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: 3/31/10 ------- Item 1. Reports to Stockholders. MARCH 31, 2010 SEMIANNUAL REPORT AND SHAREHOLDER LETTER Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund SIGN UP FOR ELECTRONIC DELIVERY on FRANKLINTEMPLETON.COM [PICTURE] FRANKLIN CUSTODIAN FUNDS [FRANKLIN TEMPLETON INVESTMENTS LOGO] Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE (R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups-- Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services. MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS [PICTURE] Not part of the semiannual report Contents SHAREHOLDER LETTER............................................................ 1 SEMIANNUAL REPORT Economic and Market Overview.................................................. 3 Franklin DynaTech Fund........................................................ 5 Franklin Growth Fund.......................................................... 13 Franklin Income Fund.......................................................... 21 Franklin U.S. Government Securities Fund...................................... 30 Franklin Utilities Fund....................................................... 39 Financial Highlights and Statements of Investments............................ 47 Financial Statements.......................................................... 100 Notes to Financial Statements................................................. 109 Shareholder Information....................................................... 132 Shareholder Letter Dear Shareholder: During the six-month period ended March 31, 2010, the U.S. economy showed signs of an increasingly broad-based expansion while interest rates remained near all-time lows and inflation was muted. Although corporate and global economic data underscored some weak spots amid short-term improvements, most U.S. companies during fourth quarter 2009 and first quarter 2010 beat consensus earnings estimates, aided by government incentives and a wave of restructuring and cost-cutting initiatives. U.S. equity markets enjoyed an unusually strong nine-month surge until first quarter 2010, when volatility returned as investors began to heed signs of overvaluation. Investor concerns also arose about the global recovery's sustainability as some government stimulus measures began to wind down. During the period, U.S. Treasury yields rose and fell in response to wavering investor sentiment. The yield curve reached record-breaking steep levels during the first quarter of 2010 and flattened only slightly by period-end. Franklin Custodian Funds' semiannual report goes into greater detail about prevailing conditions during the period under review. In addition, you will find performance data, financial information and discussions by the portfolio managers. Please remember that all securities markets fluctuate, as do mutual fund share prices. If you would like more frequent updates, franklintempleton.com provides daily prices, monthly performance figures, portfolio holdings and other information. You can also access your account, buy and sell shares, read timely articles, and find helpful financial planning tools. We hope you will take advantage of these online services. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Not part of the semiannual report | 1 Although market conditions are constantly changing, we remain committed to our disciplined strategy as we manage the Funds. As always, we recommend investors consult their financial advisors and review their portfolios to design a long-term strategy and portfolio allocation that meet their individual needs, goals and risk tolerance. We firmly believe that most people benefit from professional advice, and that advice is invaluable as investors navigate current market conditions. We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your investment needs in the years ahead. Sincerely, -s- Charles B. Johnson Charles B. Johnson President and Chief Executive Officer - Investment Management Franklin Custodian Funds THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF MARCH 31, 2010. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. 2 | Not part of the semiannual report Semiannual Report Economic and Market Overview The U.S. economy showed signs of broad-based improvement during the six-month reporting period. Domestic industrial output, manufacturing and exports posted steady gains, consumer spending and confidence rebounded from recessionary lows, and the services sector expanded for the first time in more than two years. However, challenges remained as mixed economic reports, elevated debt concerns surrounding the U.S. budget deficit and lack of job prospects for the unemployed hindered the economy's advance. Fourth quarter 2009 and first quarter 2010 corporate profit growth largely surpassed consensus estimates, which allowed businesses to begin restocking inventories that were depleted during the recession. New-home prices rose in most regions due to lower interest rates, a first-time homebuyer tax credit program, and prices dipping to levels that lured bargain hunters. Unfortunately, the housing sector overall remained weak as existing-home prices were essentially unchanged while the pace of home sales and housing starts failed to gain traction. The U.S. economy expanded at its fastest pace in six years during 2009's fourth quarter, led by large inventory adjustments, government spending, a revival of business investment and rising exports. U.S. economic output as measured by gross domestic product (GDP) grew at an annualized rate of 5.6% in the fourth quarter, followed by an estimated annualized 3.2% advance in 2010's first quarter.(1) As renewed signs of a demand-led recovery emerged, oil prices jumped from $71 per barrel at the end of September 2009 to a 17-month peak of $84 at period-end, but remained below 2008's record level. The March 2010 inflation rate was an annualized 2.3%.(2) Core inflation, which excludes food and energy costs, rose at a 1.1% annualized rate(2) and was below the Fed's informal target range of 1.5% to 2.0%. Given few inflationary pressures and uncertainty surrounding the economic recovery, the Federal Open Market Committee (FOMC) announced it intended to hold the federal funds target rate in the 0% to 0.25% range "for an extended period" as it laid the groundwork for an eventual tightening of monetary policy. During the period, it began withdrawing more of the extraordinary support 1. Source: Bureau of Economic Analysis. 2. Source: Bureau of Labor Statistics. Semiannual Report | 3 policies it had provided in response to the 2008 financial crisis. Late in the period, the labor market improved somewhat as the economy began to add jobs, and the unemployment rate subsided from a 26-year high of 10.1% in October 2009 to 9.7%, a level sustained through the first three months of 2010.(2) In February 2010, investor fears about the Greek government's ability to finance its budget deficit forced several companies to delay bond sales and prompted investors to flee to safer assets such as U.S. Treasuries. These fears largely subsided by period-end, and the credit market rebounded, although uncertainty remained about how several European countries would meet their debt obligations. U.S. companies aggressively borrowed in the debt market and liquidity levels rose. Wary investors favored short-term Treasuries, and the Treasury yield curve reached all-time steep levels in February. The spread between two- and 10-year Treasury yields increased from 236 basis points (100 basis points equal one percentage point) at the beginning of the period to 282 basis points at period-end. The two-year Treasury bill yield rose from 0.95% to 1.02% over the six-month period, while the 10-year Treasury note yield rose from 3.31% to 3.84%. As investor confidence improved amid encouraging economic data, equity markets generally rallied, though the advance was uneven. For the six months under review, the blue chip stocks of the Dow Jones Industrial Average delivered a +13.31% total return, while the broader Standard & Poor's 500 Index (S&P 500) posted a total return of +11.75% and the technology-heavy NASDAQ Composite Index returned +13.50%.(3) All major industry groups posted gains for the period, with the strongest returns from the cyclical consumer discretionary, industrials and information technology sectors. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF MARCH 31, 2010. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. 3. Source: (C) 2010 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ domestic and international common type stocks listed on The NASDAQ Stock Market. The index is market value-weighted and includes over 3,000 companies. 4 | Semiannual Report Franklin DynaTech Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks investments primarily in companies management believes are leaders in innovation, take advantage of new technologies, have superior management, and benefit from new industry conditions in the dynamically changing global economy. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. We are pleased to bring you Franklin DynaTech Fund's semiannual report for the period ended March 31, 2010. PERFORMANCE OVERVIEW Franklin DynaTech Fund - Class A delivered a +14.48% cumulative total return for the six months under review. For the same period, the Fund performed comparably to its narrow benchmark, the NASDAQ 100 Index, which posted a price-only return of +13.92%, and outperformed its broader benchmark, the Standard & Poor's 500 Index (S&P 500), which had a total return of +11.75%. (1) The Fund outperformed the Russell 1000 Growth Index, which had a +12.96% return. (2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 8. INVESTMENT STRATEGY We use fundamental, bottom-up research to seek companies meeting our criteria of growth potential, quality and valuation. In seeking sustainable growth characteristics, we look for companies we believe can produce sustainable earnings and cash flow growth, evaluating the long-term market opportunity and 1. Source: (C) 2010 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. 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. 2. Source: (C) 2010 Morningstar. The Russell 1000 Growth Index is market capitalization weighted and measures performance of those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values. The index includes reinvested dividends. The indexes are unmanaged. One cannot invest directly in an index, and an index is not 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 52. Semiannual Report | 5 competitive structure of an industry to target leaders and emerging leaders. We define quality companies as those with strong and improving competitive positions in attractive markets. We also believe important attributes of quality are experienced and talented management teams as well as financial strength reflected in the capital structure, gross and operating margins, free cash flow generation and returns on capital employed. Our valuation analysis includes a range of potential outcomes based on an assessment of multiple scenarios. In assessing value, we consider whether security prices fully reflect the balance of the sustainable growth opportunities relative to business and financial risks. PORTFOLIO BREAKDOWN Franklin DynaTech Fund Based on Total Net Assets as of 3/31/10 Software 11.2% Semiconductors & Semiconductor Equipment 10.9% Internet Software & Services 9.3% Computers & Peripherals 8.5% Pharmaceuticals 6.4% Health Care Equipment & Supplies 6.2% Energy Equipment & Services 5.9% IT Services 5.1% Communications Equipment 4.6% Internet & Catalog Retail 4.6% Biotechnology 3.9% Aerospace & Defense 3.1% Health Care Providers & Services 2.9% Life Sciences Tools & Services 2.4% Chemicals 2.3% Other 12.7% MANAGER'S DISCUSSION During the reporting period, the Fund's performance continued to benefit from the information technology sector, particularly Apple, in the computers and peripherals industry, which continued to advance due to the announcement of the iPad tablet computer.(3) IT services provider Visa aided performance as well. The Fund's Internet software and services industry holdings also boosted performance largely due to search engines Baidu and Google. Another significant contributor was Intel in the semiconductors and semiconductor equipment industry. The chip maker's strong 2009 results reflected the effects of manufacturing and product innovations that created new operating efficiencies and market opportunities. The Fund's health care sector holdings also benefited performance.(4) During the period, a number of holdings in the health care equipment industry performed well, including surgical robot developer Intuitive Surgical and heart valve manufacturer Edwards Lifesciences. The Fund's position in Teva Pharmaceutical Industries received a boost after Moody's Investors Service upgraded the drug maker's credit rating. Several consumer discretionary holdings also helped the Fund's returns, including Internet retailers Amazon.com and Priceline.com, both of which benefited from improving consumer spending.(5) In contrast, the Fund's materials sector holdings weighed on performance, largely due to Monsanto in the chemicals industry.(6) The agricultural products producer detracted from performance after the company reduced the price of its top-selling weed killer and also became the subject of a federal anti-trust investigation. The financials sector hurt performance largely due to the Fund's holding 3. The information technology sector comprises communications equipment; computers and peripherals; electronic equipment, instruments and components; Internet software and services; IT services; semiconductors and semiconductor equipment; and software in the SOI. 4. The health care sector comprises biotechnology, health care equipment and supplies, health care providers and services, health care technology, life sciences tools and services, and pharmaceuticals in the SOI. 5. The consumer discretionary sector comprises Internet and catalog retail in the SOI. 6. The materials sector comprises chemicals in the SOI. 6 | Semiannual Report in global investment banking and securities firm The Goldman Sachs Group.(7) Its share price declined amid investor concerns about federal inquiries into the company's business practices. Although the information technology sector overall was positive, some individual stocks hampered results, including Chinese search engine Sohu.com and wireless technology developer QUALCOMM. Genetic analysis tool developer Illumina from the health care sector also detracted from Fund performance. During the period, we sold Sohu.com and Illumina. As managers of Franklin DynaTech Fund, at period-end we continue to search for innovative companies that leverage new technologies and new industry conditions to build what we believe to be strong long-term growth prospects and are trading at what we perceive to be attractive valuations. We believe it is these dynamic, thought-leading companies that may lead economic advancement over the longer term. Thank you for your continued participation in Franklin DynaTech Fund. We look forward to serving your future investment needs. [PHOTO OF RUPERT H. JOHNSON, JR.] - -s- Rupert H. Johnson, Jr. 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, 2010, 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. 7. The financials sector comprises capital markets and diversified financial services in the SOI. TOP 10 HOLDINGS Franklin DynaTech Fund 3/31/10 COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - ---------------------------------------------------------------- ----------- Apple Inc. 6.2% COMPUTERS & PERIPHERALS, U.S. Google Inc., A 4.1% INTERNET SOFTWARE & SERVICES, U.S. Intel Corp. 3.6% SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, U.S. Visa Inc., A 3.3% IT SERVICES, U.S. Teva Pharmaceutical Industries Ltd., ADR 3.2% PHARMACEUTICALS, ISRAEL FMC Technologies Inc. 2.8% ENERGY EQUIPMENT & SERVICES, U.S. Amazon.com Inc. 2.4% INTERNET & CATALOG RETAIL, U.S. Hewlett-Packard Co. 2.3% COMPUTERS & PERIPHERALS, U.S. Celgene Corp. 2.2% BIOTECHNOLOGY, U.S. Priceline.com Inc. 2.2% INTERNET & CATALOG RETAIL, U.S. Semiannual Report | 7 Performance Summary as of 3/31/10 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 INFORMATION CLASS A (SYMBOL: FKDNX) CHANGE 3/31/10 9/30/09 - ----------------------- ------ ------- ------- Net Asset Value (NAV) +$3.36 $26.56 $23.20 CLASS B (SYMBOL: FDNBX) CHANGE 3/31/10 9/30/09 - ----------------------- ------ ------- ------- Net Asset Value (NAV) +$3.04 $24.64 $21.60 CLASS C (SYMBOL: FDYNX) CHANGE 3/31/10 9/30/09 - ----------------------- ------ ------- ------- Net Asset Value (NAV) +$3.01 $24.35 $21.34 CLASS R (SYMBOL: N/A) CHANGE 3/31/10 9/30/09 - --------------------- ------ ------- ------- Net Asset Value (NAV) +$3.32 $26.45 $23.13 ADVISOR CLASS (SYMBOL: N/A) CHANGE 3/31/10 9/30/09 - --------------------------- ------ ------- ------- Net Asset Value (NAV) +$3.41 $26.69 $23.28 8 | 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. CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- --------- -------- -------- --------- Cumulative Total Return (1) +14.48% +53.79% +31.58% +0.75% Average Annual Total Return (2) +7.88% +44.98% +4.39% -0.52% Value of $10,000 Investment (3) $ 10,788 $ 14,498 $ 12,399 $ 9,496 Total Annual Operating Expenses (4) 1.18% CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- --------- -------- -------- --------- Cumulative Total Return (1) +14.07% +52.66% +26.76% -5.14% Average Annual Total Return (2) +10.07% +48.66% +4.52% -0.53% Value of $10,000 Investment (3) $ 11,007 $ 14,866 $ 12,476 $ 9,486 Total Annual Operating Expenses (4) 1.93% CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- --------- -------- -------- --------- Cumulative Total Return (1) +14.11% +52.66% +26.76% -6.50% Average Annual Total Return (2) +13.11% +51.66% +4.86% -0.67% Value of $10,000 Investment (3) $ 11,311 $ 15,166 $ 12,676 $ 9,350 Total Annual Operating Expenses (4) 1.93% CLASS R 6-MONTH 1-YEAR INCEPTION (12/1/08) - ------- --------- -------- ------------------- Cumulative Total Return (1) +14.35% +53.42% +68.90% Average Annual Total Return (2) +14.35% +53.42% +48.36% Value of $10,000 Investment (3) $ 11,435 $ 15,342 $ 16,890 Total Annual Operating Expenses (4) 1.43% ADVISOR CLASS (5) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ----------------- --------- -------- -------- --------- Cumulative Total Return (1) +14.65% +54.19% +32.20% +1.23% Average Annual Total Return (2) +14.65% +54.19% +5.74% +0.12% Value of $10,000 Investment (3) $ 11,465 $ 15,419 $ 13,220 $ 10,123 Total Annual Operating Expenses (4) 0.93% 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, GO TO FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. Semiannual Report | 9 Performance Summary (CONTINUED) 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 ADVANCEMENT. THE FUND MAY ALSO INVEST IN SMALL-CAPITALIZATION COMPANIES, WHICH CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS, AND THEIR PROSPECTS FOR GROWTH ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES. THE FUND'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. Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 5. Effective 5/15/08, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 5/15/08, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 5/14/08, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 5/15/08 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were -6.43% and -3.48%. 10 | 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 - - 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 | 11 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. 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 10/1/09 VALUE 3/31/10 PERIOD* 10/1/09-3/31/10 ----------------- -------------- ----------------------- CLASS A Actual $ 1,000 $ 1,144.80 $ 5.94 Hypothetical (5% return before expenses) $ 1,000 $ 1,019.40 $ 5.59 CLASS B Actual $ 1,000 $ 1,140.70 $ 9.77 Hypothetical (5% return before expenses) $ 1,000 $ 1,015.81 $ 9.20 CLASS C Actual $ 1,000 $ 1,141.10 $ 9.93 Hypothetical (5% return before expenses) $ 1,000 $ 1,015.66 $ 9.35 CLASS R Actual $ 1,000 $ 1,143.50 $ 7.27 Hypothetical (5% return before expenses) $ 1,000 $ 1,018.15 $ 6.84 ADVISOR CLASS Actual $ 1,000 $ 1,146.50 $ 4.60 Hypothetical (5% return before expenses) $ 1,000 $ 1,020.64 $ 4.33 * Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.11%; B: 1.83%; C: 1.86%; R: 1.36%; and Advisor: 0.86%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. 12 | Semiannual Report Franklin Growth Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Fund seeks capital appreciation 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 (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. We are pleased to bring you Franklin Growth Fund's semiannual report for the period ended March 31, 2010. PERFORMANCE OVERVIEW Franklin Growth Fund - Class A delivered a +14.82% cumulative total return for the six months under review. The Fund outperformed its benchmark, the Standard & Poor's 500 Index (S&P 500), which had a total return of +11.75% for the same period. (1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 16. INVESTMENT STRATEGY We use fundamental, bottom-up research to seek companies meeting our criteria of growth potential, quality and valuation. In seeking sustainable growth characteristics, we look for companies we believe can produce sustainable earnings and cash flow growth, evaluating the long-term market opportunity and competitive structure of an industry to target leaders and emerging leaders. We define quality companies as those with strong and improving competitive positions in attractive markets. We also believe important attributes of quality are experienced and talented management teams as well as financial strength reflected in the capital structure, gross and operating margins, free cash flow generation and returns on capital employed. Our valuation analysis includes a range of potential outcomes based on an assessment of multiple scenarios. In assessing value, we consider whether security prices fully reflect the balance of the sustainable growth opportunities relative to business and financial risks. 1. Source: (C) 2010 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, and an index is not 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 61. Semiannual Report | 13 PORTFOLIO BREAKDOWN Franklin Growth Fund Based on Total Net Assets as of 3/31/10 Capital Goods 22.8% Technology Hardware & Equipment 14.6% Pharmaceuticals, Biotechnology & Life Sciences 13.8% Software & Services 8.0% Transportation 7.6% Health Care Equipment & Services 5.0% Energy 4.5% Materials 2.9% Automobiles & Components 2.4% Other 15.2% Short-Term Investments & Other Net Assets 3.2% MANAGER'S DISCUSSION Franklin Growth Fund owned shares of 149 companies at period-end. We continue to invest in a broad array of companies of all sizes and in varied industries. During the six months under review, the Fund's strong performance was broad-based with nearly every portfolio sector and individual stock gaining in value. Fund performance benefited considerably from the industrials, information technology and health care sectors. (2) Within industrials, notable contributors included aerospace and defense contractors Boeing and Northrop Grumman, railroad operators such as Union Pacific and Canadian National Railway, and industrial conglomerate 3M. Among information technology investments, the Fund's biggest gains stemmed mainly from computer hardware and electronic device maker Apple; Hewlett-Packard, one of the world's most comprehensive manufacturers of computer hardware, software and services; and Agilent Technologies, a manufacturer of advanced scientific and medical testing equipment. Results within the health care sector were aided by Millipore (sold by period-end) and Waters, both of which make a wide array of testing and processing products for the biotechnology and pharmaceuticals industries; Allergan, a leading manufacturer of eye care, skin care and aesthetic products, including best-selling pharmaceutical Botox; and Teleflex, which through its medical segment produces surgical instruments, medical devices and disposable supplies for hospital procedures. The Fund had a few detractors with a small negative impact on performance. The materials sector posted weak results, especially among companies in the chemicals and construction materials industries. Martin Marietta Materials, which produces aggregates and other raw resources used in construction, transportation and military applications; Air Products & Chemicals, which provides gases such as argon, hydrogen, nitrogen and oxygen to manufacturers and health care facilities; and Ecolab, which offers cleaning, sanitation, pest-elimination and maintenance products and services to hospitality, institutional and industrial customers, weighed on performance. In the utilities sector, the Fund's position in electric utility FPL Group also fell in value. 2. The industrials sector comprises capital goods, commercial and professional services, and transportation in the SOI. The information technology sector comprises semiconductors and semiconductor equipment, software and services, and technology hardware and equipment in the SOI. The health care sector comprises health care equipment and services; and pharmaceuticals, biotechnology, and life sciences in the SOI. 14 | Semiannual Report 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 [PHOTO OF SERENA PERIN VINTON] - -s- Serena Perin Vinton, CFA Serena Perin Vinton, CFA Portfolio Management Team Franklin Growth Fund CFA (R) is a trademark owned by CFA Institute. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2010, 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 3/31/10 COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------- ---------- Apple Inc. 5.4% TECHNOLOGY HARDWARE & EQUIPMENT General Dynamics Corp. 2.2% CAPITAL GOODS Johnson & Johnson 2.2% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES The Boeing Co. 2.1% CAPITAL GOODS International Business Machines Corp. 2.1% TECHNOLOGY HARDWARE & EQUIPMENT 3M Co. 2.0% CAPITAL GOODS Cisco Systems Inc. 2.0% TECHNOLOGY HARDWARE & EQUIPMENT Northrop Grumman Corp. 1.9% CAPITAL GOODS Allergan Inc. 1.8% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES United Technologies Corp. 1.8% CAPITAL GOODS Semiannual Report | 15 Performance Summary as of 3/31/10 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 3/31/10 9/30/09 - ----------------------- -------- -------- -------- Net Asset Value (NAV) +$ 5.10 $ 41.58 $ 36.48 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.2820 CLASS B (SYMBOL: FKGBX) CHANGE 3/31/10 9/30/09 - ----------------------- -------- -------- -------- Net Asset Value (NAV) +$ 5.01 $ 39.94 $ 34.93 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.0257 CLASS C (SYMBOL: FRGSX) CHANGE 3/31/10 9/30/09 - ----------------------- -------- -------- -------- Net Asset Value (NAV) +$ 4.90 $ 39.51 $ 34.61 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.0672 CLASS R (SYMBOL: FGSRX) CHANGE 3/31/10 9/30/09 - ----------------------- -------- -------- -------- Net Asset Value (NAV) +$ 5.09 $ 41.46 $ 36.37 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.2255 ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 3/31/10 9/30/09 - ----------------------------- -------- -------- -------- Net Asset Value (NAV) +$ 5.07 $ 41.60 $ 36.53 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.3576 16 | 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. CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- --------- -------- -------- --------- Cumulative Total Return (1) +14.82% +56.76% +28.68% +25.88% Average Annual Total Return (2) +8.21% +47.75% +3.94% +1.72% Value of $10,000 Investment (3) $ 10,821 $ 14,775 $ 12,129 $ 11,864 Total Annual Operating Expenses (4) 1.00% CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- --------- -------- -------- --------- Cumulative Total Return (1) +14.42% +55.64% +23.93% +18.59% Average Annual Total Return (2) +10.42% +51.64% +4.05% +1.72% Value of $10,000 Investment (3) $ 11,042 $ 15,164 $ 12,193 $ 11,859 Total Annual Operating Expenses (4) 1.75% CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- --------- -------- -------- --------- Cumulative Total Return (1) +14.43% +55.63% +23.96% +16.82% Average Annual Total Return (2) +13.43% +54.63% +4.39% +1.57% Value of $10,000 Investment (3) $ 11,343 $ 15,463 $ 12,396 $ 11,682 Total Annual Operating Expenses (4) 1.75% CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------- --------- -------- -------- ------------------ Cumulative Total Return (1) +14.70% +56.37% +27.09% +33.03% Average Annual Total Return (2) +14.70% +56.37% +4.91% +3.52% Value of $10,000 Investment (3) $ 11,470 $ 15,637 $ 12,709 $ 13,303 Total Annual Operating Expenses (4) 1.25% ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------- --------- -------- -------- --------- Cumulative Total Return (1) +14.98% +57.15% +30.28% +29.03% Average Annual Total Return (2) +14.98% +57.15% +5.43% +2.58% Value of $10,000 Investment (3) $ 11,498 $ 15,715 $ 13,028 $ 12,903 Total Annual Operating Expenses (4) 0.75% PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, GO TO FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. Semiannual Report | 17 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 FLUCTUATIONS AND ECONOMIC AS WELL AS POLITICAL UNCERTAINTY. THE PORTFOLIO INCLUDES INVESTMENTS IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN ONE OF THE MARKET'S MOST VOLATILE SECTORS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS 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. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 18 | 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 - - 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 | 19 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. 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 10/1/09 VALUE 3/31/10 PERIOD* 10/1/09-3/31/10 ------------------ --------------- ------------------------- CLASS A Actual $ 1,000 $ 1,148.20 $ 5.30 Hypothetical (5% return before expenses) $ 1,000 $ 1,020.00 $ 4.99 CLASS B Actual $ 1,000 $ 1,144.20 $ 9.25 Hypothetical (5% return before expenses) $ 1,000 $ 1,016.31 $ 8.70 CLASS C Actual $ 1,000 $ 1,144.30 $ 9.30 Hypothetical (5% return before expenses) $ 1,000 $ 1,016.26 $ 8.75 CLASS R Actual $ 1,000 $ 1,147.00 $ 6.64 Hypothetical (5% return before expenses) $ 1,000 $ 1,018.75 $ 6.24 ADVISOR CLASS Actual $ 1,000 $ 1,149.80 $ 3.97 Hypothetical (5% return before expenses) $ 1,000 $ 1,021.24 $ 3.73 * Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.99%; B: 1.73%; C: 1.74%; R: 1.24%; and Advisor: 0.74%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. 20 | 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 by investing, under normal market conditions, in 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 (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This semiannual report for Franklin Income Fund covers the period ended March 31, 2010. PERFORMANCE OVERVIEW Franklin Income Fund - Class A delivered a +9.47% cumulative total return for the six months under review. The Fund underperformed its equity benchmark, the Standard & Poor's 500 Index (S&P 500), which posted a total return of +11.75%; outperformed its fixed income benchmark, the Barclays Capital (BC) U.S. Aggregate Index, which returned +1.99%; and outperformed its peers as measured by the Lipper Mixed-Asset Target Allocation Moderate Funds Classification Average, which had a +7.05% total return, for the same period. (1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 25. 1. Source: (C) 2010 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. 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 BC U.S. Aggregate Index is a market capitalization-weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody's, Standard & Poor's or Fitch, respectively. Source: Lipper Inc. 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 3/31/10, there were 557 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. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, and an index is not representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 72. Semiannual Report | 21 DIVIDEND DISTRIBUTIONS* Franklin Income Fund 10/1/09-3/31/10 DIVIDEND PER SHARE (CENTS) ------------------------------------------------------------- MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS - ----- ------- ------- ---------- ------- ------- ------------- October 1.25 1.10 1.16 1.17 1.19 1.27 November 1.25 1.10 1.16 1.17 1.19 1.27 December 1.25 1.11 1.13 1.16 1.19 1.28 January 1.25 1.11 1.13 1.16 1.19 1.28 February 1.20 1.06 1.08 1.11 1.14 1.23 March 1.20 1.05 1.08 1.11 1.14 1.23 - ----------------------------------------------------------------------- TOTAL 7.40 6.53 6.74 6.88 7.04 7.56 * 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. INVESTMENT STRATEGY By generally performing 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. MANAGER'S DISCUSSION During the period under review, the Fund's two major components, high yield bonds and electric utility stocks, had mixed results. High yield bonds performed well as indicated by the Credit Suisse (CS) High Yield Index's +10.99% return.(2) In contrast, electric utility stocks had lackluster performance as measured by the S&P 500 Utilities Index's +3.47% return. (3) 2. Source: (C) 2010 Morningstar. The CS High Yield Index is designed to mirror the investible universe of the U.S. dollar-denominated high yield debt market. 3. Source: (C) 2010 Morningstar. The S&P 500 Utilities Index is a market capitalization-weighted index that includes utility stocks in the S&P 500. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, and an index is not representative of the Fund's portfolio. 22 | Semiannual Report The 10-year Treasury note declined and caused yields to increase from 3.31% to 3.84% over the period. Continued credit spread contraction, however, lifted corporate bond performance, and the investment-grade and high yield categories had positive returns. Investment-grade spreads declined from 218 basis points (bps; 100 bps equal one percentage point) to 150 bps, while high yield spreads declined from 764 bps to 591 bps.(4) The average yield to maturity for investment-grade and high yield corporate bonds fell to 4.49% and 8.48%.(4) Within fixed income, Ford Motor Credit Company bonds generated strong results, driven by a recovery in global automotive sales and the company's improved access to capital markets. During the period, independent credit rating agencies Moody's Investors Service and S&P each upgraded the company's credit ratings to B1+ and B-/Stable. Despite continued weakness in natural gas and power markets, the Fund's position in Energy Future Holdings performed well, largely due to improved high yield bond performance. During the period, we took profits in several investment-grade corporate bonds due to our concerns about rising long-term interest rates. Many of these holdings were trading at substantial premiums to par value. We eliminated positions in Allied Waste North America, American Express, Morgan Stanley, and Freeport-McMoRan Copper & Gold. As a result, our overall exposure to fixed income securities declined from 66.4% of total net assets on September 30, 2009, to 61.0% on March 31, 2010. The Fund's exposure to equity securities holdings rose from 32.4% of total net assets to 37.3% over the same period. This increase was largely due to strong appreciation from several existing positions, additions to some existing holdings and the initiation of several new positions. Several existing equity holdings generated above-market returns, including health care company Merck & Co., integrated electric utility company Dominion Resources and global integrated oil and gas company ConocoPhillips. We focused on adding equity holdings that we believed offered attractive dividend yields, traded at attractive valuations and could provide dividend growth. In general, these holdings were large-capitalization, high-quality, investment-grade companies with strong balance sheets. We initiated new positions in discount retailer Target, food and beverage company PepsiCo and integrated major oil company Exxon Mobil. We added to existing positions in mobile telecommunications company Vodafone Group, major integrated oil company ConocoPhillips and electric utility company The Southern Company. PORTFOLIO BREAKDOWN Franklin Income Fund Based on Total Net Assets as of 3/31/10 Consumer Discretionary Bonds 14.3% Utilities Stocks 11.7% Energy Bonds 10.0% Financials Stocks 8.6% Health Care Bonds 6.9% Utilities Bonds 6.9% Financials Bonds 6.6% Energy Stocks 6.2% Industrials Bonds 6.1% Information Technology Bonds 5.1% Health Care Stocks 2.8% Materials Bonds 2.4% Consumer Discretionary Stocks 2.3% Telecommunication Services Stocks 2.2% Other Bonds 2.7% Other Stocks 3.5% Short-Term Investments & Other Net Assets 1.7% 4. Sources: Barclays Capital; Credit Suisse. Semiannual Report | 23 TOP 5 EQUITY HOLDINGS Franklin Income Fund 3/31/10 COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------------------------- ---------- Bank of America Corp. 2.5% FINANCIALS Wells Fargo & Co. 2.2% FINANCIALS Exxon Mobil Corp. 1.7% ENERGY MINERALS Merck & Co. Inc. 1.6% HEALTH TECHNOLOGY Canadian Oil Sands Trust (Canada) 1.5% ENERGY TOP 5 BOND HOLDINGS* Franklin Income Fund 3/31/10 COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------------------------------- ---------- Ford Motor Credit Co. LLC 3.8% CONSUMER DISCRETIONARY Tenet Healthcare Corp. 2.5% HEALTH CARE HCA Inc. 2.3% HEALTH CARE Freescale Semiconductor Inc. 2.0% INFORMATION TECHNOLOGY Texas Competitive Electric Holdings Co. 1.9% UTILITIES * Does not include convertible bonds. Detractors from performance during the period included electric utility stocks, which languished largely due to continued weakness in domestic natural gas and power prices. Several Fund holdings underperformed the broad S&P Utilities Index, including FirstEnergy and Public Service Enterprise Group. 