims made in each of the private lawsuits referenced above are without merit and intend to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Trust, it is committed to making the Trust or its shareholders whole, as appropriate. 14. NEW ACCOUNTING PRONOUNCEMENTS The Funds adopted Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" (FIN 48), on March 31, 2008. FIN 48 clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a tax return. FIN 48 provides guidance on the measurement, recognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. The Funds have reviewed the tax positions for each of the three open tax years as of September 30, 2007 and have determined that the implementation of FIN 48 did not have a material impact on the Funds' financial statements. In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement" (SFAS 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Trust believes the adoption of SFAS 157 will have no material impact on its financial statements. In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Funds are currently evaluating the impact, if any, of applying the various provisions of SFAS 161. Semiannual Report | 121 Franklin Custodian Funds SHAREHOLDER INFORMATION BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT At a meeting held February 25, 2008, the Board of Trustees (Board), including a majority of non-interested or independent Trustees, approved renewal of the investment management agreement for each of the five separate funds comprising Franklin Custodian Funds (Fund(s)). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for each Fund, as well as periodic reports on shareholder services, legal, compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager (Manager) and its affiliates. Information furnished specifically in connection with the renewal process included a report for each Fund prepared by Lipper, Inc. (Lipper), an independent organization, as well as a Fund profitability analysis report prepared by management. The Lipper reports compared each Fund's investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Included with such profitability analysis report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates including management's explanation of differences where relevant and a three-year expense analysis with an explanation for any increase in expense ratios. Additional material accompanying such report was a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Funds by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale and a comparative analysis concerning transfer agent fees charged each Fund. In considering such materials, the independent Trustees received assistance and advice from and met separately with independent counsel. While the investment management agreements for all Funds were considered at the same Board meeting, the Board dealt with each Fund separately. In approving continuance of the investment management agreement for each Fund, the Board, including a majority of independent Trustees, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of each Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board's decision. NATURE, EXTENT AND QUALITY OF 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 122 | Semiannual Report Franklin Custodian Funds SHAREHOLDER INFORMATION (continued) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (continued) Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. The Board also noted the extent of benefits provided Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management's continuous efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted by the Board that such systems and procedures had functioned smoothly during the Florida hurricanes and blackouts experienced in recent years. Among other factors taken into account by the Board were the Manager's best execution trading policies, including a favorable report by an independent portfolio trading analytical firm. Consideration was also given to the experience of each Fund's portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management's determination of a portfolio manager's bonus compensation was the relative investment performance of the funds he or she managed and that a portion of such bonus was required to be invested in a predesignated list of funds within such person's fund management area so as to be aligned with the interests of Fund shareholders. The Board also took into account the quality of transfer agent and shareholder services provided Fund shareholders by an affiliate of the Manager, noting continuing expenditures by management to increase and improve the scope of such services, periodic favorable reports on such service conducted by third parties, the high industry ranking given the Franklin Templeton website, and the firsthand experience of individual Board members who deal with the shareholder services department in their capacities as shareholders in one or more of the various Franklin Templeton funds. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of 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 agreement renewals. The Lipper reports prepared for each Fund showed the investment performance of its Class A shares during 2007 and the previous 10-year period ended December 31, 2007, in comparison with a performance universe selected by Lipper. Investment performance was shown on a total return basis for all Funds with income return being shown as well for those Funds having income as an investment objective element. The following summarizes the performance results for each Fund. FRANKLIN DYNATECH FUND - This Fund's investment 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 Lipper report showed its total return during 2007 to be in the highest quintile of such performance universe, and on an annualized basis to be in the second-highest quintile of such universe for the previous three- and 10-year periods, and the second-lowest quintile for the previous five-year period. The Board expressed satisfaction with such performance. Semiannual Report | 123 Franklin Custodian Funds SHAREHOLDER INFORMATION (continued) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (continued) FRANKLIN GROWTH FUND - The Fund's investment 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 Lipper report showed its total return during 2007 ranked it in the upper half of its performance universe and its total return on an annualized basis ranked it in the second-highest quintile of such universe during each of the previous three- and five-year periods and the middle quintile of such universe for the previous 10-year period. The Board found such performance acceptable. FRANKLIN INCOME FUND - This Fund's investment performance was shown in comparison to a performance universe consisting of the Fund and all other retail and institutional mixed-asset target allocation moderate funds as classified by Lipper. The Fund's Lipper report showed its income return during 2007 and for each of the previous 10 years was in the highest quintile of this performance universe. The Fund's total return as shown in such report during 2007 was in the middle quintile of it performance universe, while being in the highest quintile of such universe on an annualized basis during each of the previous three-, five- and 10-year periods. The Board expressed satisfaction with such performance. FRANKLIN U.S. GOVERNMENT SECURITIES FUND - This Fund's 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 Lipper report showed its income return during 2007 was in the second-highest quintile of such universe and during each of the previous three-, five- and 