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 CFA (R) is a trademark owned by CFA Institute. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2010, 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. 24 | Semiannual Report Performance Summary as of 3/31/10 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 3/31/10 9/30/09 - ---------------------------------- ------- -------- ------- Net Asset Value (NAV) +$ 0.11 $ 2.10 $ 1.99 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.0740 CLASS B (SYMBOL: FBICX) CHANGE 3/31/10 9/30/09 - ---------------------------------- ------- -------- ------- Net Asset Value (NAV) +$ 0.11 $ 2.09 $ 1.98 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.0653 CLASS B1 (SYMBOL: FICBX) CHANGE 3/31/10 9/30/09 - ---------------------------------- ------- -------- ------- Net Asset Value (NAV) +$0.11 $ 2.10 $ 1.99 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.0674 CLASS C (SYMBOL: FCISX) CHANGE 3/31/10 9/30/09 - ---------------------------------- ------- -------- ------- Net Asset Value (NAV) +$0.12 $ 2.12 $ 2.00 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.0688 CLASS R (SYMBOL: FISRX) CHANGE 3/31/10 9/30/09 - ---------------------------------- ------- -------- ------- Net Asset Value (NAV) +$0.11 $ 2.07 $ 1.96 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.0704 ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 3/31/10 9/30/09 - ---------------------------------- ------- -------- ------- Net Asset Value (NAV) +$0.11 $ 2.09 $ 1.98 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.0756 Semiannual Report | 25 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/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. CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------- --------- -------- -------- --------- Cumulative Total Return (1) +9.47% +46.67% +25.38% +116.78% Average Annual Total Return (2) +4.73% +40.33% +3.71% +7.60% Value of $10,000 Investment (3) $10,473 $14,033 $11,999 $20,796 Distribution Rate (4) 6.58% 30-Day Standardized Yield (5) 5.95% Total Annual Operating Expenses (6) 0.68% CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (11/1/01) - --------------------------------------- --------- -------- -------- -------------------- Cumulative Total Return (1) +9.04% +45.77% +20.25% +72.67% Average Annual Total Return (2) +5.04% +41.77% +3.46% +6.71% Value of $10,000 Investment (3) $10,504 $14,177 $11,854 $17,267 Distribution Rate (4) 6.03% 30-Day Standardized Yield (5) 5.38% Total Annual Operating Expenses (6) 1.53% CLASS B1 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------- --------- -------- -------- --------- Cumulative Total Return (1) +9.11% +45.89% +22.18% +108.23% Average Annual Total Return (2) +5.11% +41.89% +3.79% +7.61% Value of $10,000 Investment (3) $10,511 $14,189 $12,047 $20,823 Distribution Rate (4) 6.17% 30-Day Standardized Yield (5) 5.71% Total Annual Operating Expenses (6) 1.17% CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------- --------- -------- -------- --------- Cumulative Total Return (1) +9.64% +46.33% +22.64% +106.35% Average Annual Total Return (2) +8.64% +45.33% +4.17% +7.51% Value of $10,000 Investment (3) $10,864 $14,533 $12,264 $20,635 Distribution Rate (4) 6.28% 30-Day Standardized Yield (5) 5.69% Total Annual Operating Expenses (6) 1.18% CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - --------------------------------------- --------- -------- -------- ------------------ Cumulative Total Return (1) +9.40% +46.10% +22.93% +73.36% Average Annual Total Return (2) +9.40% +46.10% +4.22% +6.90% Value of $10,000 Investment (3) $10,940 $14,610 $12,293 $17,336 Distribution Rate (4) 6.61% 30-Day Standardized Yield (5) 5.86% Total Annual Operating Expenses (6) 1.03% 26 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE (CONTINUED) ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- --------- -------- -------- --------- Cumulative Total Return (1) +9.60% +47.20% +26.46% +119.77% Average Annual Total Return (2) +9.60% +47.20% +4.81% +8.19% Value of $10,000 Investment (3) $10,960 $14,720 $12,646 $21,977 Distribution Rate (4) 7.06% 30-Day Standardized Yield (5) 6.34% Total Annual Operating Expenses (6) 0.53% 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, GO TO FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. 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. WHILE STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORTER TERM AS A RESULT OF FACTORS AFFECTING INDIVIDUAL COMPANIES, INDUSTRIES OR THE SECURITIES MARKET AS A WHOLE. 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): 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 3/31/10. 5. The 30-day standardized yield for the 30 days ended 3/31/10 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate (which reflects the Fund's past dividends paid to shareholders) or the income reported in the Fund's financial statements. 6. Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 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 - - 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 EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. 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 10/1/09 VALUE 3/31/10 PERIOD* 10/1/09-3/31/10 ------------------ --------------- ------------------------- CLASS A Actual $ 1,000 $ 1,094.70 $ 3.39 Hypothetical (5% return before expenses) $ 1,000 $ 1,021.69 $ 3.28 CLASS B Actual $ 1,000 $ 1,090.40 $ 7.77 Hypothetical (5% return before expenses) $ 1,000 $ 1,017.50 $ 7.49 CLASS B1 Actual $ 1,000 $ 1,091.10 $ 5.94 Hypothetical (5% return before expenses) $ 1,000 $ 1,019.25 $ 5.74 CLASS C Actual $ 1,000 $ 1,096.40 $ 6.01 Hypothetical (5% return before expenses) $ 1,000 $ 1,019.20 $ 5.79 CLASS R Actual $ 1,000 $ 1,094.00 $ 5.22 Hypothetical (5% return before expenses) $ 1,000 $ 1,019.95 $ 5.04 ADVISOR CLASS Actual $ 1,000 $ 1,096.00 $ 2.61 Hypothetical (5% return before expenses) $ 1,000 $ 1,022.44 $ 2.52 * Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.65%; B: 1.49%; B1: 1.14%; C: 1.15%; R: 1.00%; Advisor: 0.50%), multiplied by the average account value over the period, multiplied by 182/365 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 its assets predominantly 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. 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 (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. PORTFOLIO BREAKDOWN Franklin U.S. Government Securities Fund Based on Total Net Assets as of 3/31/10 [PIE CHART] - - GNMA 97.9% - - Short-Term Investments & Other Net Assets 2.1% This semiannual report for Franklin U.S. Government Securities Fund covers the period ended March 31, 2010. PERFORMANCE OVERVIEW Franklin U.S. Government Securities Fund - Class A posted a +2.05% cumulative total return for the six months under review. The Fund under-performed the +2.66% total return of its peers as measured by the Lipper GNMA Funds Classification Average.(2) In comparison, the Barclays Capital (BC) U.S. )Government: Intermediate Index returned +0.70% for the same 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 3/31/10, there were 66 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. The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index, and an index is not 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 91. 30 | Semiannual Report DIVIDEND DISTRIBUTIONS* Franklin U.S. Government Securities Fund 10/1/09-3/31/10 DIVIDEND PER SHARE ------------------------------------------------------------------------ MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS - -------- ----------- ------------------ ---------- ------------ ------------- October 2.39 cents 2.10 cents 2.13 cents 2.20 cents 2.47 cents November 2.39 cents 2.10 cents 2.13 cents 2.20 cents 2.47 cents December 2.21 cents 1.92 cents 1.92 cents 2.00 cents 2.29 cents January 2.21 cents 1.92 cents 1.92 cents 2.00 cents 2.29 cents February 2.21 cents 1.92 cents 1.92 cents 2.00 cents 2.29 cents March 2.21 cents 1.91 cents 1.93 cents 2.00 cents 2.28 cents - ---------------------------------------------------------------------------------- TOTAL 13.62 CENTS 11.87 CENTS 11.95 CENTS 12.40 CENTS 14.09 CENTS * All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. period.(3) The Fund's return reflects the effect of management fees and expenses, while the BC 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 34. INVESTMENT STRATEGY We currently invest the Fund's assets 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 reporting period, GNMA mortgage-backed securities (MBS) remained relatively attractive in the recent environment as the GNMA current coupon yielded 4.38% at period-end, an income opportunity over 5- and 10-year Treasuries, which yielded 2.55% and 3.84%. 3. Source: (C) 2010 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The BC U.S. Government: Intermediate Index is the intermediate component of the BC U.S. Government Index. The index includes public obligations of the U.S. Treasury with at least one year to final maturity and publicly issued debt of U.S. government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government. The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index, and an index is not representative of the Fund's portfolio. Semiannual Report | 31 The Federal Reserve Board's MBS purchase program supported the agency MBS market but was concluded at period-end. We believe less favorable technical conditions and higher volatility for the sector could arise due to a possible lack of consistent investor demand. Despite periods of volatility during the period, the MBS market continued to deliver the positive performance it has exhibited since the MBS purchase program was announced at the end of November 2008. Prepayment risk for higher coupon MBS remained restrained as stagnant home prices, loss of home equity and tighter underwriting standards lessened prepayment activity. Over the period, GNMA MBS and Fannie Mae (FNMA) outperformed comparable U.S. Treasuries and their conventional Freddie Mac (FHLMC) MBS counterparts. Within the sector, higher coupon GNMAs (6.5%) were the best performers, followed by their mid-coupon counterparts (5.0%-6.0%), while lower coupons (4.0% and 4.5%) lagged. Mid-coupon GNMA I securities (comprising single-issuer pools) generally outperformed comparable GNMA II securities (comprising multiple-issuer pools). We slightly decreased the Fund's allocation to GNMA II securities, as we felt GNMA I securities offered better value on a historical price spread basis. We increased the Fund's allocation to some lower and mid-coupon MBS (4.5% and 5.0%). Our heaviest allocation was in 5.0% through 6.0% coupon securities. Franklin U.S. Government Securities Fund takes a consistent and disciplined approach and invests in GNMA mortgage pass-throughs, which remained the only MBS backed by the full faith and credit of the U.S. government.(1) The Fund took a collateral-intensive research approach to uncover opportunities across the GNMA universe. We believe our experience and continual investment in new technologies can help us identify specified pools and individual securities that offer strong cash flow fundamentals and valuations. 32 | Semiannual Report Thank you for your continued participation in Franklin U.S. Government Securities Fund. We welcome your comments and questions and look forward to serving your investment needs in the years ahead. [PHOTO OF ROGER A. BAYSTON] - -s- Roger A. Bayston Roger A. Bayston, CFA [PHOTO OF PAUL VARUNOK] - -s- Paul Varunok Paul Varunok Portfolio Management Team Franklin U.S. Government Securities Fund CFA(R) is a trademark owned by CFA Institute. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2010, 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 | 33 Performance Summary as of 3/31/10 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 3/31/10 9/30/09 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) $ 0.00 $ 6.69 $ 6.69 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.1362 CLASS B (SYMBOL: FUGBX) CHANGE 3/31/10 9/30/09 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) $ 0.00 $ 6.68 $ 6.68 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.1187 CLASS C (SYMBOL: FRUGX) CHANGE 3/31/10 9/30/09 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) $ 0.00 $ 6.66 $ 6.66 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.1195 CLASS R (SYMBOL: FUSRX) CHANGE 3/31/10 9/30/09 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) $ 0.00 $ 6.69 $ 6.69 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.1240 ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 3/31/10 9/30/09 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) $ 0.00 $ 6.71 $ 6.71 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.1409 34 | Semiannual Report 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. CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------ -------- ------- ------- -------- Cumulative Total Return (1) +2.05% +4.44% +29.08% +73.25% Average Annual Total Return (2) -2.33% -0.05% +4.33% +5.19% Distribution Rate (3) 3.79% 30-Day Standardized Yield (4) 3.72% Total Annual Operating Expenses (5) 0.75% CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------ -------- ------- ------- -------- Cumulative Total Return (1) +1.79% +3.90% +25.81% +66.25% Average Annual Total Return (2) -2.21% -0.10% +4.36% +5.21% Distribution Rate (3) 3.43% 30-Day Standardized Yield (4) 3.35% Total Annual Operating Expenses (5) 1.26% CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------ -------- ------- ------- -------- Cumulative Total Return (1) +1.81% +4.10% +25.97% +64.58% Average Annual Total Return (2) +0.81% +3.10% +4.73% +5.11% Distribution Rate (3) 3.48% 30-Day Standardized Yield (4) 3.34% Total Annual Operating Expenses (5) 1.26% CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------------------------------------ -------- ------- ------- ------------------ Cumulative Total Return (1) +1.87% +4.22% +26.94% +44.21% Average Annual Total Return (2) +1.87% +4.22% +4.89% +4.54% Distribution Rate (3) 3.59% 30-Day Standardized Yield (4) 3.51% Total Annual Operating Expenses (5) 1.11% ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------ -------- ------- ------- -------- Cumulative Total Return (1) +2.12% +4.73% +30.04% +75.75% Average Annual Total Return (2) +2.12% +4.73% +5.39% +5.80% Distribution Rate (3) 4.08% 30-Day Standardized Yield (4) 4.02% 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, GO TO FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. Semiannual Report | 35 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 3/31/10. 4. The 30-day standardized yield for the 30 days ended 3/31/10 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate (which reflects the Fund's past dividends paid to shareholders) or the income reported in the Fund's financial statements. 5. Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 36 | Semiannual Report 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 - - 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 | 37 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. 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 10/1/09 VALUE 3/31/10 PERIOD* 10/1/09-3/31/10 ------------------ --------------- ----------------------- CLASS A Actual $ 1,000 $ 1,020.50 $ 3.58 Hypothetical (5% return before expenses) $ 1,000 $ 1,021.39 $ 3.58 CLASS B Actual $ 1,000 $ 1,017.90 $ 6.14 Hypothetical (5% return before expenses) $ 1,000 $ 1,018.85 $ 6.14 CLASS C Actual $ 1,000 $ 1,018.10 $ 6.19 Hypothetical (5% return before expenses) $ 1,000 $ 1,018.80 $ 6.19 CLASS R Actual $ 1,000 $ 1,018.70 $ 5.44 Hypothetical (5% return before expenses) $ 1,000 $ 1,019.55 $ 5.44 ADVISOR CLASS Actual $ 1,000 $ 1,021.20 $ 2.92 Hypothetical (5% return before expenses) $ 1,000 $ 1,022.04 $ 2.92 * Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.71%; B: 1.22%; C: 1.23%; R: 1.08%; and Advisor: 0.58%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. 38 | Semiannual Report Franklin Utilities Fund YOUR FUND'S GOAL 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 (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. PORTFOLIO BREAKDOWN Franklin Utilities Fund Based on Total Net Assets as of 3/31/10 Electric Utilities 49.3% Multi-Utilities 38.0% Independent Power Producers & Energy Traders 3.7% Oil, Gas & Consumable Fuels 3.3% Diversified Telecommunication Services 2.4% Water Utilities 1.7% Short-Term Investments & Other Net Assets 1.6% This semiannual report for Franklin Utilities Fund covers the period ended March 31, 2010. PERFORMANCE OVERVIEW Franklin Utilities Fund - Class A posted a +5.29% cumulative total return for the six months under review. The Fund underperformed its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had a total return of +11.75% for the same period. (1) However, the Fund outperformed the +3.47% total return of its narrow benchmark, the S&P 500 Utilities Index. (2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 42. INVESTMENT STRATEGY We search for the best return opportunities available in the global utilities arena with a specific focus on the U.S. electricity and gas sector. Generally, we look for companies producing a high percentage of earnings from regulated utility franchise operations. MANAGER'S DISCUSSION Investors' appetite for risk and cyclical stocks geared to an economic recovery resulted in the market's clear shift out of more defensive (non-cyclical) investment types such as utilities. In fact, utilities was one of the weakest sectors in 1. Source: (C) 2010 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. 2. Source: (C) 2010 Morningstar. The S&P 500 Utilities Index is a market capitalization-weighted index that includes utility stocks in the S&P 500. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, and an index is not 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 98. Semiannual Report | 39 the S&P 500 during the six-month review period. Nonetheless, the Fund's performance surpassed that of the S&P 500 Utilities Index, primarily due to stock selection. TOP 10 EQUITY HOLDINGS Franklin Utilities Fund 3/31/10 COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - ------------------------------------- ------------ The Southern Co. 4.6% ELECTRIC UTILITIES Entergy Corp. 4.6% ELECTRIC UTILITIES Sempra Energy 4.3% MULTI-UTILITIES PG&E Corp. 4.1% MULTI-UTILITIES Exelon Corp. 3.8% ELECTRIC UTILITIES Public Service Enterprise Group Inc. 3.6% MULTI-UTILITIES American Electric Power Co. Inc. 3.6% ELECTRIC UTILITIES PPL Corp. 3.4% ELECTRIC UTILITIES NV Energy Inc. 3.0% ELECTRIC UTILITIES Edison International 3.0% ELECTRIC UTILITIES Most portfolio holdings posted gains during this semiannual period. Among the most significant contributors to performance were Dominion Resources, one of the largest energy producers and transporters in the U.S., with operations in five eastern states; American Electric Power (AEP), another large power generator and distributor serving more than five million customers in 11 states; and Alliant Energy, which provides regulated electric and natural gas service to approximately one million electric and 400,000 natural gas customers in the states of Iowa, Wisconsin and Minnesota. Dominion's share price increase during the period was supported by its announced sale of onshore natural gas exploration and production properties for $3.5 billion, the proceeds of which we believe could be allocated to Dominion's utility franchise. The Fund's investment in AEP was helped by increased investor appetite for electric utilities offering above-average dividend yields that also did not have significant commodity exposure. This same investor preference likely benefited Alliant Energy, which also recently passed through tariff increases in Iowa and Wisconsin that could lead to higher revenues. Some of the Fund's largest detractors from performance were electric utilities FirstEnergy, which serves a region including Ohio, Pennsylvania and New Jersey; and Exelon, which operates in northern Illinois and southeastern Pennsylvania. The Fund's holdings in electric utility PPL, which operates power distribution networks in Pennsylvania and the U.K., was another detractor. Declining electricity and natural gas prices throughout the reporting period continued to cause a potential hindrance to these companies' profitability, as they sell significant volumes of power at market-based pricing. 40 | Semiannual Report 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 [PHOTO OF J. BLAIR SCHMICKER] - -s- J. Blair Schmicker J. Blair Schmicker, CFA Portfolio Management Team Franklin Utilities Fund CFA(R) and Chartered Financial Analyst(R)are trademarks owned by CFA Institute. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2010, 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. J. BLAIR SCHMICKER assumed portfolio manager responsibilities for Franklin Utilities Fund in February 2010. He specializes in equity research analysis of the utilities and industrials sectors. His primary research coverage includes the integrated utility, capital goods, alternative energy and construction industries. Prior to joining Franklin Templeton Investments in 2007, Mr. Schmicker worked as an associate at Aetos Capital and as an analyst at Credit Suisse. Mr. Schmicker received an M.B.A. from The Wharton School, and a B.A. in economics and mathematics from Dartmouth College. Mr. Schmicker is a Chartered Financial Analyst (CFA) Charterholder and a member of the CFA Institute. Semiannual Report | 41 Performance Summary as of 3/31/10 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 3/31/10 9/30/09 - -------------------------------------- ------- ------- ------- Net Asset Value (NAV) +$ 0.16 $ 10.90 $ 10.74 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.2400 Long-Term Capital Gain $ 0.1618 TOTAL $ 0.4018 CLASS B (SYMBOL: FRUBX) CHANGE 3/31/10 9/30/09 - -------------------------------------- ------- ------- ------- Net Asset Value (NAV) +$ 0.16 $ 10.90 $ 10.74 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.2125 Long-Term Capital Gain $ 0.1618 TOTAL $ 0.3743 CLASS C (SYMBOL: FRUSX) CHANGE 3/31/10 9/30/09 - -------------------------------------- ------- ------- ------- Net Asset Value (NAV) +$ 0.15 $ 10.86 $ 10.71 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.2140 Long-Term Capital Gain $ 0.1618 TOTAL $ 0.3758 CLASS R (SYMBOL: FRURX) CHANGE 3/31/10 9/30/09 - -------------------------------------- ------- ------- ------- Net Asset Value (NAV) +$ 0.16 $ 10.87 $ 10.71 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.2221 Long-Term Capital Gain $ 0.1618 TOTAL $ 0.3839 ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 3/31/10 9/30/09 - -------------------------------------- ------- ------- ------- Net Asset Value (NAV) +$ 0.16 $ 10.95 $ 10.79 DISTRIBUTIONS (10/1/09-3/31/10) Dividend Income $ 0.2482 Long-Term Capital Gain $ 0.1618 TOTAL $ 0.4100 42 | 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: 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. CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------- -------- -------- -------- --------- Cumulative Total Return (1) +5.29% +24.23% +29.31% +123.01% Average Annual Total Return (2) +0.79% +18.98% +4.36% +7.88% Value of $10,000 Investment (3) $ 10,079 $ 11,898 $ 12,379 $ 21,355 Distribution Rate (4) 3.69% 30-Day Standardized Yield (5) 3.40% Total Annual Operating Expenses (6) 0.80% CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------- -------- -------- -------- --------- Cumulative Total Return (1) +5.02% +23.61% +26.09% +114.01% Average Annual Total Return (2) +1.02% +19.61% +4.42% +7.91% Value of $10,000 Investment (3) $ 10,102 $ 11,961 $ 12,414 $ 21,401 Distribution Rate (4) 3.32% 30-Day Standardized Yield (5) 3.06% Total Annual Operating Expenses (6) 1.30% CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------- -------- -------- -------- --------- Cumulative Total Return (1) +4.96% +23.60% +26.02% +111.94% Average Annual Total Return (2) +3.96% +22.60% +4.73% +7.80% Value of $10,000 Investment (3) $ 10,396 $ 12,260 $ 12,602 $ 21,194 Distribution Rate (4) 3.37% 30-Day Standardized Yield (5) 3.05% Total Annual Operating Expenses (6) 1.30% CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - -------------------------------------- -------- -------- -------- ------------------ Cumulative Total Return (1) +5.13% +23.76% +27.03% +67.22% Average Annual Total Return (2) +5.13% +23.76% +4.90% +6.44% Value of $10,000 Investment (3) $ 10,513 $ 12,376 $ 12,703 $ 16,722 Distribution Rate (4) 3.51% 30-Day Standardized Yield (5) 3.20% Total Annual Operating Expenses (6) 1.15% ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------- -------- -------- -------- --------- Cumulative Total Return (1) +5.34% +24.27% +30.21% +126.03% Average Annual Total Return (2) +5.34% +24.27% +5.42% +8.50% Value of $10,000 Investment (3) $ 10,534 $ 12,427 $ 13,021 $ 22,603 Distribution Rate (4) 3.99% 30-Day Standardized Yield (5) 3.70% Total Annual Operating Expenses (6) 0.65% 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, GO TO FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. Semiannual Report | 43 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 3/31/10. 5. The 30-day standardized yield for the 30 days ended 3/31/10 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate (which reflects the Fund's past dividends paid to shareholders) or the income reported in the Fund's financial statements. 6. Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 44 | Semiannual Report 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 - - 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 | 45 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. 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 10/1/09 VALUE 3/31/10 PERIOD* 10/1/09-3/31/10 ----------------- -------------- ----------------------- CLASS A Actual $ 1,000 $ 1,052.90 $ 4.04 Hypothetical (5% return before expenses) $ 1,000 $ 1,020.99 $ 3.98 CLASS B Actual $ 1,000 $ 1,050.20 $ 6.54 Hypothetical (5% return before expenses) $ 1,000 $ 1,018.55 $ 6.44 CLASS C Actual $ 1,000 $ 1,049.60 $ 6.59 Hypothetical (5% return before expenses) $ 1,000 $ 1,018.50 $ 6.49 CLASS R Actual $ 1,000 $ 1,051.30 $ 5.83 Hypothetical (5% return before expenses) $ 1,000 $ 1,019.25 $ 5.74 ADVISOR CLASS Actual $ 1,000 $ 1,053.40 $ 3.28 Hypothetical (5% return before expenses) $ 1,000 $ 1,021.74 $ 3.23 * Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.79%; B: 1.28%; C: 1.29%; R: 1.14%; and Advisor: 0.64%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. 46 | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN DYNATECH FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 ---------------------------------------------------------------------------------- CLASS A PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 23.20 $ 24.87 $ 32.33 $ 25.80 $ 24.98 $ 22.01 ---------------------------------------------------------------------------------- Income from investment operations (a): Net investment income (loss) (b) ............. (0.06) (0.06) (0.08) (0.08) (0.05) (0.01) Net realized and unrealized gains (losses) ... 3.42 (0.03) (6.67) 6.61 0.87 2.98 ---------------------------------------------------------------------------------- Total from investment operations ................ 3.36 (0.09) (6.75) 6.53 0.82 2.97 ---------------------------------------------------------------------------------- Less distributions from net realized gains ...... -- (1.58) (0.71) -- -- -- --------------------------------------------------------------------------------- Redemption fees (c) ............................. -- -- --(d) --(d) --(d) --(d) ---------------------------------------------------------------------------------- Net asset value, end of period .................. $ 26.56 $ 23.20 $ 24.87 $ 32.33 $ 25.80 $ 24.98 ================================================================================== Total return (e) ................................ 14.48% 2.71% (21.36)% 25.31% 3.28% 13.49% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) .................................... 1.11% 1.16% 0.97% 0.99% 0.97% 1.00% Net investment income (loss) .................... (0.49)% (0.34)% (0.26)% (0.30)% (0.20)% (0.02)% SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $ 571,136 $ 503,472 $ 388,843 $ 553,347 $ 590,633 $ 628,732 Portfolio turnover rate ......................... 19.11% 46.05% 41.01% 18.03% 18.61% 17.26% (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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 47 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 ---------------------------------------------------------------------------------- CLASS B PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 21.60 $ 23.48 $ 30.78 $ 24.75 $ 24.15 $ 21.43 ---------------------------------------------------------------------------------- Income from investment operations (a) : Net investment income (loss) (b) ............. (0.14) (0.19) (0.29) (0.28) (0.23) (0.18) Net realized and unrealized gains (losses) ... 3.18 (0.11) (6.30) 6.31 0.83 2.90 ---------------------------------------------------------------------------------- Total from investment operations ................ 3.04 (0.30) (6.59) 6.03 0.60 2.72 ---------------------------------------------------------------------------------- Less distributions from net realized gains ...... -- (1.58) (0.71) -- -- -- ---------------------------------------------------------------------------------- Redemption fees (c) ............................. -- -- --(d) --(d) --(d) --(d) ---------------------------------------------------------------------------------- Net asset value, end of period .................. $ 24.64 $ 21.60 $ 23.48 $ 30.78 $ 24.75 $ 24.15 ================================================================================= Total return (e) ................................ 14.07% 1.96% (21.96)% 24.36% 2.48% 12.69% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) .................................... 1.83% 1.91% 1.73% 1.75% 1.72% 1.74% Net investment income (loss) .................... (1.21)% (1.09)% (1.02)% (1.06)% (0.95)% (0.76)% SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $ 12,730 $ 13,682 $ 10,704 $ 16,625 $ 18,718 $ 19,497 Portfolio turnover rate ......................... 19.11% 46.05% 41.01% 18.03% 18.61% 17.26% (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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 48 | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 ---------------------------------------------------------------------------------- CLASS C PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 21.34 $ 23.23 $ 30.46 $ 24.50 $ 23.90 $ 21.21 ---------------------------------------------------------------------------------- Income from investment operations (a) : Net investment income (loss) (b) ............. (0.14) (0.19) (0.28) (0.28) (0.23) (0.17) Net realized and unrealized gains (losses) ... 3.15 (0.12) (6.24) 6.24 0.83 2.86 ---------------------------------------------------------------------------------- Total from investment operations ................ 3.01 (0.31) (6.52) 5.96 0.60 2.69 ---------------------------------------------------------------------------------- Less distributions from net realized gains ...... -- (1.58) (0.71) -- -- -- ---------------------------------------------------------------------------------- Redemption fees (c) ............................. -- -- --(d) --(d) --(d) --(d) ---------------------------------------------------------------------------------- Net asset value, end of period .................. $ 24.35 $ 21.34 $ 23.23 $ 30.46 $ 24.50 $ 23.90 ================================================================================== Total return (e) ................................ 14.11% 1.89% (21.93)% 24.33% 2.51% 12.68% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) .................................... 1.86% 1.91% 1.73% 1.74% 1.71% 1.74% Net investment income (loss) .................... (1.24)% (1.09)% (1.02)% (1.05)% (0.94)% (0.76)% SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $ 94,837 $ 83,435 $ 53,289 $ 70,413 $ 69,069 $ 73,587 Portfolio turnover rate ......................... 19.11% 46.05% 41.01% 18.03% 18.61% 17.26% (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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 49 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND SIX MONTHS ENDED PERIOD ENDED MARCH 31, 2010 SEPTEMBER 30, (UNAUDITED) 2009 (a) --------------------------------- CLASS R PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................... $ 23.13 $ 15.66 -------------------------------- Income from investment operations (b) : Net investment income (loss) (c) ..................... (0.09) (0.09) Net realized and unrealized gains (losses) ........... 3.41 7.56 -------------------------------- Total from investment operations ........................ 3.32 7.47 -------------------------------- Net asset value, end of period .......................... $ 26.45 $ 23.13 ================================ Total return (d) ........................................ 14.35% 47.70% RATIOS TO AVERAGE NET ASSETS (e) Expenses (f) ............................................ 1.36% 1.41% Net investment income (loss) ............................ (0.74)% (0.59)% SUPPLEMENTAL DATA Net assets, end of period (000's) ....................... $ 6,733 $ 6,345 Portfolio turnover rate ................................. 19.11% 46.05% (a) For the period December 1, 2008 (effective date) to September 30, 2009. (b) 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. (c) Based on average daily shares outstanding. (d) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (e) Ratios are annualized for periods less than one year. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 50 | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND SIX MONTHS ENDED YEAR ENDED MARCH 31, 2010 SEPTEMBER 30, (UNAUDITED) 2009 2008 (a) -------------------------------------------- ADVISOR CLASS PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................... $ 23.28 $ 24.90 $ 31.40 --------------------------------------------- Income from investment operations (b) : Net investment income (loss) (c) .................... (0.03) (0.02) (0.01) Net realized and unrealized gains (losses) .......... 3.44 (0.02) (6.49) --------------------------------------------- Total from investment operations ....................... 3.41 (0.04) (6.50) --------------------------------------------- Less distributions from net realized gains ............. -- (1.58) -- --------------------------------------------- Redemption fees (d) .................................... -- -- --(e) --------------------------------------------- Net asset value, end of period ......................... $ 26.69 $ 23.28 $ 24.90 ============================================= Total return (f) ....................................... 14.65% 2.92% (20.70)% RATIOS TO AVERAGE NET ASSETS (g) Expenses (h) ........................................... 0.86% 0.91% 0.73% Net investment income (loss) ........................... (0.24)% (0.09)% (0.02)% SUPPLEMENTAL DATA Net assets, end of period (000's) ...................... $ 10,168 $ 8,208 $ 1,938 Portfolio turnover rate ................................ 19.11% 46.05% 41.01% (a) For the period May 15, 2008 (effective date) to September 30, 2008. (b) 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. (c) Based on average daily shares outstanding. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Amount rounds to less than $0.01 per share. (f) Total return is not annualized for periods less than one year. (g) Ratios are annualized for periods less than one year. (h) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 51 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - ----------------------------------------------------------------- ------------- ---------- ------------ COMMON STOCKS 100.0% AEROSPACE & DEFENSE 3.1% The Boeing Co. .............................................. United States 100,000 $ 7,261,000 Precision Castparts Corp. ................................... United States 110,000 13,938,100 ------------ 21,199,100 ------------ AIR FREIGHT & LOGISTICS 1.5% C.H. Robinson Worldwide Inc. ................................ United States 100,000 5,585,000 FedEx Corp. ................................................. United States 55,000 5,137,000 ------------ 10,722,000 ------------ BIOTECHNOLOGY 3.9% (a) Celgene Corp. ............................................... United States 250,000 15,490,000 (a) Gilead Sciences Inc. ........................................ United States 250,000 11,370,000 ------------ 26,860,000 ------------ CAPITAL MARKETS 1.6% (a) Financial Engines Inc. ...................................... United States 50,000 845,000 The Goldman Sachs Group Inc. ................................ United States 60,000 10,237,800 ------------ 11,082,800 ------------ CHEMICALS 2.3% Monsanto Co. ................................................ United States 50,000 3,571,000 Sigma-Aldrich Corp. ......................................... United States 225,000 12,073,500 ------------ 15,644,500 ------------ COMMUNICATIONS EQUIPMENT 4.6% (a) Cisco Systems Inc. .......................................... United States 500,000 13,015,000 (a) F5 Networks Inc. ............................................ United States 30,000 1,845,300 (a) Juniper Networks Inc. ....................................... United States 150,000 4,602,000 QUALCOMM Inc. ............................................... United States 175,000 7,348,250 ZTE Corp., H ................................................ China 850,000 5,150,852 ------------ 31,961,402 ------------ COMPUTERS & PERIPHERALS 8.5% (a) Apple Inc. .................................................. United States 185,000 43,462,050 Hewlett-Packard Co. ......................................... United States 300,000 15,945,000 ------------ 59,407,050 ------------ DIVERSIFIED FINANCIAL SERVICES 0.9% CME Group Inc. .............................................. United States 20,000 6,322,200 ------------ ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS 1.7% (a) BYD Co. Ltd., H ............................................. China 50,000 497,794 (a) Dolby Laboratories Inc., A .................................. United States 190,000 11,147,300 ------------ 11,645,094 ------------ ENERGY EQUIPMENT & SERVICES 5.9% (a) Cameron International Corp. ................................. United States 25,000 1,071,500 (a) FMC Technologies Inc. ....................................... United States 300,000 19,389,000 National Oilwell Varco Inc. ................................. United States 200,000 8,116,000 Schlumberger Ltd. ........................................... United States 200,000 12,692,000 ------------ 41,268,500 ------------ 52 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - ----------------------------------------------------------------- ------------- ---------- ------------ COMMON STOCKS (CONTINUED) HEALTH CARE EQUIPMENT & SUPPLIES 6.2% Alcon Inc. .................................................. Switzerland 70,000 $ 11,309,200 Baxter International Inc. ................................... United States 50,000 2,910,000 (a) Edwards Lifesciences Corp. .................................. United States 100,000 9,888,000 (a) Intuitive Surgical Inc. ..................................... United States 30,000 10,443,900 Stryker Corp. ............................................... United States 150,000 8,583,000 ------------ 43,134,100 ------------ HEALTH CARE PROVIDERS & SERVICES 2.9% (a) Express Scripts Inc. ........................................ United States 150,000 15,264,000 McKesson Corp. .............................................. United States 50,000 3,286,000 (a) VCA Antech Inc. ............................................. United States 50,000 1,401,500 ------------ 19,951,500 ------------ HEALTH CARE TECHNOLOGY 1.8% (a) Cerner Corp. ................................................ United States 150,000 12,759,000 ------------ HOTELS, RESTAURANTS & LEISURE 0.1% (a) Ctrip.com International Ltd., ADR ........................... China 25,000 980,000 ------------ INDUSTRIAL CONGLOMERATES 0.1% General Electric Co. ........................................ United States 50,000 910,000 ------------ INTERNET & CATALOG RETAIL 4.6% (a) Amazon.com Inc. ............................................. United States 125,000 16,966,250 (a) Priceline.com Inc. .......................................... United States 60,000 15,300,000 ------------ 32,266,250 ------------ INTERNET SOFTWARE & SERVICES 9.3% (a) Baidu Inc., ADR ............................................. China 20,000 11,940,000 (a) eBay Inc. ................................................... United States 50,000 1,347,500 (a) Google Inc., A .............................................. United States 50,200 28,463,902 (a) MercadoLibre Inc. ........................................... Argentina 125,000 6,026,250 (a) Quinstreet Inc. ............................................. United States 25,000 425,250 Tencent Holdings Ltd. ....................................... China 600,000 12,032,070 (a) WebMD Health Corp. .......................................... United States 100,000 4,638,000 ------------ 64,872,972 ------------ IT SERVICES 5.1% MasterCard Inc., A .......................................... United States 50,000 12,700,000 Visa Inc., A ................................................ United States 250,000 22,757,500 ------------ 35,457,500 ------------ LIFE SCIENCES TOOLS & SERVICES 2.4% (a) Thermo Fisher Scientific Inc. ............................... United States 125,000 6,430,000 (a) Waters Corp. ................................................ United States 150,000 10,131,000 ------------ 16,561,000 ------------ MACHINERY 1.6% Flowserve Corp. ............................................. United States 100,000 11,027,000 ------------ Semiannual Report | 53 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - ----------------------------------------------------------------- ------------- ---------- ------------ COMMON STOCKS (CONTINUED) OIL, GAS & CONSUMABLE FUELS 1.5% Noble Energy Inc. ........................................... United States 20,000 $ 1,460,000 Petroleo Brasileiro SA, ADR ................................. Brazil 200,000 8,898,000 ------------ 10,358,000 ------------ PHARMACEUTICALS 6.4% Allergan Inc. ............................................... United States 140,000 9,144,800 Johnson & Johnson ........................................... United States 75,000 4,890,000 Roche Holding AG ............................................ Switzerland 50,000 8,111,955 Teva Pharmaceutical Industries Ltd., ADR .................... Israel 350,000 22,078,000 ------------ 44,224,755 ------------ SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 10.9% (a) Aixtron AG .................................................. Germany 35,000 1,253,572 ARM Holdings PLC, ADR ....................................... United Kingdom 800,000 8,552,000 (a) Cree Inc. ................................................... United States 100,000 7,022,000 (a) Hittite Microwave Corp. ..................................... United States 100,000 4,397,000 Intel Corp. ................................................. United States 1,125,000 25,042,500 (a) Lam Research Corp. .......................................... United States 150,000 5,598,000 (a) Maxlinear INC, A ............................................ United States 52,000 923,000 (a) Netlogic Microsystems Inc. .................................. United States 250,000 7,357,500 Power Integrations Inc. ..................................... United States 150,000 6,180,000 (a) Silicon Laboratories Inc. ................................... United States 200,000 9,534,000 ------------ 75,859,572 ------------ SOFTWARE 11.2% (a) Adobe Systems Inc. .......................................... United States 400,000 14,148,000 (a) ANSYS Inc. .................................................. United States 200,000 8,628,000 (a) Check Point Software Technologies Ltd. ...................... Israel 200,000 7,012,000 (a) Concur Technologies Inc. .................................... United States 100,000 4,101,000 FactSet Research Systems Inc. ............................... United States 50,000 3,668,500 (a) Informatica Corp. ........................................... United States 100,000 2,686,000 Microsoft Corp. ............................................. United States 250,000 7,317,500 Oracle Corp. ................................................ United States 250,000 6,422,500 (a) Salesforce.com Inc. ......................................... United States 150,000 11,167,500 (a) Sybase Inc. ................................................. United States 200,000 9,324,000 (a) VMware Inc., A .............................................. United States 65,000 3,464,500 ------------ 77,939,500 ------------ WIRELESS TELECOMMUNICATION SERVICES 1.9% America Movil SAB de CV, L, ADR ............................. Mexico 47,600 2,396,183 (a) American Tower Corp., A ..................................... United States 250,000 10,652,500 ------------ 13,048,683 ------------ TOTAL COMMON STOCKS (COST $364,997,865) 695,462,478 ------------ 54 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------- ------------- ---------- ------------- SHORT TERM INVESTMENTS (COST $996,856) 0.1% MONEY MARKET FUNDS 0.1% (b) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ...... United States 996,856 $ 996,856 ------------- TOTAL INVESTMENTS (COST $365,994,721) 100.1% ..................... 696,459,334 OTHER ASSETS, LESS LIABILITIES (0.1)% ............................ (854,532) ------------- NET ASSETS 100.0% $ 695,604,802 ============= See Abbreviations on page 131. (a) Non-income producing. (b) See Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Semiannual Report | 55 Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN GROWTH FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 -------------------------------------------------------------------------------------- CLASS A PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ... $ 36.48 $ 37.17 $ 46.36 $ 39.10 $ 34.83 $ 30.58 -------------------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b) ............ 0.09 0.29 0.24 0.16 0.12 0.13 Net realized and unrealized gains (losses) ..................... 5.29 (0.67) (9.30) 7.21 4.21 4.20 -------------------------------------------------------------------------------------- Total from investment operations ....... 5.38 (0.38) (9.06) 7.37 4.33 4.33 -------------------------------------------------------------------------------------- Less distributions from net investment income .................... (0.28) (0.31) (0.13) (0.11) (0.06) (0.08) -------------------------------------------------------------------------------------- Redemption fees (c) .................... -- -- --(d) --(d) --(d) --(d) -------------------------------------------------------------------------------------- Net asset value, end of period ......... $ 41.58 $ 36.48 $ 37.17 $ 46.36 $ 39.10 $ 34.83 ====================================================================================== Total return (e) ....................... 14.82% (0.71)% (19.59)% 18.87% 12.46% 14.17% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) ........................... 0.99% 1.00% 0.89% 0.93% 0.91% 0.94% Net investment income .................. 0.49% 0.95% 0.56% 0.37% 0.34% 0.40% SUPPLEMENTAL DATA Net assets, end of period (000's) ...... $ 2,537,815 $2,173,714 $1,708,612 $2,123,419 $1,695,802 $1,567,675 Portfolio turnover rate ................ 2.64% 3.92% 5.64% 0.37% 2.21% 1.16% (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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 56 | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 -------------------------------------------------------------------------------- CLASS B PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................. $ 34.93 $ 35.44 $ 44.42 $ 37.65 $ 33.73 $ 29.77 -------------------------------------------------------------------------------- Income from investment operations (a): Net investment income (loss) (b) ... (0.03) 0.07 (0.08) (0.16) (0.15) (0.11) Net realized and unrealized gains (losses) ................... 5.07 (0.58) (8.90) 6.93 4.07 4.07 -------------------------------------------------------------------------------- Total from investment operations ..... 5.04 (0.51) (8.98) 6.77 3.92 3.96 -------------------------------------------------------------------------------- Less distributions from net investment income .................. (0.03) -- -- -- -- -- -------------------------------------------------------------------------------- Redemption fees (c) .................. -- -- --(d) --(d) --(d) --(d) -------------------------------------------------------------------------------- Net asset value, end of period ....... $ 39.94 $ 34.93 $ 35.44 $ 44.42 $ 37.65 $ 33.73 ================================================================================ Total return (e) ..................... 14.42% (1.44)% (20.22)% 17.98% 11.62% 13.30% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) ......................... 1.73% 1.75% 1.64% 1.69% 1.67% 1.69% Net investment income (loss) ......... (0.25)% 0.20% (0.19)% (0.39)% (0.42)% (0.35)% SUPPLEMENTAL DATA Net assets, end of period (000's) .... $ 75,004 $ 87,790 $ 89,779 $ 138,640 $ 122,871 $ 123,926 Portfolio turnover rate .............. 2.64% 3.92% 5.64% 0.37% 2.21% 1.16% (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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 57 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 ----------------------------------------------------------------------------- CLASS C PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................. $ 34.61 $ 35.14 $ 44.03 $ 37.32 $ 33.43 $ 29.51 ----------------------------------------------------------------------------- Income from investment operations (a): Net investment income (loss) (b) ... (0.05) 0.06 (0.08) (0.16) (0.15) (0.11) Net realized and unrealized gains (losses) ................... 5.02 (0.57) (8.81) 6.87 4.04 4.03 ----------------------------------------------------------------------------- Total from investment operations ..... 4.97 (0.51) (8.89) 6.71 3.89 3.92 ----------------------------------------------------------------------------- Less distributions from net investment income .................. (0.07) (0.02) -- -- -- -- ----------------------------------------------------------------------------- Redemption fees (c) .................. -- -- --(d) --(d) --(d) --(d) ----------------------------------------------------------------------------- Net asset value, end of period ....... $ 39.51 $ 34.61 $ 35.14 $ 44.03 $ 37.32 $ 33.43 ============================================================================= Total return (e) ..................... 14.43% (1.45)% (20.19)% 17.98% 11.60% 13.32% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) ......................... 1.74% 1.75% 1.64% 1.69% 1.66% 1.69% Net investment income (loss) ......... (0.26)% 0.20% (0.19)% (0.39)% (0.41)% (0.35)% SUPPLEMENTAL DATA Net assets, end of period (000's) .... $ 353,659 $315,305 $255,425 $340,671 $273,512 $270,538 Portfolio turnover rate .............. 2.64% 3.92% 5.64% 0.37% 2.21% 1.16% (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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 58 | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 ----------------------------------------------------------------------------- CLASS R PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................... $ 36.37 $ 36.87 $ 45.99 $ 38.80 $ 34.59 $ 30.39 ----------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b) .......... 0.04 0.20 0.14 0.04 0.02 0.05 Net realized and unrealized gains (losses) ................... 5.28 (0.59) (9.23) 7.16 4.19 4.16 ----------------------------------------------------------------------------- Total from investment operations ..... 5.32 (0.39) (9.09) 7.20 4.21 4.21 ----------------------------------------------------------------------------- Less distributions from net investment income .................. (0.23) (0.11) (0.03) (0.01) --(c) (0.01) ----------------------------------------------------------------------------- Redemption fees (d) .................. -- -- --(c) --(c) --(c) --(c) ----------------------------------------------------------------------------- Net asset value, end of period ....... $ 41.46 $ 36.37 $ 36.87 $ 45.99 $ 38.80 $ 34.59 ============================================================================= Total return (e) ..................... 14.70% (0.98)% (19.78)% 18.55% 12.18% 13.87% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) ......................... 1.24% 1.25% 1.14% 1.19% 1.17% 1.19% Net investment income ................ 0.24% 0.70% 0.31% 0.11% 0.08% 0.15% SUPPLEMENTAL DATA Net assets, end of period (000's) .... $ 88,249 $ 65,113 $ 30,175 $ 53,134 $ 37,804 $ 27,818 Portfolio turnover rate .............. 2.64% 3.92% 5.64% 0.37% 2.21% 1.16% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 59 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 ----------------------------------------------------------------------------- ADVISOR CLASS PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................... $ 36.53 $ 37.25 $ 46.45 $ 39.17 $ 34.89 $ 30.63 ----------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b) .......... 0.15 0.36 0.34 0.27 0.22 0.21 Net realized and unrealized gains (losses) ................... 5.28 (0.68) (9.31) 7.21 4.21 4.21 ----------------------------------------------------------------------------- Total from investment operations ..... 5.43 (0.32) (8.97) 7.48 4.43 4.42 ----------------------------------------------------------------------------- Less distributions from net investment income .................. (0.36) (0.40) (0.23) (0.20) (0.15) (0.16) ----------------------------------------------------------------------------- Redemption fees (c) .................. -- -- --(d) --(d) --(d) --(d) ----------------------------------------------------------------------------- Net asset value, end of period ....... $ 41.60 $ 36.53 $ 37.25 $ 46.45 $ 39.17 $ 34.89 ============================================================================= Total return (e) ..................... 14.98% (0.45)% (19.39)% 19.16% 12.73% 14.45% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) ......................... 0.74% 0.75% 0.64% 0.69% 0.67% 0.69% Net investment income ................ 0.74% 1.20% 0.81% 0.61% 0.58% 0.65% SUPPLEMENTAL DATA Net assets, end of period (000's) .... $ 485,715 $430,926 $256,988 $363,221 $274,603 $221,752 Portfolio turnover rate .............. 2.64% 3.92% 5.64% 0.37% 2.21% 1.16% (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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 60 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) FRANKLIN GROWTH FUND SHARES VALUE - -------------------------------------------------- ---------- ------------- COMMON STOCKS 96.8% AUTOMOBILES & COMPONENTS 2.4% (a) Ford Motor Co. ............................... 1,100,000 $ 13,827,000 Harley-Davidson Inc. ......................... 838,096 23,525,355 Johnson Controls Inc. ........................ 1,400,000 46,186,000 Toyota Motor Corp., ADR (Japan) .............. 30,000 2,412,600 ------------- 85,950,955 ------------- BANKS 0.5% Wells Fargo & Co. ............................ 505,600 15,734,272 ------------- CAPITAL GOODS 22.8% 3M Co. ....................................... 855,000 71,452,350 ABB Ltd., ADR (Switzerland) .................. 850,000 18,564,000 The Boeing Co. ............................... 1,045,000 75,877,450 Caterpillar Inc. ............................. 200,000 12,570,000 Danaher Corp. ................................ 275,000 21,975,250 Deere & Co. .................................. 100,000 5,946,000 Emerson Electric Co. ......................... 1,000,000 50,340,000 (a) First Solar Inc. ............................. 50,000 6,132,500 General Dynamics Corp. ....................... 1,000,000 77,200,000 General Electric Co. ......................... 370,000 6,734,000 Illinois Tool Works Inc. ..................... 1,000,000 47,360,000 Ingersoll-Rand PLC. .......................... 1,002,000 34,939,740 Lockheed Martin Corp. ........................ 500,000 41,610,000 Northrop Grumman Corp. ....................... 1,000,000 65,570,000 Pall Corp. ................................... 500,000 20,245,000 Precision Castparts Corp. .................... 240,000 30,410,400 Raytheon Co. ................................. 600,000 34,272,000 Rockwell Collins Inc. ........................ 350,000 21,906,500 (a) SunPower Corp., A ............................ 2,000 37,800 (a) SunPower Corp., B ............................ 48,000 803,520 Textron Inc. ................................. 1,050,000 22,291,500 (a) Thomas & Betts Corp. ......................... 500,000 19,620,000 United Technologies Corp. .................... 850,000 62,568,500 W.W. Grainger Inc. ........................... 550,000 59,466,000 ------------- 807,892,510 ------------- COMMERCIAL & PROFESSIONAL SERVICES 1.7% Avery Dennison Corp. ......................... 462,000 16,821,420 Dun & Bradstreet Corp. ....................... 122,000 9,079,240 Equifax Inc. ................................. 400,000 14,320,000 Robert Half International Inc. ............... 150,000 4,564,500 (a) Stericycle Inc. .............................. 100,000 5,450,000 (a) Verisk Analytics Inc., A ..................... 300,000 8,460,000 ------------- 58,695,160 ------------- CONSUMER DURABLES & APPAREL 1.3% NIKE Inc., B ................................. 75,000 5,512,500 VF Corp. ..................................... 500,000 40,075,000 ------------- 45,587,500 ------------- Semiannual Report | 61 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN GROWTH FUND SHARES VALUE - ---------------------------------------------------- ---------- ------------- COMMON STOCKS (CONTINUED) CONSUMER SERVICES 1.8% (a) Apollo Group Inc., A ........................... 150,000 $ 9,193,500 Carnival Corp. ................................. 1,065,000 41,407,200 (a) Interval Leisure Group Inc. .................... 60,020 873,891 Starwood Hotels & Resorts Worldwide Inc. ....... 250,000 11,660,000 ------------- 63,134,591 ------------- DIVERSIFIED FINANCIALS 1.3% American Express Co. ........................... 242,300 9,997,298 BlackRock Inc. ................................. 100,000 21,776,000 JPMorgan Chase & Co. ........................... 334,300 14,959,925 ------------- 46,733,223 ------------- ENERGY 4.5% BP PLC, ADR (United Kingdom) ................... 350,200 19,985,914 ConocoPhillips ................................. 35,000 1,790,950 Devon Energy Corp. ............................. 290,000 18,684,700 Exxon Mobil Corp. .............................. 70,000 4,688,600 (a) FMC Technologies Inc. .......................... 300,000 19,389,000 Halliburton Co. ................................ 600,000 18,078,000 National Oilwell Varco Inc. .................... 175,000 7,101,500 Occidental Petroleum Corp. ..................... 200,000 16,908,000 Peabody Energy Corp. ........................... 350,000 15,995,000 Royal Dutch Shell PLC, A, ADR (Netherlands) .... 280,000 16,200,800 Schlumberger Ltd. .............................. 309,100 19,615,486 (a) Transocean Ltd. ................................ 15,222 1,314,876 ------------- 159,752,826 ------------- FOOD & STAPLES RETAILING 0.6% CVS Caremark Corp. ............................. 600,000 21,936,000 ------------- FOOD, BEVERAGE & TOBACCO 1.3% Bunge Ltd. ..................................... 211,500 13,034,745 (a) Hansen Natural Corp. ........................... 300,000 13,014,000 PepsiCo Inc. ................................... 300,000 19,848,000 ------------- 45,896,745 ------------- HEALTH CARE EQUIPMENT & SERVICES 5.0% Aetna Inc. ..................................... 400,000 14,044,000 Baxter International Inc. ...................... 400,000 23,280,000 Cardinal Health Inc. ........................... 300,000 10,809,000 (a) CareFusion Corp. ............................... 150,000 3,964,500 Covidien PLC ................................... 350,000 17,598,000 (a) Edwards Lifesciences Corp. ..................... 50,000 4,944,000 (a) Intuitive Surgical Inc. ........................ 34,000 11,836,420 (a) Medco Health Solutions Inc. .................... 96,480 6,228,749 Medtronic Inc. ................................. 60,000 2,701,800 Quest Diagnostics Inc. ......................... 500,000 29,145,000 Teleflex Inc. .................................. 500,000 32,035,000 (a) Varian Medical Systems Inc. .................... 300,000 16,599,000 (a) Zimmer Holdings Inc. ........................... 64,000 3,788,800 ------------- 176,974,269 ------------- 62 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN GROWTH FUND SHARES VALUE - -------------------------------------------------- ---------- ------------- COMMON STOCKS (CONTINUED) HOUSEHOLD & PERSONAL PRODUCTS 0.6% The Procter & Gamble Co. ..................... 335,000 $ 21,195,450 ------------- INSURANCE 1.2% Aflac Inc. ................................... 333,300 18,094,857 (a) Berkshire Hathaway Inc., A ................... 184 22,411,200 ------------- 40,506,057 ------------- MATERIALS 2.9% Air Products and Chemicals Inc. .............. 500,000 36,975,000 Ecolab Inc. .................................. 353,700 15,545,115 Martin Marietta Materials Inc. ............... 90,000 7,519,500 Praxair Inc. ................................. 120,000 9,960,000 Randgold Resources Ltd., ADR (United Kingdom)..................................... 150,000 11,524,500 Sigma-Aldrich Corp. .......................... 400,000 21,464,000 ------------- 102,988,115 ------------- MEDIA 1.7% (a) Live Nation Entertainment Inc. ............... 88,491 1,283,119 The Walt Disney Co. .......................... 1,687,290 58,903,294 ------------- 60,186,413 ------------- PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 13.8% Abbott Laboratories .......................... 400,000 21,072,000 Allergan Inc. ................................ 997,300 65,143,636 (a) Amgen Inc. ................................... 932,000 55,696,320 (a) Biogen Idec Inc. ............................. 400,000 22,944,000 (a) Celgene Corp. ................................ 324,400 20,099,824 (a) Covance Inc. ................................. 200,000 12,278,000 (a) Dionex Corp. ................................. 250,000 18,695,000 Eli Lilly and Co. ............................ 400,000 14,488,000 (a) Gilead Sciences Inc. ......................... 250,000 11,370,000 Johnson & Johnson ............................ 1,181,010 77,001,852 Merck & Co. Inc. ............................. 788,350 29,444,872 (a) Mettler-Toledo International Inc. ............ 50,000 5,460,000 Pfizer Inc. .................................. 2,761,000 47,351,150 Pharmaceutical Product Development Inc. ...... 300,000 7,125,000 Roche Holding AG, ADR (Switzerland) .......... 530,000 21,475,600 (a) Talecris Biotherapeutics Holdings Corp. ...... 460,000 9,163,200 Teva Pharmaceutical Industries Ltd., ADR (Israel) ............................... 275,000 17,347,000 (a) Waters Corp. ................................. 500,000 33,770,000 ------------- 489,925,454 ------------- RETAILING 0.3% Expedia Inc. ................................. 300,100 7,490,496 (a) HSN Inc. ..................................... 60,020 1,766,989 ------------- 9,257,485 ------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.5% Intel Corp. .................................. 500,000 11,130,000 Texas Instruments Inc. ....................... 250,000 6,117,500 ------------- 17,247,500 ------------- Semiannual Report | 63 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN GROWTH FUND SHARES VALUE - -------------------------------------------------- ---------- ------------- COMMON STOCKS (CONTINUED) SOFTWARE & SERVICES 8.0% (a) Adobe Systems Inc. ........................... 527,900 $ 18,671,823 (a) Autodesk Inc. ................................ 800,000 23,536,000 Automatic Data Processing Inc. ............... 700,000 31,129,000 (a) Citrix Systems Inc. .......................... 100,000 4,747,000 (a) Computer Sciences Corp. ...................... 1,000,000 54,490,000 (a) Google Inc., A ............................... 76,300 43,262,863 (a) IAC/InterActiveCorp .......................... 150,050 3,412,137 MasterCard Inc., A ........................... 80,000 20,320,000 Microsoft Corp. .............................. 325,000 9,512,750 Oracle Corp. ................................. 500,000 12,845,000 Paychex Inc. ................................. 425,000 13,047,500 Visa Inc., A ................................. 250,000 22,757,500 (a) Yahoo! Inc. .................................. 1,600,000 26,448,000 ------------- 284,179,573 ------------- TECHNOLOGY HARDWARE & EQUIPMENT 14.6% (a) Agilent Technologies Inc. .................... 1,150,000 39,548,500 (a) Apple Inc. ................................... 811,000 190,528,230 (a) Cisco Systems Inc. ........................... 2,695,000 70,150,850 (a) EMC Corp. .................................... 1,000,000 18,040,000 Hewlett-Packard Co. .......................... 1,156,250 61,454,688 International Business Machines Corp. ........ 580,000 74,385,000 (a) Logitech International SA (Switzerland) ...... 150,000 2,451,000 Molex Inc. ................................... 71,483 1,491,135 Molex Inc., A ................................ 133,100 2,349,215 QUALCOMM Inc. ................................ 660,000 27,713,400 (a) Research In Motion Ltd. (Canada) ............. 400,000 29,580,000 ------------- 517,692,018 ------------- TELECOMMUNICATION SERVICES 1.2% America Movil SAB de CV, L, ADR (Mexico) ..... 259,300 13,053,162 (a) American Tower Corp., A ...................... 715,000 30,466,150 ------------- 43,519,312 ------------- TRANSPORTATION 7.6% (a) Air France-KLM, ADR (France) ................. 600,000 9,390,000 (a) Alaska Air Group Inc. ........................ 600,000 24,738,000 (a) Allegiant Travel Co. ......................... 100,000 5,786,000 Arkansas Best Corp. .......................... 500,000 14,940,000 (a) British Airways PLC, ADR (United Kingdom) .... 600,000 21,990,000 C.H. Robinson Worldwide Inc. ................. 267,300 14,928,705 Canadian National Railway Co. (Canada) ....... 500,000 30,295,000 Canadian Pacific Railway Ltd. (Canada) ....... 500,000 28,120,000 (a) Continental Airlines Inc., B ................. 1,000,000 21,970,000 Expeditors International of Washington Inc. .. 404,200 14,923,064 Forward Air Corp. ............................ 495,333 13,027,258 Heartland Express Inc. ....................... 500,000 8,250,000 (a) Ryanair Holdings PLC, ADR (Ireland) .......... 239,200 6,499,064 64 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN GROWTH FUND SHARES VALUE - ------------------------------------------------------------------------ ------------ -------------- COMMON STOCKS (CONTINUED) TRANSPORTATION (CONTINUED) Southwest Airlines Co. ............................................. 65,200 $ 861,944 Union Pacific Corp. ................................................ 600,000 43,980,000 Werner Enterprises Inc. ............................................ 462,000 10,704,540 -------------- 270,403,575 -------------- UTILITIES 1.2% American Water Works Co. Inc. ...................................... 700,000 15,232,000 FPL Group Inc. ..................................................... 250,000 12,082,500 International Power PLC (United Kingdom) ........................... 3,058,904 14,806,136 -------------- 42,120,636 -------------- TOTAL COMMON STOCKS (COST $1,715,605,439) .......................... 3,427,509,639 -------------- SHORT TERM INVESTMENTS (COST $114,279,732) 3.2% MONEY MARKET FUNDS 3.2% (b) Institutional Fiduciary Trust Money Market Portfolio, 0.00% .......................................... 114,279,732 114,279,732 -------------- TOTAL INVESTMENTS (COST $1,829,885,171) 100.0%...................... 3,541,789,371 OTHER ASSETS, LESS LIABILITIES (0.0)% (c) .......................... (1,348,055) -------------- NET ASSETS 100.0% .................................................. $3,540,441,316 ============== See Abbreviations on page 131. (a) Non-income producing. (b) See Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (c) Rounds to less than 0.1% of net assets. The accompanying notes are an integral part of these financial statements. Semiannual Report | 65 Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN INCOME FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 ----------------------------------------------------------------------------------------------------- CLASS A PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........ $ 1.99 $ 1.98 $ 2.74 $ 2.57 $ 2.50 $ 2.42 ------------------------------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b)... 0.07 0.13 0.16 0.14 0.14 0.14 Net realized and unrealized gains (losses) ................. 0.11 0.04 (0.71) 0.21 0.09 0.10 ------------------------------------------------------------------------------------------------- Total from investment operations ................. 0.18 0.17 (0.55) 0.35 0.23 0.24 ------------------------------------------------------------------------------------------------- Less distributions from: Net investment income ...... (0.07) (0.16) (0.15) (0.14) (0.15) (0.15) Net realized gains ......... -- --(c) (0.06) (0.04) (0.01) (0.01) ------------------------------------------------------------------------------------------------- Total distributions .......... (0.07) (0.16) (0.21) (0.18) (0.16) (0.16) ------------------------------------------------------------------------------------------------- Redemption fees (d) .......... -- -- --(c) --(c) --(c) --(c) ------------------------------------------------------------------------------------------------- Net asset value, end of period ..................... $ 2.10 $ 1.99 $ 1.98 $ 2.74 $ 2.57 $ 2.50 ================================================================================================= Total return (e) ............. 9.47% 10.56% (21.36)% 14.14% 9.73% 10.45% RATIOS TO AVERAGE NET ASSETS (f) Expenses ..................... 0.65%(g) 0.68%(g) 0.62%(g) 0.63%(g) 0.64%(h) 0.65%(h) Net investment income ........ 7.18% 7.93% 6.44% 5.31% 5.61% 5.54% SUPPLEMENTAL DATA Net assets, end of period (000's) ................... $ 30,823,642 $27,773,006 $26,892,973 $35,476,603 $26,641,398 $21,934,575 Portfolio turnover rate ...... 23.03% 51.36% 39.92% 25.45% 28.35% 28.51% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 66 | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 ------------------------------------------------------------------------------------------- CLASS B PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ....... $ 1.98 $ 1.97 $ 2.73 $ 2.56 $ 2.49 $ 2.41 ------------------------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b) .............. 0.06 0.12 0.14 0.12 0.12 0.11 Net realized and unrealized gains (losses) ................ 0.12 0.04 (0.71) 0.21 0.08 0.11 ------------------------------------------------------------------------------------------- Total from investment operations ................ 0.18 0.16 (0.57) 0.33 0.20 0.22 ------------------------------------------------------------------------------------------- Less distributions from: Net investment income ..... (0.07) (0.15) (0.13) (0.12) (0.12) (0.13) Net realized gains ........ -- --(c) (0.06) (0.04) (0.01) (0.01) ------------------------------------------------------------------------------------------- Total distributions ......... (0.07) (0.15) (0.19) (0.16) (0.13) (0.14) ------------------------------------------------------------------------------------------- Redemption fees (d) ......... -- -- --(c) --(c) --(c) --(c) ------------------------------------------------------------------------------------------- Net asset value, end of period ................. $ 2.09 $ 1.98 $ 1.97 $ 2.73 $ 2.56 $ 2.49 =========================================================================================== Total return (e) ............ 9.04% 9.70% (22.13)% 13.23% 8.83% 9.57% RATIOS TO AVERAGE NET ASSETS (f) Expenses .................... 1.49%(g) 1.53%(g) 1.47%(g) 1.48%(g) 1.49%(h) 1.50%(h) Net investment income ....... 