10-year periods on an annualized basis was in the highest quintile of such performance universe. The Fund's total return, as shown in such report, was in the second-highest quintile of its performance universe during 2007, and on an annualized basis was in the middle quintile of such universe for the previous three- and five-year periods, and the second-highest quintile of such universe for the previous 10-year period. The Board expressed satisfaction with such performance. FRANKLIN UTILITIES FUND - This Fund's 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 Lipper report showed its income return during 2007, as well as during each of the previous three-, five- and 10-year periods on an annualized basis was in the highest quintile of such performance universe. The Fund's total return during 2007 placed it in the lowest quintile of its performance universe, and on an annualized basis placed it in the lowest, second-lowest and middle quintile of its performance universe during the previous three-, five- and 10-year periods, respectively. The Board found such performance to be consistent with the Fund's investment emphasis on regulated electric utilities and noted that its 2007 total return exceeded 16% as shown in such Lipper report. 124 | Semiannual Report Franklin Custodian Funds SHAREHOLDER INFORMATION (continued) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (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 services covered under each Fund's investment management agreement was similar to those provided by fund managers to other mutual fund groups. In reviewing comparative costs, emphasis was given to each Fund's contractual investment management fee in comparison with the contractual investment management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual investment management fee analysis considers administrative charges as being part of management fees and total expenses for comparative consistency are shown by Lipper for Fund Class A shares. The results of such expense comparisons showed that the contractual investment management fee rate for each of Franklin DynaTech Fund, Franklin Growth Fund and Franklin Utilities Fund was in the least expensive quintile of its respective Lipper expense group, for Franklin Income Fund was in the second least expensive quintile of its Lipper expense group, and for Franklin U.S. Government Securities Fund, was less than five basis points above the median of its Lipper expense group. The actual total expenses for all the Funds were in the least expensive quintiles of their respective Lipper expense groups. Based upon the above, the Board was satisfied with the management fees and total expenses of each Fund in comparison to its respective Lipper expense group. MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services to each Fund. Specific attention was given to the methodology followed in allocating costs to each Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that, while being continuously refined and reflecting changes in the Manager's own cost accounting, the cost allocation methodology was consistent with that followed in profitability report presentations for the Funds made in prior years and that the Funds' independent registered public accounting firm had been engaged by the Manager to perform certain procedures on a biennial basis, specified and approved by the Manager and the Funds' Board solely for their purposes and use in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for the type of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to each Fund in determining its profitability, as well as the 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, Semiannual Report | 125 Franklin Custodian Funds SHAREHOLDER INFORMATION (continued) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (continued) as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC and other regulatory requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager's parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including its interest in a joint venture entity that financed up-front commissions paid to brokers/dealers who sold fund Class B shares prior to February 2005, when the offering of such shares was discontinued, as well as potential benefits resulting from allocation of fund brokerage and the use of "soft" commission dollars to pay for research. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to each Fund was not excessive in view of the nature, quality and extent of services provided. ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Manager as the Funds grow larger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as some funds get larger, at some point economies of scale do result in the Manager realizing a larger profit margin on management services provided such a fund. The Board 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 management agreement with each Fund provides an initial fee of 0.625% on the first $100 million of assets; 0.50% on the next $150 million of assets; 0.45% on the next $7.25 billion of assets; and declining thereafter for each subsequent $2.5 billion of assets until reaching a breakpoint of 0.35% for assets in excess of $50 billion, with such breakpoints continuing in the case of Franklin Income Fund and Franklin Utilities Fund to 0.345% on assets in excess of $65 billion and 0.34% on assets in excess of $80 billion. It was noted that new or reduced breakpoints in the fee structure for all Funds at the $7.5 billion and $10 billion asset levels and in the fee structure for Franklin Income and Franklin Utilities Funds at the $65 billion and $80 billion levels had been authorized by the Trustees at a Board meeting held December 3, 2007, and had become effective January 1, 2008. In discussing such overall fee structure, management noted that the asset sizes of all Funds were beneath their last breakpoint levels and stated its view that such fee structures reach a relatively low rate quickly reflecting anticipated economies of scale as a Fund's assets increase and pointed out the favorable effective management fee and total expense comparisons for each Fund within its Lipper expense group, as previously discussed under "Comparative Expenses." 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 management agreement for each Fund provides a sharing of benefits with the Fund and its shareholders. 126 | Semiannual Report Franklin Custodian Funds SHAREHOLDER INFORMATION (continued) PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. Semiannual Report | 127 This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. [LOGO] One Franklin Parkway San Mateo, CA 94403-1906 [ ] WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. SEMIANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN CUSTODIAN FUNDS 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. ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial experts are John B. Wilson and he is independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PORTFOLIO MANGERS OF CLOSE-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (a)(1) Code of Ethics (a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN CUSTODIAN FUNDS By /S/GALEN G. VETTER ------------------ Galen G. Vetter Chief Executive Officer - Finance and Administration Date May 27, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /S/GALEN G. VETTER ------------------ Galen G. Vetter Chief Executive Officer - Finance and Administration Date May 27, 2008 By /S/LAURA F. FERGERSON --------------------- Laura F. Fergerson Chief Financial Officer and Chief Accounting Officer Date May 27, 2008