6.34% 7.08% 5.59% 4.46% 4.76% 4.69% SUPPLEMENTAL DATA Net assets, end of period (000's) ............ $ 1,894,594 $2,051,280 $2,428,765 $3,745,636 $3,743,374 $3,922,396 Portfolio turnover rate ..... 23.03% 51.36% 39.92% 25.45% 28.35% 28.51% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 67 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 ------------------------------------------------------------------------------------------- CLASS B1 PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ....... $ 1.99 $ 1.98 $ 2.74 $ 2.57 $ 2.50 $ 2.42 ------------------------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b) .............. 0.07 0.13 0.15 0.13 0.13 0.12 Net realized and unrealized gains (losses) ................ 0.11 0.03 (0.71) 0.21 0.08 0.11 ------------------------------------------------------------------------------------------- Total from investment operations ................ 0.18 0.16 (0.56) 0.34 0.21 0.23 ------------------------------------------------------------------------------------------- Less distributions from: Net investment income ..... (0.07) (0.15) (0.14) (0.13) (0.13) (0.14) Net realized gains ........ -- --(c) (0.06) (0.04) (0.01) (0.01) ------------------------------------------------------------------------------------------- Total distributions ......... (0.07) (0.15) (0.20) (0.30) (0.14) (0.15) ------------------------------------------------------------------------------------------- Redemption fees (d) ......... -- -- --(c) --(c) --(c) --(c) ------------------------------------------------------------------------------------------- Net asset value, end of period ................. $ 2.10 $ 1.99 $ 1.98 $ 2.74 $ 2.57 $ 2.50 =========================================================================================== Total return (e) ............ 9.11% 10.03% (21.77)% 13.57% 9.17% 9.90% RATIOS TO AVERAGE NET ASSETS (f) Expenses .................... 1.14%(g) 1.17%(g) 1.12%(g) 1.13%(g) 1.14%(h) 1.15%(h) Net investment income ....... 6.69% 7.44% 5.94% 4.81% 5.11% 5.04% SUPPLEMENTAL DATA Net assets, end of period (000's) ............ $ 32,103 $ 68,825 $ 224,713 $ 397,224 $ 459,302 $ 493,063 Portfolio turnover rate ..... 23.03% 51.36% 39.92% 25.45% 28.35% 28.51% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 68 | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 --------------------------------------------------------------------------------------------------- CLASS C PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .............. $ 2.00 $ 1.99 $ 2.76 $ 2.59 $ 2.51 $ 2.43 --------------------------------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b) .......... 0.07 0.13 0.15 0.13 0.13 0.13 Net realized and unrealized gains (losses) ............ 0.12 0.03 (0.72) 0.21 0.09 0.10 --------------------------------------------------------------------------------------------------- Total from investment operations ............. 0.19 0.16 (0.57) 0.34 0.22 0.23 --------------------------------------------------------------------------------------------------- Less distributions from: Net investment income .. (0.07) (0.15) (0.14) (0.13) (0.13) (0.14) Net realized gains ..... -- --(c) (0.06) (0.04) (0.01) (0.01) --------------------------------------------------------------------------------------------------- Total distributions ....... (0.07) (0.15) (0.20) (0.17) (0.14) (0.15) --------------------------------------------------------------------------------------------------- Redemption fees (d) ....... -- -- --(c) --(c) --(c) --(c) --------------------------------------------------------------------------------------------------- Net asset value, end of period ................. $ 2.12 $ 2.00 $ 1.99 $ 2.76 $ 2.59 $ 2.51 =================================================================================================== Total return (e) .......... 9.64% 9.93% (21.98)% 13.47% 9.56% 9.84% RATIOS TO AVERAGE NET ASSETS (f) Expenses (f) .............. 1.15%(g) 1.18%(g) 1.12%(g) 1.13%(g) 1.14%(h) 1.15%(h) Net investment income ..... 6.68% 7.43% 5.94% 4.81% 5.11% 5.04% SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $ 14,717,275 $13,054,203 $12,443,143 $16,203,796 $12,138,969 $10,113,365 Portfolio turnover rate ... 23.03% 51.36% 39.92% 25.45% 28.35% 28.51% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 69 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 --------------------------------------------------------------------------------------------------- CLASS R PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .............. $ 1.96 $ 1.95 $ 2.71 $ 2.55 $ 2.48 $ 2.40 --------------------------------------------------------------------------------------------------- Income from investment operations (a) : Net investment income (b) .......... 0.07 0.13 0.15 0.13 0.13 0.13 Net realized and unrealized gains (losses) ............ 0.11 0.03 (0.71) 0.20 0.09 0.10 --------------------------------------------------------------------------------------------------- Total from investment operations ............. 0.18 0.16 (0.56) 0.33 0.22 0.23 --------------------------------------------------------------------------------------------------- Less distributions from: Net investment income .. (0.07) (0.15) (0.14) (0.13) (0.14) (0.14) Net realized gains ..... -- --(c) (0.06) (0.04) (0.01) (0.01) --------------------------------------------------------------------------------------------------- Total distributions ....... (0.07) (0.15) (0.20) (0.17) (0.15) (0.15) --------------------------------------------------------------------------------------------------- Redemption fees (d) ....... -- -- --(c) --(c) --(c) --(c) --------------------------------------------------------------------------------------------------- Net asset value, end of period .............. $ 2.07 $ 1.96 $ 1.95 $ 2.71 $ 2.55 $ 2.48 =================================================================================================== Total return (e) .......... 9.40% 10.31% (21.91)% 13.47% 9.43% 10.15% RATIOS TO AVERAGE NET ASSETS (f) Expenses .................. 1.00%(g) 1.03%(g) 0.97%(g) 0.98%(g) 0.99%(h) 1.00%(h) Net investment income ..... 6.83% 7.58% 6.09% 4.96% 5.26% 5.19% SUPPLEMENTAL DATA Net assets, end of period (000's) ......... $ 356,917 $ 315,298 $ 267,956 $ 286,670 $ 183,609 $ 122,222 Portfolio turnover rate ... 23.03% 51.36% 39.92% 25.45% 28.35% 28.51% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 70 | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 --------------------------------------------------------------------------------------------------- ADVISOR CLASS PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............... $ 1.98 $ 1.97 $ 2.73 $ 2.56 $ 2.49 $ 2.41 --------------------------------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b) ........... 0.07 0.14 0.16 0.15 0.14 0.14 Net realized and unrealized gains (losses) ............. 0.12 0.03 (0.70) 0.21 0.09 0.11 --------------------------------------------------------------------------------------------------- Total from investment operations .............. 0.19 0.17 (0.54) 0.36 0.23 0.25 --------------------------------------------------------------------------------------------------- Less distributions from: Net investment income ... (0.08) (0.16) (0.16) (0.15) (0.15) (0.16) Net realized gains ...... -- --(c) (0.06) (0.04) (0.01) (0.01) --------------------------------------------------------------------------------------------------- Total distributions ........ (0.08) (0.16) (0.22) (0.19) (0.16) (0.17) --------------------------------------------------------------------------------------------------- Redemption fees (d) ........ -- -- --(c) --(c) --(c) --(c) --------------------------------------------------------------------------------------------------- Net asset value, end of period .................. $ 2.09 $ 1.98 $ 1.97 $ 2.73 $ 2.56 $ 2.49 =================================================================================================== Total return (e) ........... 9.60% 10.79% (21.33)% 14.36% 9.94% 10.65% RATIOS TO AVERAGE NET ASSETS (f) Expenses ................... 0.50%(g) 0.53%(g) 0.47%(g) 0.48%(g) 0.49%(h) 0.50%(h) Net investment income ...... 7.33% 8.08% 6.59% 5.46% 5.76% 5.69% SUPPLEMENTAL DATA Net assets, end of period (000's) ................. $ 4,434,847 $ 4,183,925 $ 4,259,806 $ 6,195,966 $ 3,786,643 $ 2,280,318 Portfolio turnover rate .... 23.03% 51.36% 39.92% 25.45% 28.35% 28.51% (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 71 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - ------------------------------------------------------------------------- -------------- --------------- --------------- COMMON STOCKS AND OTHER EQUITY INTERESTS 28.1% CONSUMER DISCRETIONARY 1.9% (a) Charter Communications Inc. ................................. United States 11,871,333 $ 409,560,988 (a) Charter Communications Inc., A .............................. United States 4,084,845 140,927,153 (a) Charter Communications Inc., wts., 11/30/14 ................. United States 2,112,650 11,725,208 (a),(b),(c) Dex One Corp. ............................................... United States 10,242,757 285,977,775 (a) SuperMedia Inc. ............................................. United States 127,517 5,215,445 (a) SuperMedia Inc., Litigation Trust ........................... United States 30,326,101 341,169 Target Corp. ................................................ United States 2,500,000 131,500,000 --------------- 985,247,738 --------------- CONSUMER STAPLES 0.6% Diageo PLC .................................................. United Kingdom 10,000,000 167,923,971 PepsiCo Inc. ................................................ United States 2,500,000 165,400,000 --------------- 333,323,971 --------------- ENERGY 4.8% (a),(b) Callon Petroleum Co. ........................................ United States 4,181,258 22,411,543 (b) Canadian Oil Sands Trust .................................... Canada 26,000,000 779,807,929 ConocoPhillips .............................................. United States 11,200,000 573,104,000 Exxon Mobil Corp. ........................................... United States 13,000,000 870,740,000 Spectra Energy Corp. ........................................ United States 11,500,000 259,095,000 --------------- 2,505,158,472 --------------- FINANCIALS 4.7% Bank of America Corp. ....................................... United States 41,071,000 733,117,350 Barclays PLC ................................................ United Kingdom 15,000,000 82,056,519 (a) Citigroup Inc. .............................................. United States 30,000,000 121,500,000 (b) Colony Financial Inc. ....................................... United States 1,250,000 25,000,000 HSBC Holdings PLC ........................................... United Kingdom 35,000,000 355,031,661 (a),(b) iStar Financial Inc. ........................................ United States 5,213,500 23,929,965 JPMorgan Chase & Co. ........................................ United States 10,250,000 458,687,500 Wells Fargo & Co. ........................................... United States 21,575,000 671,414,000 --------------- 2,470,736,995 --------------- HEALTH CARE 2.3% Abbott Laboratories ......................................... United States 739,800 38,972,664 Johnson & Johnson ........................................... United States 5,000,000 326,000,000 Merck & Co. Inc. ............................................ United States 23,000,000 859,050,000 --------------- 1,224,022,664 --------------- INDUSTRIALS 0.0% (d) (a) Nortek Inc. ................................................. United States 40,000 1,620,000 --------------- MATERIALS 0.3% Nucor Corp. ................................................. United States 3,000,000 136,140,000 --------------- TELECOMMUNICATION SERVICES 2.2% AT&T Inc. ................................................... United States 18,250,000 471,580,000 Verizon Communications Inc. ................................. United States 9,000,000 279,180,000 Vodafone Group PLC .......................................... United Kingdom 175,000,000 404,000,628 --------------- 1,154,760,628 --------------- 72 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - ------------------------------------------------------------------------- ------------- --------------- --------------- COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) UTILITIES 11.3% AGL Resources Inc. .......................................... United States 3,000,000 $ 115,950,000 Alliant Energy Corp. ........................................ United States 1,000,000 33,260,000 Ameren Corp. ................................................ United States 8,250,000 215,160,000 American Electric Power Co. Inc. ............................ United States 10,000,000 341,800,000 American Water Works Co. Inc. ............................... United States 1,388,400 30,211,584 (a),(e),(f) Calpine Corp., Contingent Distribution ...................... United States 125,000,000 -- CenterPoint Energy Inc. ..................................... United States 6,000,000 86,160,000 Consolidated Edison Inc. .................................... United States 5,300,000 236,062,000 Dominion Resources Inc. ..................................... United States 10,500,000 431,655,000 DTE Energy Co. .............................................. United States 4,250,000 189,550,000 Duke Energy Corp. ........................................... United States 34,000,000 554,880,000 FirstEnergy Corp. ........................................... United States 2,800,000 109,452,000 FPL Group Inc. .............................................. United States 7,375,000 356,433,750 NiSource Inc. ............................................... United States 2,800,000 44,240,000 PG&E Corp. .................................................. United States 11,500,000 487,830,000 Pinnacle West Capital Corp. ................................. United States 4,500,000 169,785,000 Portland General Electric Co. ............................... United States 2,400,000 46,344,000 PPL Corp. ................................................... United States 2,000,000 55,420,000 Progress Energy Inc. ........................................ United States 9,400,000 369,984,000 Public Service Enterprise Group Inc. ........................ United States 15,000,000 442,800,000 Sempra Energy ............................................... United States 6,500,000 324,350,000 The Southern Co. ............................................ United States 21,000,000 696,360,000 TECO Energy Inc. ............................................ United States 10,000,000 158,900,000 Xcel Energy Inc. ............................................ United States 18,500,000 392,200,000 ---------------- 5,888,787,334 ---------------- TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS (COST $13,789,032,748) ................................... 14,699,797,802 ---------------- CONVERTIBLE PREFERRED STOCKS 3.1% CONSUMER DISCRETIONARY 0.2% (a) General Motors Corp., 6.25%, cvt. pfd., C ................... United States 11,000,000 95,148,900 ---------------- FINANCIALS 2.3% Bank of America Corp., 7.25%, cvt. pfd., L .................. United States 600,408 585,397,800 (a) Fannie Mae, 5.375%, cvt. pfd. ............................... United States 4,700 16,215,000 (a) Fannie Mae, 8.75%, cvt. pfd. ................................ United States 3,239,000 5,263,375 (a) Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A .............. United States 3,000,000 54,300,000 (g) Forest City Enterprises Inc., 7.00%, cvt. pfd., 144A ........ United States 1,000,000 56,180,000 (a) Lehman Brothers Holdings Inc., 7.25%, cvt. pfd., P .......... United States 1,000,650 2,491,619 (a) Lehman Brothers Holdings Inc., 8.75%, cvt. pfd., Q .......... United States 550,000 1,210,000 Wells Fargo & Co., 7.50%, cvt. pfd., A ...................... United States 500,000 488,500,000 ---------------- 1,209,557,794 ---------------- HEALTH CARE 0.5% Tenet Healthcare Corp., 7.00%, cvt. pfd. .................... United States 250,000 258,137,500 ---------------- UTILITIES 0.1% FPL Group Inc., 8.375%, cvt. pfd. ........................... United States 900,000 45,634,500 ---------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $3,671,187,627) .................................... 1,608,478,694 ---------------- Semiannual Report | 73 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - ---------------------------------------------------------------------------------- ------------- --------------- ------------- (h) EQUITY-LINKED SECURITIES 5.6% CONSUMER DISCRETIONARY 0.2% (g) JPMorgan Chase into Comcast Corp., 8.00%, 144A ........................... United States 5,000,000 $ 95,006,500 ------------- ENERGY 1.4% (g) Barclays Bank PLC into Weatherford International Ltd., 12.00%, 144A ...... United States 7,350,000 129,617,250 Credit Suisse into Halliburtun Co., 12.00% ............................... United States 4,000,000 94,922,000 Credit Suisse into Weatherford International Ltd., 11.00% ................ United States 6,315,000 105,749,727 (g) Deutsche Bank AG into Chesapeake Energy Corp., 12.00%, 144A .............. United States 6,200,000 157,572,380 (g) The Goldman Sachs Group Inc. into Devon Energy Corp., 10.55%, 144A ....... United States 1,600,000 96,456,320 (g) The Goldman Sachs Group Inc. into XTO Energy Inc., 9.00%, 144A ........... United States 3,600,000 166,793,760 ------------- 751,111,437 ------------- FINANCIALS 1.1% Credit Suisse into Bank of America Corp., 10.00% ......................... United States 6,310,000 115,984,110 Credit Suisse into Bank of America Corp., 11.10% ......................... United States 8,850,000 161,357,625 (g) The Goldman Sachs Group Inc. into Citigroup Inc., 10.00%, 144A ........... United States 22,000,000 90,257,860 (g),(i) Deutsche Bank AG into Citigroup Inc., 10.00%, 144A ....................... United States 24,500,000 100,450,000 (g) Morgan Stanley into Wells Fargo & Co., 8.00%, 144A ....................... United States 3,000,000 90,260,100 ------------- 558,309,695 ------------- INDUSTRIALS 0.2% (g) JPMorgan Chase & Co. into First Solar Inc., 10.00%, 144A ................. United States 687,800 84,776,165 ------------- INFORMATION TECHNOLOGY 1.1% (g) Barclays Bank PLC into Intel Corp., 8.00%, 144A .......................... United States 9,653,000 216,215,616 (g) The Goldman Sachs Group Inc. into Intel Corp., 10.00%, 144A .............. United States 7,500,000 144,037,500 (g) The Goldman Sachs Group Inc. into Xerox Corp., 12.00%, 144A .............. United States 13,400,000 123,417,752 (g) Morgan Stanley into Xilinx Inc., 8.00%, 144A ............................. United States 4,000,000 101,810,400 ------------- 585,481,268 ------------- MATERIALS 1.3% (g) Barclays Capital PLC into Newmont Mining Corp., 8.50%, 144A .............. United States 3,044,000 158,697,418 (g) Deutsche Bank AG into Newmont Mining Corp., 10.00%, 144A ................. United States 2,108,000 107,109,588 (g) The Goldman Sachs Group Inc. into Barrick Gold Corp., 12.5%, 144A ........ United States 5,000,000 194,020,000 (g) JPMorgan Chase into AngloGold Ashanti Ltd., 10.00%, 144A ................. United States 2,683,000 103,014,053 (g) Morgan Stanley into Freeport-Mcmoran Copper & Gold Inc., 9.00%, 144A ..... United States 1,250,000 103,277,375 ------------- 666,118,434 ------------- 74 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - ----------------------------------------------------------------- -------------- --------------- ---------------- (h) EQUITY-LINKED SECURITIES (CONTINUED) UTILITIES 0.3% (g) Barclays Capital into Calpine Corp., 8.00%, 144A ........ United States 7,500,000 $ 87,687,750 Credit Suisse into Calpine Corp., 8.00% ................. United States 8,000,000 97,941,600 ---------------- 185,629,350 ---------------- TOTAL EQUITY-LINKED SECURITIES (COST $2,769,186,793) .................................. 2,926,432,849 ---------------- PREFERRED STOCKS 0.5% FINANCIALS 0.5% (a) Fannie Mae, 6.75%, pfd. ................................. United States 3,000,000 2,790,000 (a) Fannie Mae, 7.625%, pfd., R ............................. United States 2,399,400 2,639,340 (a) Fannie Mae, 8.25%, pfd. ................................. United States 11,784,000 14,965,680 (a) Freddie Mac, 8.375%, pfd., Z ............................ United States 16,608,000 21,092,160 (g) GMAC Inc., 7.00%, pfd., 144A ............................ United States 267,636 204,022,268 ---------------- TOTAL PREFERRED STOCKS (COST $ 928,695,780) ............. 245,509,448 ---------------- PRINCIPAL AMOUNT(j) ------------------- (K),(L) SENIOR FLOATING RATE INTERESTS 5.3% CONSUMER DISCRETIONARY 1.3% Clear Channel Communications Inc., Term Loan B, 3.898%, 11/13/15 ............................................... United States 537,786,283 438,715,832 (b) Dex Media West LLC, Term Loan B, 7.50%, 10/24/14 ........ United States 7,235,086 6,919,680 Harrah's Operating Co. Inc., Incremental Term Loan, 9.50%, 10/01/16 ........................................ United States 100,000,000 103,659,700 Jarden Corp., Term Loan B-3, 2.79%, 1/24/12 ............. United States 61,651,580 61,747,633 (b) R.H. Donnelley Inc., Term Loan B, 8.50%, 10/24/14 ....... United States 40,369,177 39,632,439 SuperMedia Inc., Exit Term Loan, 11.00%, 12/31/15 ....... United States 27,503,638 25,879,218 (i) Univision Communications Inc., Initial Term Loan, 2.54%, 9/29/14 ......................................... United States 20,000,000 17,864,940 ---------------- 694,419,442 ---------------- HEALTH CARE 0.1% HCA Inc., Term Loan A-1, 1.54%, 11/19/12 ................ United States 36,898,997 35,932,907 ---------------- INDUSTRIALS 0.8% Allison Transmission Inc., Term Loan B, 2.98% - 3.01%, 8/07/14 ................................................ United States 172,716,862 164,697,790 Altegrity Inc., Term Loan B, 3.271%, 2/21/15 ............ United States 97,268,749 90,095,179 Ceva Group PLC, Dollar Pre-Refunded L/C Commitment, 3.29%, 8/01/12 .... United States 13,684,211 12,486,842 EGL Term Loans, 3.24%, 8/01/12 ........................ United States 113,117,105 102,512,377 Diversey Inc., Tranche B Dollar Term Loan, 5.50%, 11/24/15 ............................................... United States 40,000,000 40,525,000 ---------------- 410,317,188 ---------------- INFORMATION TECHNOLOGY 1.8% First Data Corp., Term Loan B-2, 3.032% - 3.04%, 9/24/14 ................ United States 243,750,000 216,203,569 Term Loan B-3, 3.032% - 3.04%, 9/24/14 ................ United States 326,771,616 289,192,880 Semiannual Report | 75 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(J) VALUE - ------------------------------------------------------------------------- ------------- ------------------- ---------------- (k),(l) SENIOR FLOATING RATE INTERESTS (CONTINUED) INFORMATION TECHNOLOGY (CONTINUED) Freescale Semiconductor Inc., Incremental Term Loan, 12.50%, 12/15/14 .................... United States 353,531,239 $ 365,021,005 Term Loan, 4.479%, 12/01/16 ................................ United States 62,244,671 58,899,020 ---------------- 929,316,474 ---------------- MATERIALS 0.2% Novelis Corp., U.S. Term Loan, 2.25% - 2.30%, 7/07/14 ....... United States 97,950,214 95,064,209 ---------------- UTILITIES 1.1% Texas Competitive Electric Holdings Co. LLC, Delayed Draw, Term Loan, 3.729% - 3.79%, 10/10/14 .......... United States 209,737,500 168,911,466 Term Loan B-1, 3.729% - 3.79%, 10/10/14 .................... United States 171,676,825 141,365,221 Term Loan B-2, 3.729% - 3.79%, 10/10/14 .................... United States 100,428,557 82,721,094 Term Loan B-3, 3.729% - 3.79%, 10/10/14 .................... United States 268,812,500 218,949,932 ---------------- 611,947,713 ---------------- TOTAL SENIOR FLOATING RATE INTERESTS (COST $3,311,810,124) 2,776,997,933 ---------------- CORPORATE BONDS 54.0% CONSUMER DISCRETIONARY 12.5% Cablevision Systems Corp., senior note, (g) 144A, 8.625%, 9/15/17 .................................. United States 100,000,000 106,250,000 B, 8.00%, 4/15/12 ...................................... United States 450,000,000 483,187,500 (g) CCH II LLC/CCH II Capital Corp., senior note, 144A, 13.50%, 11/30/16 ................................................... United States 227,347,163 272,248,228 CCO Holdings LLC, senior note, 8.75%, 11/15/13 .............. United States 80,000,000 82,400,000 (g) Cequel Communications Holdings I LLC, senior note, 144A, 8.625%, 11/15/17 ........................................... United States 65,000,000 67,112,500 (g) Clear Channel Worldwide Holdings Inc., senior note, A, 144A, 9.25%, 12/15/17 ................................ United States 28,700,000 29,955,625 B, 144A, 9.25%, 12/15/17 ................................ United States 116,050,000 121,852,500 (g) CSC Holdings Inc., senior note, 144A, 8.50%, 4/15/14 ..... United States 67,300,000 72,011,000 (b),(c),(m) Dex One Corp., senior sub. note, PIK, 14.00%, 1/29/17 .................................................... United States 81,136,340 83,164,748 DISH DBS Corp., senior note, 7.875%, 9/01/19 ................ United States 140,000,000 146,300,000 Dollar General Corp., senior note, 10.625%, 7/15/15 ........................... United States 306,698,000 338,134,545 (m) senior sub. note, PIK, 11.875%, 7/15/17 ................. United States 55,000,000 64,350,000 EchoStar DBS Corp., senior note, 7.75%, 5/31/15 .......................................... United States 130,000,000 136,500,000 7.125%, 2/01/16 ......................................... United States 245,000,000 250,818,750 Ford Motor Credit Co. LLC, 7.375%, 2/01/11 ......................................... United States 200,000,000 206,000,000 8.00%, 6/01/14 .......................................... United States 400,000,000 421,473,200 senior note, 9.875%, 8/10/11 ............................ United States 75,000,000 79,568,850 senior note, 7.25%, 10/25/11 ............................ United States 185,000,000 191,339,765 senior note, 7.50%, 8/01/12 ............................. United States 395,000,000 409,231,455 senior note, 7.00%, 10/01/13 ............................ United States 25,000,000 25,888,275 senior note, 8.70%, 10/01/14 ............................ United States 20,000,000 21,650,000 76 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(j) VALUE - ------------------------------------------------------------------- -------------- ------------------- -------------- CORPORATE BONDS (CONTINUED) CONSUMER DISCRETIONARY (CONTINUED) Ford Motor Credit Co. LLC, (continued) senior note, 12.00%, 5/15/15 ............................ United States 120,000,000 $ 143,497,560 senior note, 8.125%, 1/15/20 ............................ United States 47,700,000 50,120,537 (k) senior note, FRN, 5.507%, 6/15/11 ....................... United States 190,000,000 193,127,254 (k) senior note, FRN, 3.001%, 1/13/12 ....................... United States 243,000,000 235,996,300 (n) General Motors Corp., senior deb., 8.375%, 7/15/33 ........... United States 510,000,000 193,800,000 Harrah's Operating Co. Inc., senior secured note, 11.25%, 6/01/17 ..................................................... United States 150,000,000 162,375,000 Host Hotels & Resorts LP, senior note, (g) 144A, 9.00%, 5/15/17 .................................... United States 125,750,000 136,438,750 K, 7.125%, 11/01/13 ..................................... United States 85,500,000 87,423,750 O, 6.375%, 3/15/15 ...................................... United States 240,000,000 239,400,000 Q, 6.75%, 6/01/16 ....................................... United States 190,000,000 191,425,000 S, 6.875%, 11/01/14 ..................................... United States 110,000,000 111,650,000 Jarden Corp., senior note, 8.00%, 5/01/16 .................... United States 10,600,000 11,156,500 KB Home, senior note, 5.75%, 2/01/14 .......................................... United States 75,000,000 73,125,000 6.25%, 6/15/15 .......................................... United States 90,000,000 86,850,000 9.10%, 9/15/17 .......................................... United States 49,000,000 51,940,000 7.25%, 6/15/18 .......................................... United States 70,500,000 67,856,250 Limited Brands Inc., senior note, 8.50%, 6/15/19 ............. United States 21,400,000 23,968,000 MGM MIRAGE, senior note, 8.50%, 9/15/10 ............................. United States 40,000,000 40,450,000 senior note, 6.75%, 4/01/13 ............................. United States 70,000,000 63,700,000 (g) senior note, 144A, 11.375%, 3/01/18 ..................... United States 25,000,000 24,250,000 (g) senior secured note, 144A, 9.00%, 3/15/20 ............... United States 35,375,000 36,613,125 Michaels Stores Inc., senior note, 10.00%, 11/01/14 .......... United States 48,235,000 51,129,100 (g) Univision Communications Inc., (m) senior note, 144A, PIK, 10.50%, 3/15/15 ................. United States 293,555,406 254,659,315 senior secured note, 144A, 12.00%, 7/01/14 .............. United States 26,500,000 29,150,000 (g) UPC Germany GmbH, ............................................ senior secured bond, 144A, 8.125%, 12/01/17 ............. Germany 52,700,000 54,676,250 senior secured note, 144A, 8.125%, 12/01/17 ............. Germany 43,900,000 EUR 61,683,535 senior sub. note, 144A, 9.625%, 12/01/19 ................ Germany 23,100,000 EUR 33,081,808 (g) Virgin Media Secured Finance, senior secured note, 144A, ..... 7.00%, 1/15/18 ............................................. United States 70,000,000 GBP 108,673,698 Visant Holding Corp., senior note, 8.75%, 12/01/13 ........... United States 50,000,000 51,500,000 (g) WMG Acquisition Corp., senior secured note, 144A, 9.50%, 6/15/16 .................................................... United States 7,700,000 8,267,875 Wyndham Worldwide Corp., senior note, 9.875%, 5/01/14 ......................................... United States 25,000,000 28,416,425 6.00%, 12/01/16 ......................................... United States 21,727,000 21,541,191 -------------- 6,537,379,164 -------------- CONSUMER STAPLES 0.5% (g) JBS USA LLC, senior note, 144A, 11.625%, 11.625%, 5/01/14 .................................................... United States 134,500,000 154,002,500 SUPERVALU Inc., senior note, 8.00%, 5/01/16 .................. United States 108,500,000 110,398,750 -------------- 264,401,250 -------------- Semiannual Report | 77 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(j) VALUE - --------------------------------------------------------------------- ------------- ------------------- -------------- CORPORATE BONDS (CONTINUED) ENERGY 10.0% Alon Refining Krotz Springs Inc., senior secured note, 13.50%, 10/15/14 ......................................... United States 30,000,000 $ 29,100,000 (g) Antero Resources Finance, senior note, 144A, 9.375%, 12/01/17 ................................................. United States 106,200,000 109,917,000 Bill Barrett Corp., senior note, 9.875%, 7/17/16 ............ United States 8,800,000 9,526,000 (b) Callon Petroleum Co., senior secured note, 13.00%, 9/15/16 ............................................... United States 83,625,000 71,499,375 Chesapeake Energy Corp., senior note, 7.625%, 7/15/13 ........................................ United States 55,000,000 57,612,500 9.50%, 2/15/15 ......................................... United States 220,000,000 240,350,000 6.50%, 8/15/17 ......................................... United States 183,000,000 177,967,500 6.25%, 1/15/18 ......................................... United States 165,000,000 157,987,500 7.25%, 12/15/18 ........................................ United States 188,065,000 189,005,325 6.875%, 11/15/20 ....................................... United States 158,000,000 154,445,000 (g),(i) Consol Energy Inc., senior note, 144A, 8.00%, 4/01/17 ......................................... United States 42,450,000 43,829,625 8.25%, 4/01/20 ......................................... United States 80,850,000 83,477,625 Denbury Resources Inc., senior sub. note, 8.25%, 2/15/20 .... United States 77,700,000 82,750,500 El Paso Corp., senior note, 12.00%, 12/12/13 ....................................... United States 161,600,000 189,880,000 7.25%, 4/01/18 ......................................... United States 50,000,000 51,845,350 MTN, 7.75%, 1/15/32 .................................... United States 250,000,000 246,902,500 (g) Expro Finance Luxembourg, senior secured note, 144A, 8.50%, 12/15/16 .......................................... United Kingdom 56,800,000 57,651,318 Forest Oil Corp., senior note, .............................. 8.50%, 2/15/14 ......................................... United States 115,000,000 121,900,000 7.25%, 6/15/19 ......................................... United States 47,875,000 48,353,750 (g) Holly Corp., senior note, 144A, 9.875%, 6/15/17 ............. United States 35,000,000 36,225,000 (g),(i) Linn Energy Corp., senior note,144A, 8.625%, 4/15/20 ....... United States 100,000,000 100,375,000 Mariner Energy Inc., senior note, 7.50%, 4/15/13 ......................................... United States 46,500,000 47,081,250 11.75%, 6/30/16 ........................................ United States 11,300,000 12,740,750 8.00%, 5/15/17 ......................................... United States 48,900,000 48,288,750 Newfield Exploration Co., senior sub. bond, 6.875%, 2/01/20 ...................... United States 120,000,000 121,500,000 senior sub. note, 6.625%, 4/15/16 ...................... United States 128,000,000 130,880,000 senior sub. note, 7.125%, 5/15/18 ...................... United States 7,600,000 7,752,000 OPTI Canada Inc., senior note, 7.875%, 12/15/14 ............. Canada 70,000,000 65,800,000 Petrohawk Energy Corp., senior note, 9.125%, 7/15/13 ........................................ United States 85,000,000 89,143,750 10.50%, 8/01/14 ........................................ United States 129,050,000 143,084,187 7.875%, 6/01/15 United States 141,000,000 144,348,750 (g) Petroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 ......................................... Switzerland 120,000,000 108,600,000 7.00%, 5/01/17 ......................................... Switzerland 92,050,000 79,623,250 9.375%, 9/15/19 ........................................ Bermuda 94,930,000 86,860,950 Pioneer Natural Resources Co., 6.65%, 3/15/17 ......................................... United States 15,000,000 15,071,700 senior bond, 6.875%, 5/01/18 ........................... United States 110,000,000 110,488,510 78 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(j) VALUE - ----------------------------------------------------------------- -------------- ------------------- -------------- CORPORATE BONDS (CONTINUED) ENERGY (CONTINUED) Plains Exploration & Production Co., senior note, 7.75%, 6/15/15 ...................................... United States 95,500,000 $ 97,290,625 10.00%, 3/01/16 ..................................... United States 80,000,000 88,800,000 8.625%, 10/15/19 .................................... United States 50,000,000 53,250,000 Quicksilver Resources Inc., senior note, 11.75%, 1/01/16 ..................................... United States 26,800,000 30,820,000 9.125%, 8/15/19 ..................................... United States 90,000,000 94,950,000 Sabine Pass LNG LP, senior secured note, 7.25%, 11/30/13 ..................................... United States 100,000,000 94,500,000 7.50%, 11/30/16 ..................................... United States 275,000,000 244,062,500 SandRidge Energy Inc., senior note, (g) 144A, 9.875%, 5/15/16 ............................... United States 106,300,000 109,754,750 (g) 144A, 8.00%, 6/01/18 ................................ United States 232,500,000 222,037,500 (g) 144A, 8.75%, 1/15/20 ................................ United States 85,150,000 83,447,000 (k) FRN, 3.876%, 4/01/14 ................................ United States 68,925,000 63,235,448 (m) PIK, 8.625%, 4/01/15 ................................ United States 46,995,000 45,937,613 SEACOR Holdings Inc., senior note, 7.375%, 10/01/19 ......... United States 25,000,000 25,777,575 SESI LLC, senior note, 6.875%, 6/01/14 ...................... United States 117,000,000 115,245,000 Tesoro Corp., (f) 7.50%, 7/17/12 ...................................... United States 100,000,000 92,407,100 senior note, 6.50%, 6/01/17 ......................... United States 37,000,000 34,225,000 senior note, 9.75%, 6/01/19 ......................... United States 41,400,000 43,470,000 (g) W&T Offshore Inc., senior note, 144A, 8.25%, 6/15/14 ........ United States 192,500,000 181,912,500 (g) Western Refining Inc., (k) senior note, 144A, FRN, 10.75% 6/15/14 .............. United States 25,000,000 22,625,000 senior secured note, 144A, 11.25%, 6/15/17 .......... United States 25,000,000 22,625,000 -------------- 5,238,237,326 -------------- FINANCIALS 6.0% (o) Bank of America Corp., pfd., sub. bond, M, 8.125%, Perpetual ................................................. United States 100,000,000 102,158,000 Duke Realty LP, senior note, 5.95%, 2/15/17 ...................................... United States 37,500,000 36,899,025 6.50%, 1/15/18 ...................................... United States 35,500,000 35,547,463 8.25%, 8/15/19 ...................................... United States 19,400,000 21,672,574 (p) FelCor Lodging LP, senior secured note, 10.00%, 10/01/14 .... United States 157,450,000 162,960,750 Forest City Enterprises Inc., senior note, 7.625%, 6/01/15 ................................................... United States 42,250,000 39,503,750 GMAC Inc., senior note, 6.875%, 8/28/12 ..................................... United States 160,000,000 163,000,000 (g) 144A, 8.00%, 3/15/20 ................................ United States 300,000,000 308,250,000 HCP Inc., senior note, 6.00%, 1/30/17 ...................................... United States 33,325,000 33,221,359 5.625%, 5/01/17 ..................................... United States 15,040,000 14,680,484 6.70%, 1/30/18 United States 10,500,000 10,716,132 (g) International Lease Finance Corp., senior note, 144A, 8.625%, 9/15/15 ..................................... United States 58,300,000 59,738,203 8.75%, 3/15/17 ...................................... United States 171,500,000 175,806,536 (b) iStar Financial Inc., 8.625%, 6/01/13 ..................................... United States 174,100,000 150,596,500 (g) senior secured note, 144A, 8.00%, 3/15/11 ........... United States 6,142,000 6,149,678 (g) senior secured note, 144A, 10.00%, 6/15/14 .......... United States 117,350,000 117,936,750 Semiannual Report | 79 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(j) VALUE - ------------------------------------------------------------------- --------------- ------------------- --------------- CORPORATE BONDS (CONTINUED) FINANCIALS (CONTINUED) (o) JPMorgan Chase & Co., junior sub. note, 1, 7.90%, Perpetual .................................................. United States 865,000,000 $ 925,293,960 (g),(i) LBI Escrow Corp., senior secured note, 144A, 8.00%, 11/01/17 ................................................... United States 88,000,000 91,410,000 (g),(k) Liberty Mutual Group, junior sub. note, 144A, FRN, 10.75%, 6/15/88 ............................................ United States 100,000,000 113,000,000 (g) Reynolds Group Escrow, senior secured note, 144A, 7.75%, 10/15/16 ........................................... United Kingdom 10,000,000 10,325,000 (o) Wells Fargo Capital XIII, pfd., 7.70%, Perpetual ........... United States 44,500,000 46,168,750 (o) Wells Fargo Capital XV, pfd., 9.75%, Perpetual ............. United States 449,600,000 505,800,000 --------------- 3,130,834,914 --------------- HEALTH CARE 6.6% Community Health Systems Inc., senior sub. note, 8.875%, 7/15/15 ................................................... United States 375,000,000 389,062,500 DaVita Inc., senior note, 6.625%, 3/15/13 ............................. United States 40,000,000 40,450,000 senior sub. note, 7.25%, 3/15/15 ......................... United States 70,000,000 71,750,000 HCA Inc., 6.75%, 7/15/13 ........................................... United States 79,320,000 79,716,600 6.375%, 1/15/15 .......................................... United States 169,455,000 161,829,525 senior note, 6.50%, 2/15/16 .............................. United States 195,000,000 185,981,250 senior secured note, 9.25%, 11/15/16 ..................... United States 300,000,000 319,687,500 (g) senior secured note, 144A, 8.50%, 4/15/19 ................ United States 190,000,000 205,318,750 (g) senior secured note, 144A, 7.875%, 2/15/20 ............... United States 165,000,000 173,146,875 (g) senior secured note, 144A, 7.25%, 9/15/20 ................ United States 51,700,000 52,540,125 (g) IMS Health Inc., senior note, 144A, 12.50%, 3/01/18 .................................................. United States 40,000,000 46,750,000 (g),(m) Quintiles Transnational Corp., senior note, 144A, PIK, 9.50%, 12/30/14 ........................................... United States 100,000,000 102,250,000 (g) Talecris Biotherapeutics Holdings Corp., senior note, 144A, 7.75%, 11/15/16 ..................................... United States 36,250,000 36,612,500 Tenet Healthcare Corp., senior note, 7.375%, 2/01/13 ............................. United States 446,365,000 453,060,475 senior note, 9.875%, 7/01/14 ............................. United States 30,000,000 32,025,000 (g) senior secured note, 144A, 9.00%, 5/01/15 ................ United States 300,000,000 324,750,000 (g) senior secured note, 144A, 10.00%, 5/01/18 ............... United States 300,000,000 337,500,000 (k) senior note, FRN, 9.25%, 2/01/15 ......................... United States 115,000,000 121,181,250 (g) senior secured note, 144A, 8.875%, 7/01/19 ............... United States 30,000,000 32,625,000 (k),(m) US Oncology Holdings Inc., senior note, PIK, FRN, 7.178%, 3/15/12 ........................................... United States 90,093,895 85,814,435 US Oncology Inc., senior note, 10.75%, 8/15/14 ............................. United States 15,000,000 15,675,000 senior secured note, 9.125%, 8/15/17 ..................... United States 40,000,000 42,000,000 (g) Vanguard Health Holding Co. II LLC, senior bond, 144A, 8.00%, 2/01/18 ...................................... United States 151,000,000 147,602,500 --------------- 3,457,329,285 --------------- 80 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(J) VALUE - -------------------------------------------------------------------- -------------- ------------------- --------------- CORPORATE BONDS (CONTINUED) INDUSTRIALS 5.3% (g) American Airlines Inc., senior secured note, 144A, 10.50%, 10/15/12 .................................................. United States 57,500,000 $ 61,668,750 (g) Bombardier Inc., senior note, 144A, 7.50%, 3/15/18 ........................................... Canada 60,000,000 62,850,000 7.75%, 3/15/20 ........................................... Canada 85,000,000 88,825,000 (g) Case New Holland Inc., senior note, 144A, 7.75%, 9/01/13 ................................................... United States 201,050,000 209,594,625 (g) Ceva Group PLC, senior secured note, 144A, 11.625%, 10/01/16 ........................................ United Kingdom 11,800,000 12,655,500 11.50%, 4/01/18 .......................................... United Kingdom 212,525,000 221,557,312 (g) Delta Air Lines Inc., senior secured note, 144A, 9.50%, 9/15/14 ........................................... United States 83,150,000 88,139,000 11.75%, 3/15/15 .......................................... United States 110,000,000 118,525,000 Greenbrier Cos. Inc., senior note, 8.375%, 5/15/15 ......... United States 31,706,000 29,010,990 Hertz Corp., senior note, 8.875%, 1/01/14 ............................. United States 445,000,000 459,462,500 senior sub. note, 10.50%, 1/01/16 ........................ United States 140,000,000 151,025,000 (g) Icahn Enterprises/FIN, senior note, 144A, 7.75%, 1/15/16 ........................................... United States 120,000,000 116,025,000 8.00%, 1/15/18 ........................................... United States 105,000,000 101,587,500 (g),(m) JohnsonDiversey Holdings Inc., senior note, 144A, PIK, 10.50%, 5/15/20 ........................................... United States 49,200,000 53,874,000 (g) JohnsonDiversey Inc., senior note, 144A, 8.25%, 11/15/19 .................................................. United States 30,000,000 31,162,500 The Manitowoc Co. Inc., senior note, 9.50%, 2/15/18 ........ United States 63,800,000 66,830,500 Navistar International Corp., senior note, 8.25%, 11/01/21 United States 33,300,000 34,132,500 Nortek Inc., senior secured note, 11.00%, 12/15/13 ......... United States 40,177,777 43,291,555 RBS Global & Rexnord Corp., (g) 144A, 9.50%, 8/01/14 ................................... United States 98,206,000 102,625,270 senior note, 9.50%, 8/01/14 .............................. United States 173,274,000 181,071,330 senior sub. note, 11.75%, 8/01/16 ........................ United States 97,000,000 104,517,500 (g) RSC Equipment Rental/RSC Holdings, senior note, 144A, 10.25%, 11/15/19 .......................................... United States 58,000,000 58,435,000 (g) RSC Equipment Rental Inc., senior secured note, 144A, 10.00%, 7/15/17 ........................................... United States 30,000,000 31,950,000 (g) Severstal Columbus LLC, senior secured note, 144A, 10.25%, 2/15/18 ................................................... United States 25,000,000 26,000,000 Terex Corp., senior sub. note, 8.00%, 11/15/17 ............. United States 185,000,000 180,837,500 (g) Transdigm Inc., senior sub. note, 144A, 7.75%, 7/15/14 ................................................... United States 50,000,000 51,500,000 United Rentals North America Inc., senior sub. note, 7.75%, 11/15/13 .................................................. United States 59,820,000 57,875,850 --------------- 2,745,029,682 --------------- INFORMATION TECHNOLOGY 3.2% (g) Advanced Micro Devices Inc., senior note, 144A, 8.125%, 12/15/17 .................................................. United States 66,700,000 69,034,500 Ceridian Corp., senior note, 11.50%, 11/15/15 .............. United States 75,000,000 72,187,500 First Data Corp., senior note, 9.875%, 9/24/15 .................................................. United States 80,000,000 68,600,000 9/24/15 .................................................. United States 273,000,000 236,827,500 Semiannual Report | 81 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(j) VALUE - ---------------------------------------------------------------- ---------------- ------------------- --------------- CORPORATE BONDS (CONTINUED) INFORMATION TECHNOLOGY (CONTINUED) Freescale Semiconductor Inc., senior note, 8.875%, 12/15/14 ......................... United States 380,000,000 $ 364,800,000 senior note, 10.125%, 12/15/16 ........................ United States 176,000,000 156,640,000 (g) senior secured note, 144A, 10.125%, 3/15/18 ........... United States 100,000,000 107,500,000 Lucent Technologies Inc., 6.45%, 3/15/29 ................... United States 140,900,000 100,039,000 Sanmina-SCI Corp., senior sub. note, 6.75%, 3/01/13 ........................................ United States 150,000,000 150,750,000 8.125%, 3/01/16 ....................................... United States 100,000,000 101,125,000 SunGard Data Systems Inc., senior note, 9.125%, 8/15/13 .......................... United States 35,000,000 36,050,000 senior note, 10.625%, 5/15/15 ......................... United States 55,000,000 60,225,000 senior sub. note, 10.25%, 8/15/15 ..................... United States 85,000,000 89,781,250 (g) ViaSat Inc., senior note, 144A, 8.875%, 9/15/16 ............ United States 49,250,000 50,789,063 --------------- 1,664,348,813 --------------- MATERIALS 2.2% Boise Cascade LLC, senior sub. note, 7.125%, 10/15/14 ...... United States 15,000,000 13,950,000 (g) Cemex Finance LLC, senior secured note, 144A, 9.50%, 12/14/16 .............................................. United States 50,000,000 52,000,000 (g) Hexion Fin/Hexion Escrow, senior secured note, 144A, 8.875%, 2/01/18 ....................................... United States 35,000,000 34,650,000 Huntsman International LLC, (g) senior note, 144A, 5.50%, 6/30/16 ..................... United States 105,000,000 95,287,500 senior sub. note, 7.875%, 11/15/14 .................... United States 35,000,000 35,525,000 senior sub. note, 7.375%, 1/01/15 ..................... United States 15,000,000 14,962,500 (g) Ineos Group Holdings PLC, senior sub. note, 144A, 7.875%, 2/15/16 ............................................... United Kingdom 190,000,000 EUR 201,985,157 (g) Kerling PLC, senior sec. note, 144A, 10.625%, 1/28/17 ...... United Kingdom 53,700,000 EUR 76,270,364 (g) Nalco Co., senior note, 144A, 8.25%, 5/15/17 ............... United States 29,650,000 31,651,375 Nalco Finance Holdings, senior note, 9.00%, 2/01/14 ........ United States 380,000,000 393,300,000 NewPage Corp., senior secured note, 10.00%, 5/01/12 ....................................... United States 52,800,000 36,894,000 11.375%, 12/31/14 ..................................... United States 50,000,000 50,000,000 Owens-Brockway Glass Container Inc., senior note, 7.375%, 5/15/16 ............................................... United States 43,850,000 46,261,750 United States Steel Corp., senior note, 7.375%, 4/01/20 .... United States 40,000,000 40,300,000 --------------- 1,123,037,646 --------------- TELECOMMUNICATION SERVICES 1.9% (g) Clearwire Communications LLC/Finance, senior sec. note, 144A, 12.00%, 12/01/15 ................................ United States 50,000,000 51,125,000 (g) Clearwire Corp., senior secured note, 144A, 12.00%, 12/01/15 ...................................... United States 145,000,000 148,625,000 Cricket Communications Inc., senior note, 9.375%, 11/01/14 ......................... United States 65,000,000 66,462,500 senior secured note, 7.75%, 5/15/16 ................... United States 30,000,000 31,275,000 Crown Castle International Corp., senior bond, 7.125%, 11/01/19 ......................... United States 31,200,000 31,746,000 senior note, 9.00%, 1/15/15 ........................... United States 35,000,000 38,062,500 (g) Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 ..... Jamaica 65,000,000 63,943,750 82 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(j) VALUE - ---------------------------------------------------------------------- --------------- ------------------- --------------- CORPORATE BONDS (CONTINUED) TELECOMMUNICATION SERVICES (CONTINUED) (g),(i) New Communications Holdings, senior note, 144A, 7.875%, 4/15/15 ........................................... United States 47,900,000 $ 49,456,750 8.25%, 4/15/17 ............................................ United States 57,975,000 59,279,438 8.50%, 4/15/20 ............................................ United States 64,150,000 64,951,875 8.75%, 4/15/22 ............................................ United States 63,900,000 64,219,500 (g) Qwest Communications International Inc., senior note, 144A, 7.125%, 4/01/18 ............................................ United States 36,500,000 37,868,750 Qwest Corp., senior note, 8.375%, 5/01/16 .................... United States 17,350,000 19,605,500 Sprint Nextel Corp., senior note, 8.375%, 8/15/17 ............ United States 90,200,000 91,102,000 Virgin Media Finance PLC, senior note, 1, 9.50%, 8/15/16 ..... United Kingdom 74,800,000 82,093,000 (g) Wind Acquisition Finance SA, senior note, 144A, 11.75%, 7/15/17 .................................................... Italy 26,100,000 29,101,500 Windstream Corp., senior note, 7.875%, 11/01/17 .............. United States 70,750,000 70,042,500 --------------- 998,960,563 --------------- UTILITIES 5.8% The AES Corp., senior note, 8.00%, 10/15/17 .................. United States 90,000,000 91,800,000 (g) Calpine Construction Finance, senior secured note, 144A, 8.00%, 6/01/16 ............................................. United States 100,000,000 102,750,000 CMS Energy Corp., senior note, 8.75%, 6/15/19 ................ United States 11,850,000 13,438,966 (g) Crosstex Energy/Crosstex Energy Finance, senior note, 144A, 8.875%, 2/15/18 ............................................ United States 32,800,000 33,989,000 Dynegy Holdings Inc., senior note, 7.50%, 6/01/15 ............................................ United States 170,000,000 141,950,000 8.375%, 5/01/16 ........................................... United States 250,000,000 208,750,000 7.75%, 6/01/19 ............................................ United States 105,000,000 79,800,000 (g) 144A, 7.50%, 6/01/15 ...................................... United States 115,000,000 95,450,000 Dynegy Roseton Danskammer Pass Through Trust, secured bond, B, 7.67%, 11/8/16 .......................................... United States 64,500,000 62,686,260 Energy Future Holdings Corp., senior note, 10.875%, 11/01/17 ......................................... United States 190,000,000 142,025,000 P, 5.55%, 11/15/14 ........................................ United States 406,220,000 298,508,330 (m) PIK, 12.00%, 11/01/17 ................................. United States 344,500,000 235,982,500 (g) Intergen NV, senior secured note, 144A, 9.00%, 6/30/17 ...... Netherlands 80,000,000 82,800,000 (g) Niska Gas Storage U.S./Canada, senior note, 144A, 8.875%, 3/15/18 .................................................... United States 75,000,000 77,062,500 Public Service Co. of New Mexico, senior note, 7.95%, 5/15/18 .................................................... United States 55,000,000 57,466,585 Reliant Energy Inc., senior note, 7.625%, 6/15/14 ........................................... United States 150,000,000 141,000,000 7.875%, 6/15/17 ........................................... United States 180,000,000 162,450,000 Texas Competitive Electric Holdings Co. LLC, senior note, A, 10.25%, 11/01/15 ....................................... United States 740,000,000 518,000,000 B, 10.25%, 11/01/15 ....................................... United States 290,000,000 203,000,000 (m),(p) PIK, 11.25%, 11/01/16 ..................................... United States 425,000,000 293,250,000 --------------- 3,042,159,141 --------------- TOTAL CORPORATE BONDS (COST $27,024,478,725) ................. 28,201,717,784 --------------- Semiannual Report | 83 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(j) VALUE - ----------------------------------------------------------------------- --------------- ------------------- --------------- CONVERTIBLE BONDS 1.4% CONSUMER DISCRETIONARY 0.5% (g) Host Hotels & Resorts LP, cvt., senior note, 144A, 2.625%, 4/15/12 ................................................... United States 120,956,000 $ 116,420,150 (g) Liberty Global Inc., cvt., senior sub. note, 144A, 4.50%, 11/15/16 .................................................. United States 101,250,000 130,612,500 --------------- 247,032,650 --------------- FINANCIALS 0.6% CapitalSource Inc., cvt., senior sub. note, 4.00%, 7/15/34 ............................................ United States 118,925,000 114,465,313 7.25%, 7/15/37 ............................................ United States 12,676,000 12,121,425 (b),(k) iStar Financial Inc., cvt., senior note, FRN, 0.751%, 10/01/12 .................................................. United States 250,000,000 190,125,000 --------------- 316,711,738 --------------- HEALTH CARE 0.2% LifePoint Hospitals Inc., cvt., senior sub. note, 3.50%, 5/15/14 ................................................... United States 75,941,000 76,422,466 --------------- INFORMATION TECHNOLOGY 0.1% Advanced Micro Devices Inc., cvt., senior note, 6.00%, 5/01/15 ............................................ United States 36,025,000 34,719,094 (g) 144A, 5.75%, 8/15/12 ...................................... United States 39,550,000 39,599,437 --------------- 74,318,531 --------------- TOTAL CONVERTIBLE BONDS (COST $716,084,648) .................. 714,485,385 --------------- MUNICIPAL BONDS (COST $180,212,400) 0.3% (i) California State GO, 7.95%, 3/01/36 .......................... United States 180,000,000 184,559,400 --------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $52,390,688,845) .................................... 51,357,979,295 --------------- SHORT TERM INVESTMENTS 1.4% U.S. GOVERNMENT AND AGENCY SECURITIES (COST $99,999,861) 0.2% (q) FHLB, 4/05/10 ................................................ United States 100,000,000 99,999,400 --------------- TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS AND REPURCHASE AGREEMENTS (COST $52,490,688,706) .............. 51,457,978,695 --------------- SHARES ---------------- MONEY MARKET FUNDS (COST $260,988,866) 0.5% (r) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ..................................................... United States 260,988,866 260,988,866 --------------- INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.1% MONEY MARKET FUNDS 0.1% (s) Bank of New York Institutional Cash Reserve Fund, Series A, 0.01% ........................................... United States 30,561,238 30,561,238 (a) Bank of New York Institutional Cash Reserve Fund, B .......... United States 451,668 361,334 --------------- TOTAL MONEY MARKET FUNDS (COST $31,012,906) .................. 30,922,572 --------------- 84 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(j) VALUE - ---------------------------------------------------------------------- -------------- ------------------- --------------- SHORT TERM INVESTMENTS (CONTINUED) REPURCHASE AGREEMENTS (COST $347,581,492) 0.6% (t) Joint Repurchase Agreement, 0.008%, 4/01/10 (Maturity Value $347,581,567) ................................. United States $ 347,581,492 $ 347,581,492 Banc of America Securities LLC (Maturity Value $43,534,591) Barclays Capital Inc. (Maturity Value $52,999,237) BNP Paribas Securities Corp. (Maturity Value $56,780,925) Deutsche Bank Securities Inc. (Maturity Value $42,849,856) HSBC Securities (USA) Inc. (Maturity Value $56,780,925) Morgan Stanley & Co. Inc. (Maturity Value $56,780,925) UBS Securities LLC (Maturity Value $37,855,108) Collateralized by U.S. Government Agency Securities, 0.375% - 6.25%, 4/27/10 - 6/14/13; (q) U.S. Government Agency Discount Notes, 4/05/10 - 9/27/10; and U.S. Treasury Notes, 1.375% - 4.00%, 9/15/10 - 2/28/15 --------------- TOTAL SHORT TERM INVESTMENTS (COST $739,583,125) ................. 739,492,330 --------------- TOTAL INVESTMENTS (COST $53,130,271,970) 99.7% ................... 52,097,471,625 OTHER ASSETS, LESS LIABILITIES 0.3% .............................. 161,907,074 --------------- NET ASSETS 100.0% ................................................ $52,259,378,699 --------------- See Abbreviations on page 131. (a) Non-income producing. (b) See Note 11 regarding holdings of 5% voting securities. (c) See Note 13 regarding other considerations. (d) Rounds to less than 0.1% of net assets. (e) Contingent distributions represent the right to receive additional distributions, if any, during the reorganization of the underlying company. Shares represent total underlying principal of debt securities. (f) Security has been deemed illiquid because it may not be able to be sold within seven days. At March 31, 2010, the aggregate value of these securities was $92,407,100, representing 0.18% of net assets. (g) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust's Board of Trustees. At March 31, 2010, the aggregate value of these securities was $11,275,677,765, representing 21.58% of net assets. (h) See Note 1(f) regarding equity-linked securities. (i) A portion or all of the security purchased on a when-issued or delayed delivery basis. See Note 1(d). (j) The principal amount is stated in U.S. dollars unless otherwise indicated. (k) The coupon rate shown represents the rate at period end. (l) See Note 1(h) regarding senior floating rate interests. (m) Income may be received in additional securities and/or cash. (n) See Note 8 regarding defaulted securities. (o) Perpetual security with no stated maturity date. (p) A portion or all of the security is on loan at March 31, 2010. See Note 1(g). (q) The security is traded on a discount basis with no stated coupon rate. (r) See Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (s) The rate shown is the annualized seven-day yield at period end. (t) See Note 1(c) regarding joint repurchase agreement. The accompanying notes are an integral part of these financial statements. Semiannual Report | 85 Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN U.S. GOVERNMENT SECURITIES FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 ------------------------------------------------------------------------------------------- CLASS A PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................ $ 6.69 $ 6.45 $ 6.39 $ 6.43 $ 6.53 $ 6.68 ------------------------------------------------------------------------------------------- Income from investment operations (a) Net investment income (b) ....... 0.13 0.27 0.30 0.31 0.30 0.28 Net realized and unrealized gains (losses) ................ 0.01 0.27 0.08 (0.02) (0.09) (0.11) ------------------------------------------------------------------------------------------- Total from investment operations 0.14 0.54 0.38 0.29 0.21 0.17 ------------------------------------------------------------------------------------------- Less distributions from net investment income ................. (0.14) (0.30) (0.32) (0.33) (0.31) (0.32) ------------------------------------------------------------------------------------------- Redemption fees (c) ................ -- -- -- (d) -- (d) -- (d) -- (d) ------------------------------------------------------------------------------------------- Net asset value, end of period ..... $ 6.69 $ 6.69 $ 6.45 $ 6.39 $ 6.43 $ 6.53 =========================================================================================== Total return (e) ................... 2.05% 8.50% 6.00% 4.63% 3.40% 2.67% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) ....................... 0.71% 0.73% 0.72% 0.72% 0.72% 0.72% Net investment income .............. 3.77% 4.11% 4.64% 4.78% 4.64% 4.29% SUPPLEMENTAL DATA Net assets, end of period (000's)... $ 6,410,681 $6,275,792 $5,353,961 $5,073,449 $5,291,117 $5,901,449 Portfolio turnover rate ............ 22.11% 34.74% 21.66% 12.34% 20.54% 29.14% (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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 86 | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 --------------------------------------------------------------------------------- CLASS B PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ... $ 6.68 $ 6.44 $ 6.38 $ 6.42 $ 6.52 $ 6.67 --------------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b) ............. 0.11 0.24 0.27 0.27 0.26 0.25 Net realized and unrealized gains (losses) ............................. 0.01 0.26 0.07 (0.01) (0.08) (0.11) --------------------------------------------------------------------------------- Total from investment operations ....... 0.12 0.50 0.34 0.26 0.18 0.14 --------------------------------------------------------------------------------- Less distributions from net investment income ................................ (0.12) (0.26) (0.28) (0.30) (0.28) (0.29) --------------------------------------------------------------------------------- Redemption fees (c) .................... -- -- -- (d) -- (d) -- (d) -- (d) --------------------------------------------------------------------------------- Net asset value, end of period ......... $ 6.68 $ 6.68 $ 6.44 $ 6.38 $ 6.42 $ 6.52 ================================================================================= Total return (e) ....................... 1.79% 7.79% 5.61% 4.10% 2.87% 2.13% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) ........................... 1.22% 1.24% 1.24% 1.25% 1.24% 1.25% Net investment income .................. 3.26% 3.60% 4.12% 4.25% 4.12% 3.76% SUPPLEMENTAL DATA Net assets, end of period (000's) ...... $ 174,947 $230,575 $284,649 $316,720 $388,807 $478,788 Portfolio turnover rate ................ 22.11% 34.74% 21.66% 12.34% 20.54% 29.14% (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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 87 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 --------------------------------------------------------------------------------- CLASS C PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ... $ 6.66 $ 6.42 $ 6.36 $ 6.40 $ 6.50 $ 6.65 --------------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b) ............. 0.11 0.23 0.27 0.27 0.26 0.25 Net realized and unrealized gains (losses) ............................. 0.01 0.27 0.07 (0.01) (0.08) (0.11) --------------------------------------------------------------------------------- Total from investment operations ....... 0.12 0.50 0.34 0.26 0.18 0.14 --------------------------------------------------------------------------------- Less distributions from net investment income ..................... (0.12) (0.26) (0.28) (0.30) (0.28) (0.29) --------------------------------------------------------------------------------- Redemption fees (c) .................... -- -- -- (d) -- (d) -- (d) -- (d) --------------------------------------------------------------------------------- Net asset value, end of period ......... $ 6.66 $ 6.66 $ 6.42 $ 6.36 $ 6.40 $ 6.50 ================================================================================= Total return (e) ....................... 1.81% 8.01% 5.48% 4.12% 2.88% 2.14% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) ........................... 1.23% 1.24% 1.24% 1.25% 1.23% 1.25% Net investment income .................. 3.25% 3.60% 4.12% 4.25% 4.13% 3.76% SUPPLEMENTAL DATA Net assets, end of period (000's) ...... $ 1,977,819 $1,464,614 $610,148 $418,951 $424,462 $508,539 Portfolio turnover rate ................ 22.11% 34.74% 21.66% 12.34% 20.54% 29.14% (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 repurchas es of the Fund shares in relation to income earned and/or fluctuating mar ket value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0 .01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for per iods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 88 | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 ---------------------------------------------------------------------------- CLASS R PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ... $ 6.69 $ 6.45 $ 6.39 $ 6.43 $ 6.53 $ 6.68 ---------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b) ............. 0.11 0.25 0.28 0.28 0.27 0.26 Net realized and unrealized gains (losses) ............................. 0.01 0.26 0.07 (0.01) (0.08) (0.11) ---------------------------------------------------------------------------- Total from investment operations ....... 0.12 0.51 0.35 0.27 0.19 0.15 ---------------------------------------------------------------------------- Less distributions from net investment income ................................ (0.12) (0.27) (0.29) (0.31) (0.29) (0.30) ---------------------------------------------------------------------------- Redemption fees (c) .................... -- -- -- (d) -- (d) -- (d) -- (d) ---------------------------------------------------------------------------- Net asset value, end of period ......... $ 6.69 $ 6.69 $ 6.45 $ 6.39 $ 6.43 $ 6.53 ============================================================================ Total return (e) ....................... 1.87% 8.12% 5.61% 4.25% 3.01% 2.29% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) ........................... 1.08% 1.09% 1.09% 1.10% 1.09% 1.10% Net investment income .................. 3.40% 3.75% 4.27% 4.40% 4.27% 3.91% SUPPLEMENTAL DATA Net assets, end of period (000's) ...... $ 128,730 $138,548 $104,648 $74,537 $71,104 $65,790 Portfolio turnover rate ................ 22.11% 34.74% 21.66% 12.34% 20.54% 29.14% (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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 89 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 --------------------------------------------------------------------------- ADVISOR CLASS PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ... $ 6.71 $ 6.47 $ 6.41 $ 6.45 $ 6.55 $ 6.69 --------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b) ............. 0.13 0.28 0.31 0.31 0.31 0.29 Net realized and unrealized gains (losses) ............................. 0.01 0.27 0.08 (0.01) (0.09) (0.10) --------------------------------------------------------------------------- Total from investment operations ....... 0.14 0.55 0.39 0.30 0.22 0.19 --------------------------------------------------------------------------- Less distributions from net investment income ................................ (0.14) (0.31) (0.33) (0.34) (0.32) (0.33) --------------------------------------------------------------------------- Redemption fees (c) .................... -- -- -- (d) -- (d) -- (d) -- (d) --------------------------------------------------------------------------- Net asset value, end of period ......... $ 6.71 $ 6.71 $ 6.47 $ 6.41 $ 6.45 $ 6.55 =========================================================================== Total return (e) ....................... 2.12% 8.63% 6.11% 4.75% 3.53% 2.95% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) ........................... 0.58% 0.59% 0.59% 0.60% 0.59% 0.60% Net investment income .................. 3.90% 4.25% 4.77% 4.90% 4.77% 4.41% SUPPLEMENTAL DATA Net assets, end of period (000's) ...... $ 985,225 $863,951 $612,026 $470,751 $387,239 $334,681 Portfolio turnover rate ................ 22.11% 34.74% 21.66% 12.34% 20.54% 29.14% (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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 90 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------- ----------------- -------------- MORTGAGE-BACKED SECURITIES 97.9% GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 97.9% GNMA GP 30 Year, 8.25%, 3/15/17 - 10/15/17 ....................... $ 90,733 $ 100,508 GNMA GP 30 Year, 9.25%, 5/15/16 - 12/15/16 ....................... 199,649 221,397 GNMA GP 30 Year, 11.00%, 7/15/10 - 11/15/10 ...................... 17,410 17,760 GNMA GP 30 Year, 11.25%, 7/15/13 - 12/15/15 ...................... 125,294 139,695 GNMA GP 30 Year, 11.50%, 2/15/13 - 5/15/13 ....................... 19,926 22,082 GNMA GP 30 Year, 11.75%, 7/15/13 - 8/15/13 ....................... 23,665 26,033 GNMA GP 30 Year, 12.00%, 3/15/11 ................................. 2,044 2,143 GNMA GP 30 Year, 12.75%, 5/15/14 ................................. 3,683 4,229 GNMA I SF 15 Year, 6.50%, 5/15/18 ................................ 781,008 846,809 GNMA I SF 30 Year, 4.50%, 3/15/39 ................................ 105,530,660 107,030,116 GNMA I SF 30 Year, 4.50%, 1/15/39 - 3/15/40 ...................... 1,210,140,981 1,227,336,621 GNMA I SF 30 Year, 5.00%, 8/15/39 ................................ 180,363,401 188,201,046 (a)GNMA I SF 30 Year, 5.00%, 2/15/33 - 3/15/40 ...................... 2,152,014,611 2,245,373,054 GNMA I SF 30 Year, 5.50%, 2/15/39 ................................ 134,442,230 142,483,008 GNMA I SF 30 Year, 5.50%, 5/15/28 - 12/15/39 ..................... 1,485,317,715 1,578,362,720 GNMA I SF 30 Year, 6.00%, 10/15/23 - 2/15/39 ..................... 970,409,345 1,043,289,633 GNMA I SF 30 Year, 6.00%, 12/15/39 ............................... 121,867,481 130,384,727 GNMA I SF 30 Year, 6.50%, 5/15/23 - 8/15/37 ...................... 236,588,345 258,180,778 GNMA I SF 30 Year, 6.75%, 3/15/26 ................................ 38,644 43,124 GNMA I SF 30 Year, 7.00%, 4/15/16 - 9/15/32 ...................... 144,019,469 161,459,528 GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 ..................... 470,243 527,651 GNMA I SF 30 Year, 7.50%, 7/15/16 - 8/15/33 ...................... 46,781,933 52,687,920 GNMA I SF 30 Year, 7.70%, 1/15/21 - 1/15/22 ...................... 359,273 409,588 GNMA I SF 30 Year, 8.00%, 11/15/15 - 9/15/30 ..................... 27,962,335 31,811,557 GNMA I SF 30 Year, 8.50%, 5/15/16 - 6/15/25 ...................... 6,144,598 7,016,097 GNMA I SF 30 Year, 9.00%, 11/15/15 - 7/15/23 ..................... 7,498,969 8,496,571 GNMA I SF 30 Year, 9.50%, 5/15/16 - 8/15/22 ...................... 4,584,830 5,260,675 GNMA I SF 30 Year, 10.00%, 2/15/16 - 3/15/25 ..................... 6,065,607 6,860,414 GNMA I SF 30 Year, 10.50%, 2/15/12 - 10/15/21 .................... 4,507,795 5,059,123 GNMA I SF 30 Year, 11.00%, 7/15/10 - 5/15/21 ..................... 2,825,118 3,144,878 GNMA I SF 30 Year, 11.50%, 3/15/13 - 2/15/16 ..................... 769,562 856,790 GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 ..................... 3,859,766 4,318,746 GNMA I SF 30 Year, 12.50%, 5/15/10 - 1/15/16 ..................... 2,339,046 2,638,609 GNMA I SF 30 Year, 13.00%, 1/15/11 - 9/15/15 ..................... 2,691,771 3,028,613 GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 ..................... 36,538 40,654 GNMA II GP 30 Year, 11.50%, 8/20/13 .............................. 9,781 10,810 GNMA II SF 30 Year, 4.50%, 12/20/39 .............................. 136,875,974 138,430,866 GNMA II SF 30 Year, 4.50%, 5/20/33 - 2/20/40 ..................... 195,159,695 197,575,954 GNMA II SF 30 Year, 5.00%, 9/20/33 ............................... 145,870,757 152,518,760 GNMA II SF 30 Year, 5.00%, 7/20/33 - 12/20/39 .................... 254,130,822 265,124,450 GNMA II SF 30 Year, 5.50%, 12/20/34 .............................. 93,961,595 100,001,637 GNMA II SF 30 Year, 5.50%, 6/20/34 - 3/20/39 ..................... 555,981,800 590,550,845 GNMA II SF 30 Year, 6.00%, 10/20/23 - 12/20/38 ................... 543,326,958 584,955,793 GNMA II SF 30 Year, 6.50%, 6/20/24 - 1/20/39 ..................... 175,158,995 190,418,148 GNMA II SF 30 Year, 7.00%, 2/20/28 - 7/20/33 ..................... 26,014,625 29,257,547 GNMA II SF 30 Year, 7.50%, 10/20/22 - 4/20/32 .................... 4,776,162 5,379,981 Semiannual Report | 91 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (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, 8.00%, 8/20/16 - 6/20/30 .......................... $ 2,402,932 $ 2,732,629 GNMA II SF 30 Year, 8.50%, 4/20/16 - 6/20/25 .......................... 1,206,955 1,370,196 GNMA II SF 30 Year, 9.00%, 8/20/16 - 11/20/21 ......................... 384,491 436,904 GNMA II SF 30 Year, 9.50%, 3/20/18 - 4/20/25 .......................... 242,012 278,055 GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 ......................... 459,830 519,980 GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 ......................... 1,240,656 1,379,513 GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 ......................... 187,581 209,105 GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 ......................... 102,692 113,437 GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 ......................... 168,375 187,881 GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 ....................... 112,666 127,137 GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 ........................ 109,727 124,481 -------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $9,174,543,281) ................ 9,477,387,006 -------------- SHARES ---------------- SHORT TERM INVESTMENTS (COST $239,265,772) 2.5% MONEY MARKET FUNDS 2.5% ............................................... (b)Institutional Fiduciary Trust Money Market Portfolio, 0.00% ........... 239,265,772 239,265,772 -------------- TOTAL INVESTMENTS (COST $9,413,809,053) 100.4% ........................ 9,716,652,778 OTHER ASSETS, LESS LIABILITIES (0.4)% ................................. (39,250,640) -------------- NET ASSETS 100.0% ..................................................... $9,677,402,138 ============== See Abbreviations on page 131. (a) A portion or all of the security purchased on a TBA basis. See Note 1(d). (b) See Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. 92 | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN UTILITIES FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 --------------------------------------------------------------------------------------- CLASS A PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .............................. $ 10.74 $ 11.92 $ 14.58 $ 12.89 $ 12.59 $ 10.16 --------------------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b) ........... 0.21 0.43 0.41 0.40 0.43 0.45 Net realized and unrealized gains (losses) ..................... 0.35 (1.11) (1.93) 2.16 0.37 2.42 --------------------------------------------------------------------------------------- Total from investment operations ...... 0.56 (0.68) (1.52) 2.56 0.80 2.87 --------------------------------------------------------------------------------------- Less distributions from: Net investment income ............... (0.24) (0.42) (0.40) (0.40) (0.41) (0.44) Net realized gains .................. (0.16) (0.08) (0.74) (0.47) (0.09) -- --------------------------------------------------------------------------------------- Total distributions ................... (0.40) (0.50) (1.14) (0.87) (0.50) (0.44) --------------------------------------------------------------------------------------- Redemption fees (c) ................... -- -- -- (d) -- (d) -- (d) -- (d) --------------------------------------------------------------------------------------- Net asset value, end of period ........ $ 10.90 $ 10.74 $ 11.92 $ 14.58 $ 12.89 $ 12.59 ======================================================================================= Total return (e) ...................... 5.29% (5.20)% (11.63)% 20.32% 6.69% 28.81% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) .......................... 0.79% 0.80% 0.74% 0.75% 0.76% 0.78% Net investment income ................. 3.82% 4.29% 2.92% 2.83% 3.54% 3.92% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $ 1,684,461 $1,543,060 $1,769,397 $2,157,614 $1,926,732 $1,986,034 Portfolio turnover rate ............... 3.82% 15.49% 8.32% 10.84% 7.97% 13.53% (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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 93 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 --------------------------------------------------------------------------------- CLASS B PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................... $ 10.74 $ 11.91 $ 14.56 $ 12.88 $ 12.57 $ 10.15 --------------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b) ........... 0.18 0.38 0.33 0.33 0.37 0.39 Net realized and unrealized gains (losses) ........................... 0.35 (1.10) (1.91) 2.15 0.38 2.42 --------------------------------------------------------------------------------- Total from investment operations ...... 0.53 (0.72) (1.58) 2.48 0.75 2.81 --------------------------------------------------------------------------------- Less distributions from: Net investment income ............... (0.21) (0.37) (0.33) (0.33) (0.35) (0.39) Net realized gains .................. (0.16) (0.08) (0.74) (0.47) (0.09) -- --------------------------------------------------------------------------------- Total distributions ................... (0.37) (0.45) (1.07) (0.80) (0.44) (0.39) --------------------------------------------------------------------------------- Redemption fees (c) ................... -- -- -- (d) -- (d) -- (d) -- (d) --------------------------------------------------------------------------------- Net asset value, end of period ........ $ 10.90 $ 10.74 $ 11.91 $ 14.56 $ 12.88 $ 12.57 ================================================================================= Total return (e) 5.02% (5.65)% (12.04)% 19.66% 6.25% 28.11% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) .......................... 1.28% 1.30% 1.24% 1.26% 1.26% 1.28% Net investment income ................. 3.33% 3.79% 2.42% 2.32% 3.04% 3.42% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $ 58,404 $ 64,176 $ 92,695 $127,587 $133,824 $154,277 Portfolio turnover rate ............... 3.82% 15.49% 8.32% 10.84% 7.97% 13.53% (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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 94 | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 ----------------------------------------------------------------------------- CLASS C PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..... $ 10.71 $ 11.88 $ 14.53 $ 12.85 $ 12.55 $ 10.13 ----------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b) .............. 0.18 0.38 0.33 0.33 0.37 0.39 Net realized and unrealized gains (losses) .............................. 0.34 (1.10) (1.91) 2.15 0.37 2.42 ----------------------------------------------------------------------------- Total from investment operations ......... 0.52 (0.72) (1.58) 2.48 0.74 2.81 ----------------------------------------------------------------------------- Less distributions from: Net investment income .................. (0.21) (0.37) (0.33) (0.33) (0.35) (0.39) Net realized gains ..................... (0.16) (0.08) (0.74) (0.47) (0.09) -- ----------------------------------------------------------------------------- Total distributions ...................... (0.37) (0.45) (1.07) (0.80) (0.44) (0.39) ----------------------------------------------------------------------------- Redemption fees (c) ...................... -- -- -- (d) -- (d) -- (d) -- (d) ----------------------------------------------------------------------------- Net asset value, end of period ........... $ 10.86 $ 10.71 $ 11.88 $ 14.53 $ 12.85 $ 12.55 ============================================================================= Total return (e) ......................... 4.96% (5.64)% (12.06)% 19.72% 6.19% 28.16% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) ............................. 1.29% 1.30% 1.24% 1.26% 1.25% 1.28% Net investment income .................... 3.32% 3.79% 2.42% 2.32% 3.05% 3.42% SUPPLEMENTAL DATA Net assets, end of period (000's) ........ $ 354,864 $300,544 $339,247 $424,977 $391,509 $435,714 Portfolio turnover rate .................. 3.82% 15.49% 8.32% 10.84% 7.97% 13.53% (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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 95 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 ------------------------------------------------------------------------- CLASS R PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ... $ 10.71 $ 11.89 $ 14.54 $ 12.86 $ 12.57 $ 10.15 ------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b) ............ 0.19 0.40 0.36 0.35 0.39 0.43 Net realized and unrealized gains (losses) ............................ 0.35 (1.11) (1.92) 2.16 0.36 2.40 ------------------------------------------------------------------------- Total from investment operations ....... 0.54 (0.71) (1.56) 2.51 0.75 2.83 ------------------------------------------------------------------------- Less distributions from: Net investment income ................ (0.22) (0.39) (0.35) (0.36) (0.37) (0.41) Net realized gains ................... (0.16) (0.08) (0.74) (0.47) (0.09) -- ------------------------------------------------------------------------- Total distributions .................... (0.38) (0.47) (1.09) (0.83) (0.46) (0.41) ------------------------------------------------------------------------- Redemption fees (c) .................... -- -- -- (d) -- (d) -- (d) -- (d) ------------------------------------------------------------------------- Net asset value, end of period ......... $ 10.87 $ 10.71 $ 11.89 $ 14.54 $ 12.86 $ 12.57 ========================================================================= Total return (e) ....................... 5.13% (5.57)% (11.92)% 19.92% 6.29% 28.35% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) ........................... 1.14% 1.15% 1.09% 1.11% 1.11% 1.13% Net investment income .................. 3.47% 3.94% 2.57% 2.47% 3.19% 3.57% SUPPLEMENTAL DATA Net assets, end of period (000's) ...... $ 39,668 $37,795 $36,596 $41,845 $27,736 $14,649 Portfolio turnover rate ................ 3.82% 15.49% 8.32% 10.84% 7.97% 13.53% (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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 96 | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED SEPTEMBER 30, (UNAUDITED) 2009 2008 2007 2006 2005 --------------------------------------------------------------------------- ADVISOR CLASS PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period... $ 10.79 $ 11.98 $ 14.64 $ 12.95 $ 12.64 $ 10.20 --------------------------------------------------------------------------- Income from investment operations (a): Net investment income (b) ........... 0.22 0.45 0.42 0.42 0.45 0.48 Net realized and unrealized gains (losses) ..................... 0.35 (1.12) (1.92) 2.17 0.38 2.42 --------------------------------------------------------------------------- Total from investment operations ...... 0.57 (0.67) (1.50) 2.59 0.83 2.90 --------------------------------------------------------------------------- Less distributions from: Net investment income ............... (0.25) (0.44) (0.42) (0.43) (0.43) (0.46) Net realized gains .................. (0.16) (0.08) (0.74) (0.47) (0.09) -- --------------------------------------------------------------------------- Total distributions ................... (0.41) (0.52) (1.16) (0.90) (0.52) (0.46) --------------------------------------------------------------------------- Redemption fees (c) ................... -- -- -- (d) -- (d) -- (d) -- (d) --------------------------------------------------------------------------- Net asset value, end of period ........ $ 10.95 $ 10.79 $ 11.98 $ 14.64 $ 12.95 $ 12.64 =========================================================================== Total return (e) ...................... 5.34% (5.12)% (11.45)% 20.43% 6.88% 29.00% RATIOS TO AVERAGE NET ASSETS (f) Expenses (g) .......................... 0.64% 0.65% 0.59% 0.61% 0.61% 0.63% Net investment income ................. 3.97% 4.44% 3.07% 2.97% 3.69% 4.07% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $ 160,443 $124,454 $58,817 $86,823 $103,041 $110,249 Portfolio turnover rate ............... 3.82% 15.49% 8.32% 10.84% 7.97% 13.53% (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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 97 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - ------------------------------------------------------------ --------------- -------------- -------------- COMMON STOCKS 95.1% DIVERSIFIED TELECOMMUNICATION SERVICES 2.4% AT&T Inc. .................................................. United States 1,200,000 $ 31,008,000 Verizon Communications Inc. ................................ United States 800,000 24,816,001 -------------- 55,824,001 -------------- ELECTRIC.UTILITIES 47.7% Allegheny Energy Inc. ...................................... United States 1,400,000 32,200,000 American.Electric Power Co. Inc. ........................... United States 2,400,000 82,032,000 Cleco Corp. ................................................ United States 1,000,000 26,550,000 Duke Energy Corp. .......................................... United States 3,800,000 62,016,000 Edison International ....................................... United States 2,000,000 68,340,000 Entergy Corp. .............................................. United States 1,300,000 105,755,000 Exelon Corp. ............................................... United States 2,000,000 87,620,000 FirstEnergy Corp. .......................................... United States 1,700,000 66,453,000 FPL Group Inc. ............................................. United States 1,300,000 62,829,000 Great Plains Energy Inc. ................................... United States 1,000,000 18,570,000 Hawaiian.Electric Industries Inc. .......................... United States 600,000 13,470,000 Northeast Utilities ........................................ United States 900,000 24,876,000 NV Energy Inc. ............................................. United States 5,600,000 69,048,000 Pinnacle.West Capital Corp. ................................ United States 600,000 22,638,000 PNM Resources Inc. ......................................... United States 3,300,000 41,349,000 Portland.General Electric Co. .............................. United States 1,100,000 21,241,000 PPL Corp. .................................................. United States 2,800,000 77,588,000 Progress.Energy Inc. ....................................... United States 1,500,000 59,040,000 Scottish.and Southern Energy PLC ........................... United Kingdom 1,500,000 25,074,723 The Southern Co. ........................................... United States 3,200,000 106,112,000 Westar Energy Inc. ......................................... United States 1,080,600 24,097,380 -------------- 1,096,899,103 -------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 2.5% Constellation Energy Group ................................. United States 1,600,000 56,176,000 -------------- MULTI-UTILITIES 37.5% Alliant Energy Corp. ....................................... United States 1,500,000 49,890,000 Ameren Corp. ............................................... United States 800,000 20,864,000 CenterPoint Energy Inc. .................................... United States 3,800,000 54,568,000 CMS Energy Corp. ........................................... United States 1,300,000 20,098,000 Consolidated Edison Inc. ................................... United States 1,100,000 48,994,000 Dominion.Resources Inc. .................................... United States 1,500,000 61,665,000 DTE Energy Co. ............................................. United States 500,000 22,300,000 GDF Suez.................................................... France 700,000 27,048,019 National.Grid PLC .......................................... United Kingdom 4,987,755 48,580,205 NiSource.Inc. .............................................. United States 1,300,000 20,540,000 PG&E Corp. ................................................. United States 2,200,000 93,324,000 Public Service Enterprise Group Inc. ....................... United States 2,800,000 82,656,000 RWE AG ..................................................... Germany 300,000 26,657,566 SCANA Corp. ................................................ United States 775,000 29,132,250 Sempra Energy .............................................. United States 2,000,000 99,800,000 TECO Energy Inc. ........................................... United States 700,000 11,123,000 98 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED) FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------ -------------- ---------------- -------------- COMMON STOCKS (CONTINUED) MULTI-UTILITIES (CONTINUED) United Utilities Group PLC ......................................... United Kingdom 2,960,189 $ 25,124,002 Vectren Corp. ...................................................... United States 800,000 19,776,000 Wisconsin Energy Corp. ............................................. United States 900,000 44,469,000 Xcel Energy Inc. ................................................... United States 2,600,000 55,120,000 -------------- 861,729,042 -------------- OIL, GAS & CONSUMABLE FUELS 3.3% Spectra Energy Corp. ............................................... United States 2,197,600 49,511,928 The Williams Cos. Inc. ............................................. United States 1,105,190 25,529,889 -------------- 75,041,817 -------------- WATER UTILITIES 1.7% American Water Works Co. Inc. ...................................... United States 1,800,000 39,168,000 -------------- TOTAL COMMON STOCKS (COST $1,724,114,278) .......................... 2,184,837,963 -------------- PRINCIPAL AMOUNT ---------------- CORPORATE BONDS 3.3% ELECTRIC UTILITIES 1.6% MidAmerican Energy Holdings Co., senior note, 8.48%, 9/15/28 ....... United States $25,000,000 30,918,375 Northeast Generation Co., senior secured note, B-1, 8.812%, ........ 10/15/26........................................................... United States 7,142,579 7,200,841 -------------- 38,119,216 -------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 1.2% Energy Future Holdings Corp., senior note, P, 5.55%, 11/15/14 ................................................ United States 32,300,000 23,735,461 R, 6.55%, 11/15/34 ................................................ United States 5,700,000 2,964,000 -------------- 26,699,461 -------------- MULTI-UTILITIES 0.5% Aquila Inc., senior note, 9.95%, 2/01/11 .................................................... United States 6,000,000 6,307,608 8.27%, 11/15/21 ................................................... United States 6,100,000 6,359,091 -------------- 12,666,699 -------------- TOTAL CORPORATE BONDS (COST $77,804,433) ........................... 77,485,376 -------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $1,801,918,711) ............................................. 2,262,323,339 -------------- SHARES ---------------- SHORT TERM INVESTMENTS (COST $27,420,822) 1.2% MONEY MARKET FUNDS 1.2% (a) Institutional Fiduciary Trust Money Market Portfolio, 0.00%......... United States 27,420,822 27,420,822 -------------- TOTAL INVESTMENTS (COST $1,829,339,533) 99.6% ...................... 2,289,744,161 OTHER ASSETS, LESS LIABILITIES 0.4% ................................ 8,096,457 -------------- NET ASSETS 100.0% .................................................. $2,297,840,618 ============== (a) See Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Semiannual Report | 99 Franklin Custodian Funds FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES March 31, 2010 (unaudited) FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------ Assets: Investments in securities: Cost - Unaffiliated issuers .......................... $ 364,997,865 $1,715,605,439 $50,474,392,213 Cost - Non-controlled affiliated issuers (Note 11).... -- -- 2,047,309,399 Cost - Sweep Money Fund (Note 7) ..................... 996,856 114,279,732 260,988,866 Cost - Repurchase agreements ......................... -- -- 347,581,492 ------------------------------------------------ Total cost of investments ............................ $ 365,994,721 $1,829,885,171 $53,130,271,970 ================================================ Value - Unaffiliated issuers ......................... $ 695,462,478 $3,427,509,639 $49,685,749,885 Value - Non-controlled affiliated issuers (Note 11)... -- -- 1,803,151,382 Value - Sweep Money Fund (Note 7) .................... 996,856 114,279,732 260,988,866 Value - Repurchase agreements ........................ -- -- 347,581,492 ------------------------------------------------ Total value of investments (a) ....................... 696,459,334 3,541,789,371 52,097,471,625 Cash ................................................... -- 112,444 14,938,582 Receivables: Investment securities sold ........................... -- -- 431,485,786 Capital shares sold .................................. 987,587 5,596,822 133,431,332 Dividends and interest ............................... 301,317 2,882,806 660,077,897 Other assets ........................................... 138 8,156 1,949,252 ------------------------------------------------ Total assets ...................................... 697,748,376 3,550,389,599 53,339,354,474 ------------------------------------------------ Liabilities: Payables: Investment securities purchased ...................... -- -- 903,707,432 Capital shares redeemed .............................. 919,786 5,124,878 91,464,215 Affiliates ........................................... 756,511 3,382,367 44,170,391 Allocator Funds (Note 12) ............................ -- 50,955 149,484 Unaffiliated transfer agent fees ..................... 334,067 1,016,566 6,466,410 Payable upon return of securities loaned ............... -- -- 31,012,906 Accrued expenses and other liabilities ................. 133,210 373,517 3,004,937 ------------------------------------------------ Total liabilities ................................. 2,143,574 9,948,283 1,079,975,775 ------------------------------------------------ Net assets, at value ............................ $ 695,604,802 $3,540,441,316 $52,259,378,699 ================================================ Net assets consist of: Paid-in capital ........................................ $ 430,274,715 $1,923,436,003 $59,950,751,117 Undistributed net investment income (loss) ............. (1,965,046) -- -- Distributions in excess of net investment income ....... -- (2,303,424) (402,932,276) Net unrealized appreciation (depreciation) ............. 330,470,898 1,711,904,200 (1,033,021,174) Accumulated net realized gain (loss) ................... (63,175,765) (92,595,463) (6,255,418,968) ------------------------------------------------ Net assets, at value ............................ $ 695,604,802 $3,540,441,316 $52,259,378,699 ================================================ (a) The Franklin Income Fund includes $30,292,875 of securities loaned. The accompanying notes are an integral part of these financial statements. 100 | Semiannual Report Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2010 (unaudited) FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------ CLASS A: Net assets, at value ...................................... $ 571,135,665 $2,537,815,311 $30,823,642,079 ------------------------------------------------ Shares outstanding ........................................ 21,501,836 61,031,378 14,683,998,418 ------------------------------------------------ Net asset value per share (a) ............................. $ 26.56 $ 41.58 $ 2.10 ------------------------------------------------ Maximum offering price per share (net asset value per share / 94.25%, 94.25% and 95.75%, respectively) ......... $ 28.18 $ 44.12 $ 2.19 ------------------------------------------------ CLASS B: Net assets, at value ...................................... $ 12,730,440 $ 75,003,509 $ 1,894,593,654 ------------------------------------------------ Shares outstanding ........................................ 516,618 1,877,922 906,716,489 ------------------------------------------------ Net asset value and maximum offering price per share (a)... $ 24.64 $ 39.94 $ 2.09 ------------------------------------------------ CLASS B1: Net assets, at value ...................................... -- -- $ 32,103,072 ------------------------------------------------ Shares outstanding ........................................ -- -- 15,268,038 ------------------------------------------------ Net asset value and maximum offering price per share (a)... -- -- $ 2.10 ------------------------------------------------ CLASS C: Net assets, at value ...................................... $ 94,837,479 $ 353,659,109 $14,717,275,473 ------------------------------------------------ Shares outstanding ........................................ 3,894,713 8,950,015 6,956,068,311 ------------------------------------------------ Net asset value and maximum offering price per share (a)... $ 24.35 $ 39.51 $ 2.12 ------------------------------------------------ CLASS R: Net assets, at value ...................................... $ 6,733,008 $ 88,248,730 $ 356,917,380 ------------------------------------------------ Shares outstanding ........................................ 254,511 2,128,308 172,083,411 ------------------------------------------------ Net asset value and maximum offering price per share ...... $ 26.45 $ 41.46 $ 2.07 ------------------------------------------------ ADVISOR CLASS: Net assets, at value ...................................... $ 10,168,210 $ 485,714,657 $ 4,434,847,041 ------------------------------------------------ Shares outstanding ........................................ 380,962 11,675,135 2,124,611,267 ------------------------------------------------ Net asset value and maximum offering price per share ...... $ 26.69 $ 41.60 $ 2.09 ------------------------------------------------ (a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. The accompanying notes are an integral part of these financial statements. Semiannual Report | 101 Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2010 (unaudited) FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND -------------------------------- Assets: Investments in securities: Cost - Unaffiliated issuers ............................................................ $ 9,174,543,281 $1,801,918,711 Cost - Sweep Money Fund (Note 7) ....................................................... 239,265,772 27,420,822 -------------------------------- Total cost of investments .............................................................. $ 9,413,809,053 $1,829,339,533 ================================ Value - Unaffiliated issuers ........................................................... $ 9,477,387,006 $2,262,323,339 Value - Sweep Money Fund (Note 7) ...................................................... 239,265,772 27,420,822 -------------------------------- Total value of investments ............................................................. 9,716,652,778 2,289,744,161 Receivables: Capital shares sold .................................................................... 29,240,518 6,259,963 Dividends and interest ................................................................. 38,699,303 7,736,993 Other assets ............................................................................. 22,982 5,698 -------------------------------- Total assets ........................................................................ 9,784,615,581 2,303,746,815 -------------------------------- Liabilities: Payables: Investment securities purchased ........................................................ 63,915,346 -- Capital shares redeemed ................................................................ 34,224,229 3,399,814 Affiliates ............................................................................. 7,590,132 1,835,847 Allocator Funds (Note 12) .............................................................. 29,377 6,897 Unaffiliated transfer agent fees ....................................................... 1,102,458 377,743 Accrued expenses and other liabilities ................................................... 351,901 285,896 -------------------------------- Total liabilities ................................................................... 107,213,443 5,906,197 -------------------------------- Net assets, at value .............................................................. $ 9,677,402,138 $2,297,840,618 ================================ Net assets consist of: Paid-in capital .......................................................................... $ 9,753,117,340 $1,840,955,301 Undistributed net investment income (distributions in excess of net investment income) ... (10,879,861) 3,313,770 Net unrealized appreciation (depreciation) ............................................... 302,843,725 460,412,497 Accumulated net realized gain (loss) ..................................................... (367,679,066) (6,840,950) -------------------------------- Net assets, at value .............................................................. $ 9,677,402,138 $2,297,840,618 ================================ The accompanying notes are an integral part of these financial statements. 102 | Semiannual Report Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2010 (unaudited) FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND ---------------------------------- CLASS A: Net assets, at value .................................................... $ 6,410,681,408 $ 1,684,461,363 ---------------------------------- Shares outstanding ...................................................... 957,566,053 154,566,858 ---------------------------------- Net asset value per share (a) ........................................... $ 6.69 $ 10.90 ---------------------------------- Maximum offering price per share (net asset value per share / 95.75%).... $ 6.99 $ 11.38 ---------------------------------- CLASS B: Net assets, at value .................................................... $ 174,946,938 $ 58,404,333 ---------------------------------- Shares outstanding ...................................................... 26,172,408 5,360,010 ---------------------------------- Net asset value and maximum offering price per share (a) ................. $ 6.68 $ 10.90 ---------------------------------- CLASS C: Net assets, at value .................................................... $ 1,977,819,248 $ 354,864,068 ---------------------------------- Shares outstanding ...................................................... 297,135,674 32,671,619 ---------------------------------- Net asset value and maximum offering price per share (a) ................. $ 6.66 $ 10.86 ---------------------------------- CLASS R: Net assets, at value .................................................... $ 128,729,784 $ 39,668,134 ---------------------------------- Shares outstanding ...................................................... 19,245,938 3,649,824 ---------------------------------- Net asset value and maximum offering price per share ..................... $ 6.69 $ 10.87 ---------------------------------- ADVISOR CLASS: Net assets, at value .................................................... $ 985,224,760 $ 160,442,720 ---------------------------------- Shares outstanding ...................................................... 146,782,474 14,645,723 ---------------------------------- Net asset value and maximum offering price per share .................... $ 6.71 $ 10.95 ---------------------------------- (a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. The accompanying notes are an integral part of these financial statements. Semiannual Report | 103 Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the six months ended March 31, 2010 (unaudited) FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND --------------------------------------------------- Investment income: Dividends: Unaffiliated issuers ............................................ $ 2,033,472 $ 23,980,325 $ 297,642,682 Non-controlled affiliated issuers (Note 11) ..................... -- -- 22,913,188 Interest: Unaffiliated issuers ............................................ -- 7,876 1,491,441,173 Non-controlled affiliated issuers (Note 11) ..................... -- -- 36,890,591 Income from securities loaned ..................................... -- -- 297,481 --------------------------------------------------- Total investment income .................................... 2,033,472 23,988,201 1,849,185,115 --------------------------------------------------- Expenses: Management fees (Note 3a) ......................................... 1,581,497 7,385,689 96,302,659 Distribution fees: (Note 3c) Class A ......................................................... 666,574 2,876,058 21,889,371 Class B ......................................................... 64,178 402,276 9,817,508 Class B1 ........................................................ -- -- 133,751 Class C ......................................................... 442,759 1,640,631 44,940,438 Class R ......................................................... 16,364 186,647 836,472 Transfer agent fees (Note 3e) ..................................... 1,006,957 3,685,459 22,543,650 Special servicing agreement fees (Note 12) ........................ -- 284,524 1,192,645 Custodian fees (Note 4) ........................................... 4,329 22,099 388,255 Reports to shareholders ........................................... 88,645 313,566 2,558,744 Registration and filing fees ...................................... 59,706 87,928 462,351 Professional fees ................................................. 41,773 44,463 255,331 Trustees' fees and expenses ....................................... 2,593 20,931 144,684 Other ............................................................. 23,144 96,461 615,734 --------------------------------------------------- Total expenses ............................................. 3,998,519 17,046,732 202,081,593 Expense reductions (Note 4) ................................ (1) (2) (118) --------------------------------------------------- Net expenses ............................................ 3,998,518 17,046,730 202,081,475 --------------------------------------------------- Net investment income (loss) .......................... (1,965,046) 6,941,471 1,647,103,640 --------------------------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments: Unaffiliated issuers ......................................... 17,956,791 37,922,016 (1,197,548,711) Non-controlled affiliated issuers (Note 11)................... -- -- (82,755,348) Written options ................................................. -- -- 1,038,713 Foreign currency transactions ................................... 77,557 8,821 (1,824,169) --------------------------------------------------- Net realized gain (loss) .............................. 18,034,348 37,930,837 (1,281,089,515) --------------------------------------------------- Net change in unrealized appreciation (depreciation) on: Investments ..................................................... 72,035,852 406,845,894 4,140,394,887 Translation of other assets and liabilities denominated in foreign currencies ........................................... -- (371) (27,938) --------------------------------------------------- Net change in unrealized appreciation (depreciation) ..................................... 72,035,852 406,845,523 4,140,366,949 --------------------------------------------------- Net realized and unrealized gain (loss) .............................. 90,070,200 444,776,360 2,859,277,434 --------------------------------------------------- Net increase (decrease) in net assets resulting from operations ...... $ 88,105,154 $ 451,717,831 $ 4,506,381,074 =================================================== The accompanying notes are an integral part of these financial statements. 104 | Semiannual Report Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) for the six months ended March 31, 2010 (unaudited) FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------------------------- Investment income: Dividends ......................................................... $ -- $ 47,025,820 Interest .......................................................... 210,792,913 3,322,330 -------------------------------- Total investment income ...................................... 210,792,913 50,348,150 -------------------------------- Expenses: Management fees (Note 3a) ......................................... 21,169,980 5,027,416 Distribution fees: (Note 3c) Class A ......................................................... 4,169,741 1,203,467 Class B ......................................................... 647,999 198,815 Class C ......................................................... 5,719,471 1,063,248 Class R ......................................................... 344,845 96,710 Transfer agent fees (Note 3e) ..................................... 5,122,985 1,534,423 Special servicing agreement fees (Note 12) ........................ 166,953 44,813 Custodian fees (Note 4) ........................................... 59,585 21,612 Reports to shareholders ........................................... 326,375 159,426 Registration and filing fees ...................................... 181,653 89,934 Professional fees ................................................. 76,135 25,623 Trustees' fees and expenses ....................................... 36,109 10,507 Other ............................................................. 177,295 47,412 -------------------------------- Total expenses ............................................... 38,199,126 9,523,406 Expense reductions (Note 4) .................................. (3) (3) -------------------------------- Net expenses ............................................... 38,199,123 9,523,403 -------------------------------- Net investment income ................................... 172,593,790 40,824,747 -------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ..................................................... 11,890,615 (3,401,415) Foreign currency transactions ................................... -- (31,551) -------------------------------- Net realized gain (loss) ................................ 11,890,615 (3,432,966) -------------------------------- Net change in unrealized appreciation (depreciation) on: Investments ..................................................... 1,733,412 68,491,039 Translation of other assets and liabilities denominated in foreign currencies ........................................... -- (17,207) -------------------------------- Net change in unrealized appreciation (depreciation) .... 1,733,412 68,473,832 -------------------------------- Net realized and unrealized gain (loss) .............................. 13,624,027 65,040,866 -------------------------------- Net increase (decrease) in net assets resulting from operations ...... $ 186,217,817 $ 105,865,613 ================================ The accompanying notes are an integral part of these financial statements. Semiannual Report | 105 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, 2010 YEAR ENDED MARCH 31, 2010 YEAR ENDED (UNAUDITED) SEPTEMBER 30, 2009 (UNAUDITED) SEPTEMBER 30, 2009 -------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ...................... $ (1,965,046) $ (2,203,451) $ 6,941,471 $ 19,035,425 Net realized gain (loss) from investments and foreign currency transactions .................. 18,034,348 (59,040,251) 37,930,837 18,944,348 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies .................................... 72,035,852 117,993,942 406,845,523 50,707,596 -------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ................. 88,105,154 56,750,240 451,717,831 88,687,369 -------------------------------------------------------------------------- Distributions to shareholders from: Net investment income: Class A ........................................ -- -- (16,704,519) (13,937,611) Class B ........................................ -- -- (59,099) -- Class C ........................................ -- -- (605,181) (158,739) Class R ........................................ -- -- (424,812) (93,243) Advisor Class .................................. -- -- (4,186,666) (2,842,374) Net realized gains: Class A ........................................ -- (23,817,251) -- -- Class B ........................................ -- (674,313) -- -- Class C ........................................ -- (3,500,844) -- -- Advisor Class .................................. -- (211,314) -- -- -------------------------------------------------------------------------- Total distributions to shareholders ................. -- (28,203,722) (21,980,277) (17,031,967) -------------------------------------------------------------------------- Capital share transactions: (Note 2) Class A ........................................ (4,888,201) 95,693,757 58,900,673 423,439,580 Class B ........................................ (2,699,717) 2,223,304 (23,638,394) 64,703 Class C ........................................ (330,044) 24,245,692 (5,570,020) 55,014,386 Class R ........................................ (466,616) 4,561,511 13,103,712 30,600,261 Advisor Class .................................. 741,734 5,097,576 (4,939,883) 151,094,118 -------------------------------------------------------------------------- Total capital share transactions .................... (7,642,844) 131,821,840 37,856,088 660,213,048 -------------------------------------------------------------------------- Net increase (decrease) in net assets ........ 80,462,310 160,368,358 467,593,642 731,868,450 Net assets: Beginning of period ................................. 615,142,492 454,774,134 3,072,847,674 2,340,979,224 -------------------------------------------------------------------------- End of period ....................................... $ 695,604,802 $ 615,142,492 $ 3,540,441,316 $ 3,072,847,674 ========================================================================== Undistributed net investment income (loss) (distributions in excess of net investment income) included in net assets: End of period ..................................... $ (1,965,046) $ -- $ (2,303,424) $ 12,735,382 ========================================================================== The accompanying notes are an integral part of these financial statements. 106 | Semiannual Report 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, 2010 YEAR ENDED MARCH 31, 2010 YEAR ENDED (UNAUDITED) SEPTEMBER 30, 2009 (UNAUDITED) SEPTEMBER 30, 2009 -------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ............................ $ 1,647,103,640 $ 3,021,185,783 $ 172,593,790 $ 326,946,470 Net realized gain (loss) from investments, written options and foreign currency transactions .................................. (1,281,089,515) (4,679,001,452) 11,890,615 8,947,805 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ............................ 4,140,366,949 5,364,093,012 1,733,412 306,262,342 -------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ................ 4,506,381,074 3,706,277,343 186,217,817 642,156,617 -------------------------------------------------------------------------- Distributions to shareholders from: Net investment income: Class A ....................................... (1,056,761,799) (2,122,519,292) (129,334,653) (266,824,581) Class B ....................................... (64,655,718) (162,039,544) (3,682,161) (10,979,232) Class B1 ...................................... (1,479,961) (12,892,120) -- -- Class C ....................................... (461,117,464) (924,754,117) (30,774,270) (39,006,086) Class R ....................................... (11,627,078) (22,649,572) (2,560,862) (5,108,595) Advisor Class ................................. (161,290,476) (322,719,140) (19,573,023) (32,473,805) Net realized gains: Class A ....................................... -- (15,591,600) -- -- Class B ....................................... -- (1,384,690) -- -- Class B1 ...................................... -- (124,160) -- -- Class C ....................................... -- (7,179,957) -- -- Class R ....................................... -- (166,198) -- -- Advisor Class ................................. -- (2,449,031) -- -- -------------------------------------------------------------------------- Total distributions to shareholders ................ (1,756,932,496) (3,594,469,421) (185,924,969) (354,392,299) -------------------------------------------------------------------------- Capital share transactions: (Note 2) Class A ....................................... 1,435,953,453 729,974,966 134,084,364 707,313,300 Class B ....................................... (265,899,390) (324,408,642) (55,687,864) (64,174,344) Class B1 ...................................... (39,010,992) (136,813,461) -- -- Class C ....................................... 892,934,344 543,188,709 513,764,204 820,560,727 Class R ....................................... 23,180,055 40,235,428 (9,791,990) 29,529,703 Advisor Class ................................. 16,235,823 (24,803,405) 121,259,448 227,056,372 -------------------------------------------------------------------------- Total capital share transactions ................... 2,063,393,293 827,373,595 703,628,162 1,720,285,758 -------------------------------------------------------------------------- Net increase (decrease) in net assets ............................... 4,812,841,871 939,181,517 703,921,010 2,008,050,076 Net assets: Beginning of period ................................ 47,446,536,828 46,507,355,311 8,973,481,128 6,965,431,052 -------------------------------------------------------------------------- End of period ...................................... $ 52,259,378,699 $ 47,446,536,828 $ 9,677,402,138 $ 8,973,481,128 ========================================================================== Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of period .................................... $ (402,932,276) $ (293,103,420) $ (10,879,861) $ 2,451,318 ========================================================================== The accompanying notes are an integral part of these financial statements. Semiannual Report | 107 Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FRANKLIN UTILITIES FUND ------------------------------------- SIX MONTHS ENDED MARCH 31, 2010 YEAR ENDED (UNAUDITED) SEPTEMBER 30, 2009 ------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ......................................................... $ 40,824,747 $ 79,810,590 Net realized gain (loss) from investments and foreign currency transactions ... (3,432,966) 28,009,600 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ............. ................................................... 68,473,832 (249,432,367) ------------------------------------- Net increase (decrease) in net assets resulting from operations .......... 105,865,613 (141,612,177) ------------------------------------- Distributions to shareholders from: Net investment income: Class A .................................................................... (35,370,116) (60,897,517) Class B .................................................................... (1,186,684) (2,457,137) Class C .................................................................... (6,383,269) (10,325,076) Class R .................................................................... (779,667) (1,233,300) Advisor Class .............................................................. (3,215,899) (2,775,441) Net realized gains: Class A .................................................................... (23,199,153) (11,143,330) Class B .................................................................... (922,593) (556,682) Class C .................................................................... (4,562,415) (2,138,465) Class R .................................................................... (555,438) (236,227) Advisor Class .............................................................. (1,930,079) (407,396) ------------------------------------- Total distributions to shareholders ............................................. (78,105,313) (92,170,571) ------------------------------------- Capital share transactions: (Note 2) Class A .................................................................... 120,272,722 (47,298,609) Class B .................................................................... (6,743,468) (18,007,546) Class C .................................................................... 50,753,084 (4,044,700) Class R .................................................................... 1,342,666 4,676,850 Advisor Class .............................................................. 34,425,335 71,734,045 ------------------------------------- Total capital share transactions ................................................ 200,050,339 7,060,040 ------------------------------------- Net increase (decrease) in net assets .................................... 227,810,639 (226,722,708) Net assets: Beginning of period ............................................................. 2,070,029,979 2,296,752,687 ------------------------------------- End of period ................................................................... $ 2,297,840,618 $ 2,070,029,979 ===================================== Undistributed net investment income included in net assets: End of period ................................................................... $ 3,313,770 $ 9,424,658 ===================================== The accompanying notes are an integral part of these financial statements. 108 | Semiannual Report 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 an 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 C, CLASS R CLASS A, CLASS B, CLASS B1, & ADVISOR CLASS CLASS C, CLASS R & ADVISOR CLASS - ---------------------------------------- -------------------------------- Franklin DynaTech Fund Franklin Income Fund Franklin Growth Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund The following summarizes the Funds' significant accounting policies. a. SECURITY VALUATION Equity and other 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. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds and non-registered money market funds are valued at the closing net asset value. Short term investments are valued at cost. Corporate debt securities, government securities, municipal securities, mortgage backed securities, asset-backed securities, collateralized debt obligations and other debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Funds may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Funds' 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. Debt securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the date that the values of the foreign debt securities are determined. Senior secured corporate loans with floating or variable interest rates generally trade in the over-the-counter market rather than on a securities exchange. The Funds may utilize independent pricing services, quotations from loan dealers and other financial institutions, and information with respect to bond and note transactions, to assist in determining a current market value for Semiannual Report | 109 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) a. SECURITY VALUATION (CONTINUED) each security. The Funds' pricing services use independent market quotations from loan dealers or financial institutions and may incorporate valuation methodologies that consider multiple bond characteristics such as dealer quotes, issuer type, coupon, maturity, weighted average maturity, interest rate spreads and yield curves, cash flow and credit risk/quality analysis, to determine current value. Foreign equity 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 equity 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 security is determined. The Funds have procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Funds' 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. The Funds may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. 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. 110 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) b. FOREIGN CURRENCY TRANSLATION (CONTINUED) The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. c. JOINT REPURCHASE AGREEMENT The Funds may enter into a joint repurchase agreement whereby their uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the fund to the seller, collateralized by securities which are delivered to the fund's custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. The joint repurchase agreement held by the funds at period end had been entered into on March 31, 2010. The joint repurchase agreement is valued at cost which approximates market value. d. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, AND TBA BASIS The Funds may purchase securities on a when-issued, delayed delivery, and to-be-announced (TBA) basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Funds will generally purchase these securities with the intention of holding the securities, they may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. e. DERIVATIVE FINANCIAL INSTRUMENTS Certain funds may invest in derivative financial instruments (derivatives) in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives may contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, Semiannual Report | 111 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) e. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) the potential for an illiquid secondary market, and the potential for market movements which may expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Derivatives are marked to market daily based upon quotations from market makers or the Fund's independent pricing services and the Fund's net benefit or obligation under the contract, as measured by the fair market value of the contract, is included in net assets. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations. The Franklin Income Fund generally purchases or writes option contracts in order to manage or gain exposure to equity price risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of a particular security, currency or index, or notional amount of a swap (swaption), at a specified price. Options purchased are recorded as an asset while options written are recorded as a liability. Upon exercise of an option, the acquisition cost or sales proceeds of the security is adjusted by any premium paid or received. Upon expiration of an option, any premium paid or received is recorded as a realized loss or gain. Upon closing an option other than through expiration or exercise, the difference between the premium and the cost to close the position is recorded as a realized gain or loss. See Note 10 regarding other derivative information. f. EQUITY-LINKED SECURITIES The Franklin Income Fund may invest in equity-linked securities. Equity-linked securities are hybrid financial instruments that generally combine both debt and equity characteristics into a single note form. Income received from equity linked securities is recorded as realized gains in the Statement of Operations and may be based on the performance of an underlying equity security, an equity index, or an option position. The risks of investing in equity-linked securities include unfavorable price movements in the underlying security and the credit risk of the issuing financial institution. There may be no guarantee of a return of principal with equity linked securities and the appreciation potential may be limited. Equity-linked securities may be more volatile and less liquid than other investments held by the Fund. g. SECURITIES LENDING The Franklin Income Fund participates in a principal based security lending program. The fund receives 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 112 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) g. SECURITIES LENDING (CONTINUED) is delivered to the fund on the next business day. The collateral is invested in a non-registered money fund (Bank of New York Institutional Cash Reserve Fund or ICRF) and in a money market fund managed by the fund's custodian on the fund's behalf. The fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the principal may default on its obligations to the fund. In September of 2008, the Bank of New York Mellon (BNYM) advised the Fund that the ICRF had exposure to certain defaulted debt obligations of Lehman Brothers Holdings, Inc. and that they had created a separate sleeve (Series B) of the ICRF to hold these securities apart from the main investments. Each investor in the ICRF was allocated its pro-rata portion of Series B. The Fund's position in Series B is disclosed on the Statement of Investments at fair value and any unrealized loss attributable to the position is included in net assets. h. 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. i. INCOME TAXES 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. As a result, no provision for federal income taxes is required. The Funds file U.S. income tax returns as well as tax returns in certain other jurisdictions. As of March 31, 2010, and for all open tax years, the Funds have determined that no provision for income tax is required in the Funds' financial statements. Open tax years are those that remain subject to examination by such taxing authorities, which in the case of the U.S. is three years after the filing of a fund's tax return. j. 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 Semiannual Report | 113 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) j. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) 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, not including 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. k. 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. 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. 114 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST At March 31, 2010, 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, 2010 Shares sold .................... 2,004,116 $ 49,818,877 6,838,086 $ 266,368,287 Shares issued in reinvestment of distributions ................ -- -- 402,844 15,404,767 Shares redeemed ................ (2,206,800) (54,707,078) (5,793,608) (222,872,381) ----------------------------------------------------------- Net increase (decrease) ........ (202,684) $ (4,888,201) 1,447,322 $ 58,900,673 =========================================================== Year ended September 30, 2009 Shares sold .................... 2,782,002 $ 53,411,677 12,015,889 $ 359,509,553 Shares issued on merger (Note 14) .................... 7,598,915 126,195,671 14,593,037 451,362,637 Shares issued in reinvestment of distributions ................ 1,359,432 21,288,705 486,462 12,711,248 Shares redeemed ................ (5,668,339) (105,202,296) (13,479,108) (400,143,858) ----------------------------------------------------------- Net increase (decrease) ........ 6,072,010 $ 95,693,757 13,616,280 $ 423,439,580 =========================================================== CLASS B SHARES: Six Months ended March 31, 2010 Shares sold .................... 26,881 $ 618,708 33,405 $ 1,253,187 Shares issued in reinvestment of distributions ................ -- -- 1,489 54,809 Shares redeemed ................ (143,742) (3,318,425) (669,933) (24,946,390) ----------------------------------------------------------- Net increase (decrease) ........ (116,861) $ (2,699,717) (635,039) $ (23,638,394) =========================================================== Year ended September 30, 2009 Shares sold .................... 68,034 $ 1,166,470 269,458 $ 7,369,648 Shares issued on merger (Note 14) .................... 471,140 7,329,289 897,036 26,650,945 Shares issued in reinvestment of distributions ................ 39,296 576,475 -- -- Shares redeemed ................ (400,924) (6,848,930) (1,186,449) (33,955,890) ----------------------------------------------------------- Net increase (decrease) ........ 177,546 $ 2,223,304 (19,955) $ 64,703 =========================================================== CLASS C SHARES: Six Months ended March 31, 2010 Shares sold .................... 436,143 $ 9,894,790 755,646 $ 27,978,429 Shares issued in reinvestment of distributions ................ -- -- 15,351 559,243 Shares redeemed ................ (450,476) (10,224,834) (932,113) (34,107,692) ----------------------------------------------------------- Net increase (decrease) ........ (14,333) $ (330,044) (161,116) $ (5,570,020) =========================================================== Year ended September 30, 2009 Shares sold .................... 610,534 $ 10,952,317 1,769,875 $ 50,036,992 Shares issued on merger (Note 14) .................... 1,986,027 30,539,237 2,280,868 67,125,954 Shares issued in reinvestment of distributions ................ 219,790 3,186,956 5,806 144,797 Shares redeemed ................ (1,201,455) (20,432,818) (2,213,519) (62,293,357) ----------------------------------------------------------- Net increase (decrease) ........ 1,614,896 $ 24,245,692 1,843,030 $ 55,014,386 =========================================================== Semiannual Report | 115 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 R SHARES: Six Months ended March 31, 2010 Shares sold .................... 45,185 $ 1,121,427 614,658 $ 23,698,539 Shares issued in reinvestment of distributions ................ -- -- 10,831 413,311 Shares redeemed ................ (64,971) (1,588,043) (287,457) (11,008,138) --------------------------------------------------------- Net increase (decrease) ........ (19,786) $ (466,616) 338,032 $ 13,103,712 ========================================================= Year ended September 30, 2009 (a) Shares sold .................... 105,135 $ 1,878,341 2,050,622 $ 61,397,829 Shares issued on merger (Note 14) .................... 269,510 4,473,861 308,381 9,519,723 Shares issued in reinvestment of distributions ................ -- -- 3,545 92,515 Shares redeemed ................ (100,348) (1,790,691) (1,390,720) (40,409,806) --------------------------------------------------------- Net increase (decrease) ........ 274,297 $ 4,561,511 971,828 $ 30,600,261 ========================================================= ADVISOR CLASS SHARES: Six Months ended March 31, 2010 Shares sold .................... 51,551 $ 1,308,738 598,425 $ 23,232,896 Shares issued in reinvestment of distributions ................ -- -- 102,177 3,905,212 Shares redeemed ................ (23,180) (567,004) (823,339) (32,077,991) --------------------------------------------------------- Net increase (decrease) ........ 28,371 $ 741,734 (122,737) $ (4,939,883) ========================================================= Year ended September 30, 2009 Shares sold .................... 193,916 $ 3,835,277 1,828,858 $ 54,651,357 Shares issued on merger (Note 14) .................... 99,151 1,649,870 4,691,275 145,148,039 Shares issued in reinvestment of distributions ................ 13,467 211,295 102,244 2,668,575 Shares redeemed ................ (31,772) (598,866) (1,722,646) (51,373,853) --------------------------------------------------------- Net increase (decrease) ........ 274,762 $ 5,097,576 4,899,731 $ 151,094,118 ========================================================= (a) For the period December 1, 2008 (effective date) to September 30, 2009, for the Franklin DynaTech Fund. FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND ----------------------------------- --------------------------------- SHARES AMOUNT SHARES AMOUNT ----------------------------------------------------------------------- CLASS A SHARES: Six Months ended March 31, 2010 Shares sold ................. 1,576,591,081 $ 3,213,841,437 124,065,841$ 830,968,510 Shares issued in reinvestment of distributions .......... 401,331,361 808,301,285 14,281,548 95,494,486 Shares redeemed ............. (1,270,125,334) (2,586,189,269) (118,400,194) (792,378,632) ----------------------------------------------------------------------- Net increase (decrease) ..... 707,797,108 $ 1,435,953,453 19,947,195 $ 134,084,364 ======================================================================= Year ended September 30, 2009 Shares sold ................. 3,194,615,875 $ 5,446,582,263 327,684,616 $ 2,154,557,471 Shares issued in reinvestment of distributions .......... 929,761,078 1,563,293,948 28,818,237 189,352,370 Shares redeemed ............. (3,760,506,184) (6,279,901,245) (248,416,455) (1,636,596,541) ----------------------------------------------------------------------- Net increase (decrease) ..... 363,870,769 $ 729,974,966 108,086,398$ 707,313,300 ======================================================================= 116 | 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 B SHARES: Six Months ended March 31, 2010 Shares sold ................. 8,087,103 $ 16,414,369 933,182 $ 6,242,446 Shares issued in reinvestment of distributions .......... 22,318,313 44,727,747 430,503 2,877,233 Shares redeemed ............. (160,640,686) (327,041,506) (9,693,605) (64,807,543) -------------------------------------------------------------------- Net increase (decrease) ..... (130,235,270) $ (265,899,390) (8,329,920) $ (55,687,864) ==================================================================== Year ended September 30, 2009 Shares sold ................. 34,580,449 $ 58,074,216 8,056,168 $ 52,523,598 Shares issued in reinvestment of distributions .......... 63,807,057 106,531,528 1,218,659 7,988,052 Shares redeemed ............. (295,644,541) (489,014,386) (18,942,006) (124,685,994) -------------------------------------------------------------------- Net increase (decrease) ..... (197,257,035) $ (324,408,642) (9,667,179) $ (64,174,344) ==================================================================== CLASS B1 SHARES: Six Months ended March 31, 2010 Shares sold ................. 87,642 $ 180,178 Shares issued in reinvestment of distributions .......... 426,645 854,437 Shares redeemed ............. (19,883,483) (40,045,607) ---------------------------------- Net increase (decrease) ..... (19,369,196) (39,010,992) ================================== Year ended September 30, 2009 Shares sold ................. 616,259 $ 1,006,991 Shares issued in reinvestment of distributions .......... 4,478,768 7,437,357 Shares redeemed ............. (84,121,447) (145,257,809) ---------------------------------- Net increase (decrease) ..... (79,026,420) $ (136,813,461) ================================== CLASS C SHARES: Six Months ended March 31, 2010 Shares sold ................. 811,200,034 $ 1,666,950,076 108,871,363 $ 725,234,137 Shares issued in reinvestment of distributions .......... 159,914,613 324,735,550 3,574,666 23,781,589 Shares redeemed ............. (535,043,386) (1,098,751,282) (35,349,898) (235,251,522) -------------------------------------------------------------------- Net increase (decrease) ..... 436,071,261 $ 892,934,344 77,096,131 $ 513,764,204 ==================================================================== Year ended September 30, 2009 Shares sold ................. 1,490,228,499 $ 2,568,269,575 177,348,206 $ 1,163,765,108 Shares issued in reinvestment of distributions .......... 372,417,014 631,594,234 4,298,963 28,151,041 Shares redeemed ............. (1,592,519,479) (2,656,675,100) (56,632,697) (371,355,422) -------------------------------------------------------------------- Net increase (decrease) ..... 270,126,034 $ 543,188,709 125,014,472 $ 820,560,727 ==================================================================== Semiannual Report | 117 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 R SHARES: Six Months ended March 31, 2010 Shares sold ................. 32,670,166 $ 65,717,871 4,775,546 $ 31,951,629 Shares issued in reinvestment of distributions .......... 5,446,023 10,842,622 372,092 2,486,745 Shares redeemed ............. (26,569,727) (53,380,438) (6,620,088) (44,230,364) ----------------------------------------------------------------- Net increase (decrease) ..... 11,546,462 $ 23,180,055 (1,472,450) $ (9,791,990) ================================================================= Year ended September 30, 2009 Shares sold ................. 68,996,085 $ 115,848,208 13,507,302 $ 88,919,423 Shares issued in reinvestment of distributions .......... 12,725,193 21,140,911 758,236 4,977,846 Shares redeemed ............. (58,266,413) (96,753,691) (9,774,179) (64,367,566) ----------------------------------------------------------------- Net increase (decrease) ..... 23,454,865 $ 40,235,428 4,491,359 $ 29,529,703 ================================================================= ADVISOR CLASS SHARES: Six Months ended March 31, 2010 Shares sold ................. 196,977,757 $ 399,697,232 30,613,325 $ 205,621,866 Shares issued in reinvestment of distributions .......... 72,414,844 144,990,702 2,359,147 15,813,014 Shares redeemed ............. (261,640,781) (528,452,111) (14,933,906) (100,175,432) ----------------------------------------------------------------- Net increase (decrease) ..... 7,751,820 $ 16,235,823 18,038,566 $ 121,259,448 ================================================================= Year ended September 30, 2009 Shares sold ................. 537,139,078 $ 923,014,317 56,386,916 $ 373,566,694 Shares issued in reinvestment of distributions .......... 185,103,308 309,081,671 4,110,288 27,061,258 Shares redeemed ............. (772,328,637) (1,256,899,393) (26,340,863) (173,571,580) ----------------------------------------------------------------- Net increase (decrease) ..... (50,086,251) $ (24,803,405) 34,156,341 $ 227,056,372 ================================================================= FRANKLIN UTILITIES FUND ---------------------------- SHARES AMOUNT ---------------------------- CLASS A SHARES: Six Months ended March 31, 2010 Shares sold ...................................... 19,369,848 $ 212,982,699 Shares issued in reinvestment of distributions.... 4,520,035 48,855,778 Shares redeemed .................................. (12,993,488) (141,565,755) ---------------------------- Net increase (decrease) ......................... 10,896,395 $ 120,272,722 ============================ Year ended September 30, 2009 Shares sold ...................................... 21,564,244 $ 217,252,356 Shares issued in reinvestment of distributions.... 5,861,644 57,450,592 Shares redeemed .................................. (32,180,738) (322,001,557) ---------------------------- Net increase (decrease) .......................... (4,754,850) $ (47,298,609) ============================ 118 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED) FRANKLIN UTILITIES FUND --------------------------- SHARES AMOUNT --------------------------- CLASS B SHARES: Six Months ended March 31, 2010 Shares sold ............................................. 241,141 $ 2,639,135 Shares issued in reinvestment of distributions .......... 126,304 1,366,468 Shares redeemed ......................................... (984,191) (10,749,071) --------------------------- Net increase (decrease) ................................. (616,746) $ (6,743,468) =========================== Year ended September 30, 2009 Shares sold ............................................. 320,985 $ 3,200,510 Shares issued in reinvestment of distributions .......... 184,409 1,806,989 Shares redeemed ......................................... (2,310,669) (23,015,045) --------------------------- Net increase (decrease) ................................. (1,805,275) $ (18,007,546) =========================== CLASS C SHARES: Six Months ended March 31, 2010 Shares sold ............................................. 7,253,863 $ 79,607,806 Shares issued in reinvestment of distributions .......... 632,358 6,816,177 Shares redeemed ......................................... (3,286,533) (35,670,899) --------------------------- Net increase (decrease) ................................. 4,599,688 $ 50,753,084 =========================== Year ended September 30, 2009 Shares sold ............................................. 6,347,474 $ 64,084,256 Shares issued in reinvestment of distributions .......... 738,883 7,227,247 Shares redeemed ......................................... (7,568,351) (75,356,203) --------------------------- Net increase (decrease) ................................. (481,994) $ (4,044,700) =========================== CLASS R SHARES: Six Months ended March 31, 2010 Shares sold ............................................. 665,364 $ 7,241,333 Shares issued in reinvestment of distributions .......... 122,079 1,316,377 Shares redeemed ......................................... (665,505) (7,215,044) --------------------------- Net increase (decrease) ................................. 121,938 $ 1,342,666 =========================== Year ended September 30, 2009 Shares sold ............................................. 1,545,267 $ 15,712,097 Shares issued in reinvestment of distributions .......... 147,603 1,446,259 Shares redeemed ......................................... (1,242,997) (12,481,506) --------------------------- Net increase (decrease) ................................. 449,873 $ 4,676,850 =========================== ADVISOR CLASS SHARES: Six Months ended March 31, 2010 Shares sold ............................................. 4,220,006 $ 46,654,991 Shares issued in reinvestment of distributions .......... 406,755 4,418,188 Shares redeemed ......................................... (1,511,033) (16,647,844) --------------------------- Net increase (decrease) ................................. 3,115,728 $ 34,425,335 =========================== Year ended September 30, 2009 Shares sold ............................................. 8,908,323 $ 94,646,702 Shares issued in reinvestment of distributions .......... 267,630 2,655,239 Shares redeemed ......................................... (2,556,521) (25,567,896) --------------------------- Net increase (decrease) ................................. 6,619,432 $ 71,734,045 =========================== Semiannual Report | 119 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries: 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 a. MANAGEMENT FEES 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 The Franklin DynaTech Fund, the Franklin Growth Fund and the Franklin U.S. Government Securities 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% In excess of $50 billion 120 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) a. MANAGEMENT FEES (CONTINUED) Under a subadvisory agreement, Investment Advisory, an affiliate of Advisers, provides subadvisory services to the Franklin Growth Fund and receives from Advisers fees based on the average monthly net assets of the fund. b. ADMINISTRATIVE FEES Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Funds. c. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds' Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate. 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' Class B, B1, C and R 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: 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% 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% 0.50% Semiannual Report | 121 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) d. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the period: FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND -------- --------- ----------- Sales charges retained net of commissions paid to unaffiliated broker/dealers ...... $ 77,520 $ 656,131 $ 7,766,802 Contingent deferred sales charges retained ......................................... $ 7,515 $ 23,234 $ 649,405 FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------- --------- Sales charges retained net of commissions paid to unaffiliated broker/dealers ...... $ 1,660,186 $ 311,549 Contingent deferred sales charges retained ......................................... $ 473,976 $ 26,733 e. TRANSFER AGENT FEES For the period ended March 31, 2010, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services: FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME U.S. GOVERNMENT UTILITIES FUND FUND FUND SECURITIES FUND FUND --------- ----------- ------------ --------------- ---------- Transfer agent fees ............... $ 573,018 $ 2,098,376 $ 10,691,261 $ 3,140,795 $ 922,899 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, 2010, the custodian fees were reduced as noted in the Statements of Operations. 122 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At September 30, 2009, the capital loss carryforwards were as follows: FRANKLIN FRANKLIN DYNATECH FRANKLIN FRANKLIN U.S. GOVERNMENT FUND GROWTH FUND INCOME FUND SECURITIES FUND -------------------------------------------------------------------- Capital loss carryforwards expiring in: 2010 ........................................ $ 7,950,525 $ -- $ -- $ 11,768,551 2011 ........................................ 3,784,201 -- -- 33,556,845 2012 ........................................ -- -- -- 129,102,166 2013 ........................................ -- -- -- 74,283,298 2014 ........................................ -- -- -- 47,763,112 2015 ........................................ -- -- -- 28,034,940 2016 ........................................ 9,095,484 120,221,975 -- 20,514,778 2017 ........................................ 34,738,251 -- 589,874,490 18,668,917 -------------------------------------------------------------------- $ 55,568,461 (a) $ 120,221,975 (b) $ 589,874,490 $ 363,692,607 ==================================================================== (a) Includes $46,198,980 from the merged Franklin Global Communications Fund, Franklin Global Health Care Fund and Franklin Technology Fund, which may be carried over to offset future capital gains, subject to certain limitations. (b) Includes $123,319,972 from the merged Franklin Capital Growth, which may be carried over to offset future capital gains, subject to certain limitations. 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, 2009, deferred losses were as follows: FRANKLIN FRANKLIN DYNATECH FRANKLIN U.S. GOVERNMENT FRANKLIN FUND INCOME FUND SECURITIES FUND UTILITIES FUND --------------------------------------------------------------- Realized capital losses ............................ $ 25,293,981 $ 4,350,025,960 $ 15,877,074 $ -- Realized currency losses ........................... $ -- $ -- $ -- $ 85,988 At March 31, 2010, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows: FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND --------------------------------------------------- Cost of investments ............................... $ 366,149,373 $ 1,844,938,496 $ 53,363,628,372 =================================================== Unrealized appreciation ........................... $ 330,622,955 $ 1,739,984,456 $ 5,166,055,587 Unrealized depreciation ........................... (312,994) (43,133,581) (6,432,212,334) --------------------------------------------------- Net unrealized appreciation (depreciation) ........ $ 330,309,961 $ 1,696,850,875 $ (1,266,156,747) =================================================== Semiannual Report | 123 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. INCOME TAXES (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FRANKLIN FUND UTILITIES FUND --------------------------------- Cost of investments ................................ $ 9,413,809,053 $ 1,830,213,928 ================================= Unrealized appreciation ............................ $ 310,632,204 $ 523,428,059 Unrealized depreciation ............................ (7,788,479) (63,897,826) --------------------------------- Net unrealized appreciation (depreciation) ......... $ 302,843,725 $ 459,530,233 ================================= Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, 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, payments-in-kind, and bond discounts and premiums. 6. INVESTMENT TRANSACTIONS Purchases and sales (excluding short term securities) for the period ended March 31, 2010, were as follows: FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------ Purchases ........................................ $ 122,110,079 $ 83,899,601 $ 13,542,412,870 Sales ............................................ $ 131,916,435 $ 128,803,594 $ 11,181,661,366 FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------------------------ Purchases ........................................ $ 3,152,828,050 $ 255,239,078 Sales ............................................ $ 2,007,335,871 $ 81,562,070 Transactions in options written during the period ended March 31, 2010, were as follows: NUMBER OF PREMIUMS CONTRACTS RECEIVED ----------------------- FRANKLIN INCOME FUND Options outstanding at September 30, 2009 ..... -- $ -- Options written ............................... 26,796 1,038,713 Options expired ............................... (26,796) (1,038,713) Options exercised ............................. -- -- Options closed ................................ -- -- ----------------------- Options outstanding at March 31, 2010 ......... -- $ -- ======================= 124 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 8. CREDIT RISK AND DEFAULTED SECURITIES At March 31, 2010, the Franklin Income Fund had 56.1% of its portfolio invested in high yield, senior secured floating rate notes, or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities. The Franklin Income Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At March 31, 2010, the aggregate value of these securities was $193,800,000, representing 0.37% of the fund's net assets. The fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. The securities have been identified on the accompanying Statement of Investments. 9. 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, 2010, unfunded commitments were as follows: UNFUNDED BORROWER COMMITMENT ------------- FRANKLIN INCOME FUND CF Industries Holdings, Inc., Bridge Term Loan ........... $ 325,000,000 ------------- Unfunded loan commitments and funded portions of credit agreements are marked to market daily and any unrealized appreciation or depreciation is included in the Statement of Assets and Liabilities and Statement of Operations. Semiannual Report | 125 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 10. OTHER DERIVATIVE INFORMATION For the period ended March 31, 2010, the effect of derivative contracts on the Franklin Income Fund's Statement of Operations was as follows: CHANGE IN AVERAGE UNREALIZED AMOUNT DERIVATIVE CONTRACTS REALIZED GAIN APPRECIATION OUTSTANDING NOT ACCOUNTED FOR AS STATEMENT OF OPERATIONS (LOSS) FOR (DEPRECIATION) DURING THE HEDGING INSTRUMENTS LOCATIONS THE PERIOD FOR THE PERIOD THE PERIOD (a) - ----------------------------------------------------------------------------------------------------------------------------------- Equity contracts Net realized gain (loss) from written options $ 1,038,713 $ -- $ 6,335 (a) Represents the average number of option contracts or notional amount for other derivative contracts outstanding during the period. See Note 1(e) regarding derivative financial instruments. 11. 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, 2010, were as shown below. NUMBER OF NUMBER OF SHARES/ SHARES/ REALIZED PRINCIPAL HELD PRINCIPAL VALUE CAPITAL AT BEGINNING GROSS GROSS HELD AT END AT END INVESTMENT GAIN NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF PERIOD OF PERIOD INCOME (LOSS) - ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND NON-CONTROLLED AFFILIATES Ameren Corp .................. 12,100,000 -- 3,850,000 8,250,000 $ -- (a) $ 7,934,850 $ (90,329,119) Ameren Corp., senior note, 8.875%, 5/15/14 ............ 58,200,000 -- 58,200,000 -- -- (a) 4,620,078 7,173,310 Canadian Oil Sands Trust ..... 25,847,400 152,600 -- 26,000,000 779,807,929 14,690,838 -- Callon Petroleum Co. ......... -- 4,181,258 -- 4,181,258 22,411,543 -- -- Callon Petroleum Co., senior secured note, 13.00%, 9/15/16 ............ -- 83,625,000 -- 83,625,000 71,499,375 3,835,135 -- Colony Financial Inc. ........ 1,250,000 -- -- 1,250,000 25,000,000 287,500 -- iStar Financial Inc. ......... 5,213,500 -- -- 5,213,500 23,929,965 -- -- iStar Financial Inc., 8.625%, 6/01/13 ............ 169,100,000 5,000,000 -- 174,100,000 150,596,500 12,714,807 -- iStar Financial Inc., cvt., senior note, FRN, 0.751%, 10/01/12 ...... 250,000,000 -- -- 250,000,000 190,125,000 1,669,240 -- iStar Financial Inc., senior secured note, 144A, 8.00%, 3/15/11 ....... -- 6,142,000 -- 6,142,000 6,149,678 266,153 -- iStar Financial Inc., senior secured note, 144A, 10.00%, 6/15/14 ...... 54,850,000 62,500,000 -- 117,350,000 117,936,750 11,591,292 -- 126 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 11. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (CONTINUED) NUMBER OF NUMBER OF SHARES/ SHARES/ REALIZED PRINCIPAL HELD PRINCIPAL VALUE CAPITAL AT BEGINNING GROSS GROSS HELD AT END AT END INVESTMENT GAIN NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF PERIOD OF PERIOD INCOME (LOSS) - ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND (CONTINUED) NON-CONTROLLED AFFILIATES (CONTINUED) (b) Dex Media West LLC, Term Loan B, 7.50%, 10/24/14 ... -- 7,771,319 536,233 7,235,086 $ 6,919,680 $ 75,119 $ 164,777 Dex One Corp. ................... -- 10,242,757 -- 10,242,757 285,977,775 -- -- Dex One Corp., senior sub. note, PIK, 14.00%, 1/29/17 ..... -- 81,136,340 -- 81,136,340 83,164,748 1,649,772 -- (b) R.H. Donnelley Inc., Term Loan B, 8.50%, 10/24/14 ... -- 42,659,116 2,289,939 40,369,177 39,632,439 468,995 235,684 ------------------------------------------- TOTAL AFFILIATED SECURITIES (3.45% of Net Assets) .......... $ 1,803,151,382 $ 59,803,779 $ (82,755,348) =========================================== (a) As of March 31, 2010, no longer an affiliate. (b) Company is a wholly owned subsidiary of Dex One Corp. 12. SPECIAL SERVICING AGREEMENT On May 1, 2009, certain funds, which are eligible underlying investments of one or more of the Franklin Templeton Fund Allocator Series Funds (Allocator Funds), entered into a Special Servicing Agreement (SSA) with the Allocator Funds and certain service providers of the funds and the Allocator Funds. Under the SSA, the funds may pay a portion of the Allocator Funds' expenses (other than any asset allocation, administrative and distribution fees), to the extent such payments are less than the amount of the benefits realized or expected to be realized by the funds (e.g., due to reduced costs associated with servicing accounts) from the investment in the funds by the Allocator Funds. The Allocator Funds are either managed by Franklin Advisers, Inc. or administered by FT Services. For the period ended March 31, 2010, the funds were held by one or more of the Allocator Funds and were allocated expenses as noted in the Statements of Operations. At March 31, 2010, one or more of the Allocator Funds owned a percentage of the funds' outstanding shares as follows: FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND - ----------------------------------------------------------------- 6.85% 5.27% 3.19% 2.56% 13. OTHER CONSIDERATIONS From time to time, officers, directors or employees of the Franklin Income Fund's Investment Manager may have discussions or enter into agreements with issuers, underwriters or creditors' committees which, pursuant to the fund's policies and requirements of applicable securities laws, could prevent the fund from trading in the securities of such company for limited or extended periods of time. Semiannual Report | 127 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 14. REORGANIZATION On December 3, 2008, the Franklin DynaTech Fund acquired the net assets of the Franklin Global Communications Fund, the Franklin Global Health Care Fund, and the Franklin Technology Fund pursuant to a plan of reorganization approved by the Franklin Global Communications Fund's, the Franklin Global Health Care Fund's, and the Franklin Technology Fund's shareholders. The reorganization was accomplished by a tax free exchange, and the net assets acquired and shares issued were as follows: SHARES ISSUED UNREALIZED BY FRANKLIN APPRECIATION FUND NAME NET ASSETS DYNATECH FUND (DEPRECIATION) - -------------------------------------------------------------------------------------------- Franklin Global Communications Fund ......... $ 47,740,803 2,914,752 $ (18,325,185) Franklin Global Health Care Fund ............ 89,644,203 5,503,466 (8,804,887) Franklin Technology Fund .................... 32,802,922 2,006,525 (10,136,675) -------------------------------------------- Total ....................................... $ 170,187,928 10,424,743 $ (37,266,747) ============================================ The combined net assets of the Franklin DynaTech Fund immediately after the reorganization were $475,468,843. On May 6, 2009, the Franklin Growth Fund acquired the net assets of the Franklin Capital Growth Fund pursuant to a plan of reorganization approved by the Franklin Capital Growth Fund's shareholders. The reorganization was accomplished by a tax-free exchange of 22,770,597 shares of the Franklin Growth Fund for the net assets of the Franklin Capital Growth Fund which aggregate $699,807,298, including $(9,584,107) of unrealized appreciation (depreciation). The combined net assets of the Franklin Growth Fund immediately after the reorganization were $2,586,155,713. 15. CREDIT FACILITY The Funds, together with other U.S. registered and foreign investment funds (collectively "Borrowers"), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 21, 2011. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay their share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.10% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statements of Operations. During the period ended March 31, 2010, the Funds did not utilize the Global Credit Facility. 128 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 16. FAIR VALUE MEASUREMENTS The Funds follow a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Funds' own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds' investments and are summarized in the following fair value hierarchy: - Level 1 - quoted prices in active markets for identical securities - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - Level 3 - significant unobservable inputs (including the fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a summary of the inputs used as of March 31, 2010, in valuing the funds' assets carried at fair value: LEVEL 1 LEVEL 2 LEVEL 3 TOTAL -------------------------------------------------- FRANKLIN DYNATECH FUND ASSETS: Investments in Securities: ............. Equity Investments (a) .............. $ 695,462,478 $ -- $ -- $ 695,462,478 Short Term Investments .............. 996,856 -- -- 996,856 -------------------------------------------------- Total Investments in Securities ... $ 696,459,334 $ -- $ -- $ 696,459,334 ================================================== FRANKLIN GROWTH FUND ASSETS: Investments in Securities: Equity Investments (a) .............. $ 3,427,509,639 $ -- $ -- $ 3,427,509,639 Short Term Investments .............. 114,279,732 -- -- 114,279,732 -------------------------------------------------- Total Investments in Securities ... $ 3,541,789,371 $ -- $ -- $ 3,541,789,371 ================================================== Semiannual Report | 129 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 16. FAIR VALUE MEASUREMENTS (CONTINUED) LEVEL 1 LEVEL 2 LEVEL 3 TOTAL ---------------------------------------------------------------------- FRANKLIN INCOME FUND ASSETS: Investments in Securities: Equity Investments:(b) Consumer Discretionary ............. $ 1,080,055,469 $ 341,169 $ -- $ 1,080,396,638 Health Care ........................ 1,224,022,664 258,137,500 -- 1,482,160,164 Financials ......................... 3,642,913,594 282,890,643 -- 3,925,804,237 Industrials ........................ -- 1,620,000 -- 1,620,000 Utilities .......................... 5,888,787,334 45,634,500 -- (c) 5,934,421,834 Other Equity Investments (a) ....... 4,129,383,071 -- -- 4,129,383,071 Equity-Linked Securities ................ -- 2,926,432,849 -- 2,926,432,849 Senior Floating Rate .................... -- 2,776,997,933 -- 2,776,997,933 Interests ............................... Corporate Bonds ......................... -- 28,109,310,684 92,407,100 28,201,717,784 Convertible Bonds ....................... -- 714,485,385 -- 714,485,385 Municipal Bonds ......................... -- 184,559,400 -- 184,559,400 Short Term Investments .................. 260,988,866 478,503,464 -- 739,492,330 ---------------------------------------------------------------------- Total Investments in Securities .... $ 16,226,150,998 $ 35,778,913,527 $ 92,407,100 $ 52,097,471,625 ====================================================================== FRANKLIN U.S. GOVERNMENT SECURITIES FUND ASSETS: Investments in Securities: Mortgage-Backed Securities .............. $ -- $ 9,477,387,006 $ -- $ 9,477,387,006 Short Term Investments .................. 239,265,772 -- -- 239,265,772 ---------------------------------------------------------------------- Total Investments in Securities .... $ 239,265,772 $ 9,477,387,006 $ -- $ 9,716,652,778 ====================================================================== FRANKLIN UTILITIES FUND ASSETS: Investments in Securities: Equity Investments (a) .................. $ 2,184,837,963 $ -- $ -- $ 2,184,837,963 Corporate Bonds ......................... -- 77,485,376 -- 77,485,376 Short Term Investments .................. 27,420,822 -- -- 27,420,822 ---------------------------------------------------------------------- Total Investments in Securities ... $ 2,212,258,785 $ 77,485,376 $ -- $ 2,289,744,161 ====================================================================== (a) For detailed industry descriptions, see the accompanying Statements of Investments. (b) Includes common, preferred and convertible preferred stock as well as other equity investments. (c) Includes securities determined to have no value at March 31, 2010. 130 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 16. FAIR VALUE MEASUREMENTS (CONTINUED) At March 31, 2010, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining the Funds' fair value, were as follows: NET CHANGE NET CHANGE IN UNREALIZED IN APPRECIATION BALANCE AT NET UNREALIZED NET TRANSFER BALANCE (DEPRECIATION) BEGINNING REALIZED APPRECIATION PURCHASES IN (OUT) OF AT END ON ASSETS HELD OF YEAR GAIN (LOSS) (DEPRECIATION) (SALES) LEVEL 3 OF PERIOD AT PERIOD END ------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND ASSETS Corporate Bonds ...... $ -- $ -- $ 157,100 $ 92,250,000 $ -- $ 92,407,100 $ 157,100 17. NEW ACCOUNTING PRONOUNCEMENTS In January 2010, the Financial Accounting Standards Board issued an Accounting Standards Update which enhances and clarifies existing fair value measurement disclosure requirements and is effective for interim and annual periods beginning after December 15, 2009. The Funds believe the adoption of this Accounting Standards Update will not have a material impact on their financial statements. 18. SUBSEQUENT EVENTS The Funds have evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure. ABBREVIATIONS CURRENCY CAD - Canadian Dollar EUR - Euro GBP - British Pound SELECTED PORTFOLIO ADR - American Depository Receipt FHLB - Federal Home Loan Bank FRN - Floating Rate Note GP - Graduated Payment L/C - Letter of Credit MTN - Medium Term Note PIK - Payment-In-Kind SF - Single Family Semiannual Report | 131 Franklin Custodian Funds SHAREHOLDER INFORMATION BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT At a meeting held February 23, 2010, 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 within 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 additional material, including 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 to U.S. mutual funds and other accounts, 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 it showing that the investment policies and restrictions for each Fund were consistently complied with as well as other reports periodically furnished the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adopted throughout the Franklin Templeton fund 132 | Semiannual Report Franklin Custodian Funds SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. The Board also noted the extent of benefits provided Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management's continuous efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted 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, and the continuous enhancements to and high industry ranking given the Franklin Templeton website. Particular attention was given to management's conservative approach and diligent risk management procedures, including continuous monitoring of counterparty credit risk and attention given to derivatives and other complex instruments. The Board also took into account, among other things, management's efforts in establishing a global credit facility for the benefit of the Funds and other accounts managed by Franklin Templeton Investments to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the Manager's parent company and its commitment to the mutual fund business as evidenced by its subsidization of money market funds. The Board also noted management's efforts to minimize any negative impact on the nature and quality of services provided the Funds arising from Franklin Templeton Investments' implementation of a hiring freeze and employee reductions in response to market conditions during the latter part of 2008 and early 2009. 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 individual Fund showed the investment performance of its Class A shares during 2009 and the previous 10-year period ended December 31, 2009, in comparison with a performance universe selected by Lipper. Investment performance was Semiannual Report | 133 Franklin Custodian Funds SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) 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 Lipper report showed the Fund's total return for 2009 to be in the second-lowest quintile of its performance universe but to be in either the highest or next-to-highest quintile of such universe in each of the previous three-, five- and 10-year periods on an annualized basis. In explaining 2009 performance, management pointed out that the Fund had a broader view of the technology sector than other funds within the performance universe and had holdings in the health care sector, which had performed poorly in 2009. The Board was satisfied with the Fund's overall performance as shown in the Lipper report, noting such explanation. 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 Lipper report showed the Fund's total return during 2009 to be in the second-highest quintile of such performance universe and its total return on an annualized basis to be in the highest quintile of such universe during each of the previous three- and five-year periods, and in the upper half of such universe for the previous 10-year period. The Board expressed satisfaction with the Fund's performance as shown in the Lipper report. FRANKLIN INCOME FUND - The 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 Lipper report showed the Fund's income return during 2009 to be in the highest or best performing quintile of its performance universe and that its income return during each of the previous 10 years was also in the highest quintile of such performance universe. The Lipper report showed the Fund's total return during 2009 to be in the highest quintile of its Lipper performance universe, and on an annualized basis to be in the highest or second-highest quintile of such universe during each of the previous three-, five- and 10-year periods. The Board was satisfied with the Fund's performance as shown in the Lipper report. 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 2009 to be in the second-highest quintile of its Lipper performance universe and its income return on an annualized basis to be in the highest or second-highest quintile of such universe during each of the previous three-, five- and 10-year periods. The Fund's Lipper report showed its total return to be in the lowest quintile of its performance universe during 2009, and its total return on an annualized basis to be in the second-lowest quintile of such universe for the previous three-year period, and in the 134 | Semiannual Report Franklin Custodian Funds SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) middle quintile of such universe for each of the previous five- and 10-year periods. The Board found such comparative performance to be acceptable in view of the Fund's income investment objective and conservative policy of investing only in plain vanilla Ginnie Mae pass-through securities, noting that the Fund's total return for the annualized three-year period was within 18 basis points of the performance universe median. 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 2009, as well as during each of the previous three-, five- and 10-year periods on an annualized basis to be in the highest quintile of such performance universe. The Fund's total return during 2009 placed it in the middle quintile of its performance universe, and placed it in the highest or second-highest quintile of such universe during each of the previous three-, five- and 10-year periods on an annualized basis. The Board was satisfied with the Fund's performance as shown in the Lipper report. 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. Lipper expense data is based upon information taken from each fund's most recent annual report, which reflects historical asset levels that may be quite different from those currently existing, particularly in a period of market volatility. While recognizing such inherent limitation and the fact that expense ratios generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Lipper to be an appropriate measure of comparative expenses. In reviewing comparative costs, Lipper provides information on 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 the contractual investment management fee rate for each of Franklin DynaTech Fund, Franklin Growth Fund and Franklin Utilities Fund to be in the least expensive quintile of its respective Lipper expense group, to be in the second-highest quintile of its expense group for Franklin Income Fund, and to be within one basis point of its expense group median for Franklin U.S. Government Securities Fund. The actual total expense ratios for all the Funds were in the least expensive quintile of their respective Lipper expense groups with the exception of Franklin U.S. Government Securities Fund whose total expense ratio was, however, below the median of its Lipper expense group. 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 as shown in the Lipper reports. Semiannual Report | 135 Franklin Custodian Funds SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services to each of the individual funds during the 12-month period ended September 30, 2009, being the most recent fiscal year-end for Franklin Resources, Inc., the Manager's parent. In reviewing the analysis, 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 review the reasonableness of the allocation methodologies solely for use by the Fund's Board 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, 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 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 136 | Semiannual Report Franklin Custodian Funds SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) 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. 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. PROXY VOTING POLICIES AND PROCEDURES The Trust's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330. Semiannual Report | 137 This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. Franklin Templeton Funds LITERATURE REQUEST. TO RECEIVE A PROSPECTUS, PLEASE CALL US AT (800) DIAL BEN/(800) 342-5236 OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE, WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING TONE. VALUE Franklin All Cap Value Fund Franklin Balance Sheet Investment Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund (1) Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Quest Fund (2) Mutual Recovery Fund (3) Mutual Shares Fund BLEND Franklin Focused Core Equity Fund Franklin Large Cap Equity Fund Franklin Rising Dividends Fund GROWTH Franklin DynaTech Fund Franklin Flex Cap Growth Fund Franklin Growth Fund Franklin Growth Opportunities Fund Franklin Small Cap Growth Fund Franklin Small-Mid Cap Growth Fund SECTOR Franklin Biotechnology Discovery Fund Franklin Global Real Estate Fund Franklin Gold & Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Mutual Financial Services Fund GLOBAL Mutual Global Discovery Fund (4) Templeton Global Long-Short Fund (5) Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund INTERNATIONAL Franklin India Growth Fund Franklin International Growth Fund Franklin International Small Cap Growth Fund Mutual European Fund Mutual International Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Emerging Markets Small Cap Fund Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Frontier Markets Fund HYBRID Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Income Fund Templeton Income Fund ASSET ALLOCATION Franklin Templeton Corefolio(R) Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund (6) Franklin Templeton Conservative Allocation Fund (7) Franklin Templeton Growth Allocation Fund (7) Franklin Templeton Moderate Allocation Fund (7) Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund FIXED INCOME Franklin Adjustable U.S. Government Securities Fund (8) Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Limited Maturity U.S. Government Securities Fund (8) Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund (8) Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund TAX-FREE INCOME (9) NATIONAL Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund (10) LIMITED-/INTERMEDIATE-TERM California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Michigan (12) Arizona Minnesota (12) California11 Missouri Colorado New Jersey Connecticut New York (11) Florida North Carolina Georgia Ohio (12) Kentucky Oregon Louisiana Pennsylvania Maryland Tennessee Massachusetts (12) Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust (13) 1. The fund is closed to new investors. Existing shareholders and select retirement plans can continue adding to their accounts. 2. Effective 5/1/09, Mutual Qualified Fund changed its name to Mutual Quest Fund. The fund's investment goal and strategy remained unchanged. 3. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5% - 25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. 4. Effective 5/1/09, Mutual Discovery Fund changed its name to Mutual Global Discovery Fund. The fund's investment goal and strategy remained unchanged. 5. Effective 12/18/09, this fund is closed to new investors, pending a proposal to merge the fund into Templeton World Fund. Existing shareholders may continue to make additional investments until shortly before the completion of the transaction, expected in April 2010. 6. Effective 3/19/10, this fund is closed to new investors, pending a reorganization of the fund into Franklin Templeton Corefolio Allocation Fund. Existing shareholders may continue to make additional investments until shortly before the completion of the transaction, expected in June 2010. 7. Effective 5/1/10, the Franklin Templeton Target Funds changed their name to the Franklin Templeton Allocation Funds. The funds' investment goals and primary investment strategies remained unchanged. 8. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 9. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. 10. The fund invests primarily in insured municipal securities. 11. These funds are available in three or more variations, including long-term portfolios, intermediate-term portfolios, portfolios of insured securities, a high-yield portfolio (CA only) and a money market portfolio (CA only). 12. The Board of Trustees approved the elimination of the non-fundamental policy requiring the fund to invest at least 80% of net assets in insured municipal securities and the removal of the word "Insured" from the fund name. The changes became effective 2/15/09. 13. The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 05/10 Not part of the semiannual report (LOGO) One Franklin Parkway San Mateo, CA 94403-1906 SIGN UP FOR ELECTRONIC DELIVERY on FRANKLINTEMPLETON.COM SEMIANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN CUSTODIAN FUNDS INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. (800) DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES (800) 632-2301 Authorized for distribution only when accompanied or preceded by a summary prospectus and/or prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. A prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FCF S 05/10 Item 2. Code of Ethics. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. Item 3. Audit Committee Financial Expert. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial expert is John B. Wilson and he is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. Item 4. Principal Accountant Fees and Services. N/A Item 5. Audit Committee of Listed Registrants. N/A Item 6. Schedule of Investments. N/A Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. N/A Item 8. Portfolio Managers of Closed-End Management Investment Companies. N/A Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. N/A Item 10. Submission of Matters to a Vote of Security Holders. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein. Item 11. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (b) Changes in Internal Controls. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. Item 12. Exhibits. (a)(1) Code of Ethics (a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, 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/LAURA F. FERGERSON ---------------------- Laura F. Fergerson Chief Executive Officer - Finance and Administration Date May 27, 2010 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/LAURA F. FERGERSON ---------------------- Laura F. Fergerson Chief Executive Officer - Finance and Administration Date May 27, 2010 By/s/GASTON GARDEY ------------------- Gaston Gardey Chief Financial Officer and Chief Accounting Officer Date May 27, 2010