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 811-06243
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FRANKLIN STRATEGIC SERIES
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(Exact name of registrant as specified in charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: 650 312-2000
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Date of fiscal year end: 4/30
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Date of reporting period: 10/31/07
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ITEM 1. REPORTS TO STOCKHOLDERS.
[GRAPHIC OMITTED]
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OCTOBER 31, 2007
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Franklin Aggressive
Growth Fund
(Franklin Growth
Opportunities Fund,
effective November 1, 2007)
Franklin Flex Cap
Growth Fund
Franklin Small Cap
Growth Fund II
Franklin Small-Mid Cap
Growth Fund
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SEMIANNUAL REPORT AND SHAREHOLDER LETTER GROWTH
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WANT TO RECEIVE
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Eligible shareholders can
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franklintempleton.com.
See inside for details.
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[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
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.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]
Not part of the semiannual report
Contents
SHAREHOLDER LETTER ........................................................ 1
SEMIANNUAL REPORT
Economic and Market Overview .............................................. 3
Franklin Aggressive Growth Fund ........................................... 5
Franklin Flex Cap Growth Fund ............................................. 13
Franklin Small Cap Growth Fund II ......................................... 21
Franklin Small-Mid Cap Growth Fund ........................................ 29
Financial Highlights and Statements of Investments ........................ 37
Financial Statements ...................................................... 73
Notes to Financial Statements ............................................. 78
Shareholder Information ................................................... 93
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Semiannual Report
Economic and Market Overview
During the six-month period ended October 31, 2007, the U.S. economy grew
solidly. Growth was supported by relatively low core inflation, consumer
spending, some improving economic data and corporate earnings reports.
Counterbalancing these positive factors were mixed inflation signals, diminished
liquidity in the financial markets and concerns about a national housing market
decline and its potential spillover effects.
The unemployment rate increased from 4.5% at the beginning of the period to 4.7%
in October 2007. 1 Although consumer confidence in July neared a six-year high,
it declined through period-end and the pace of consumer spending slowed as
worries about the housing slump and high gasoline prices made individuals more
cautious. Oil prices established a new record high in October, crossing $94 per
barrel in response to perceived tight supply and high demand for oil, refinery
maintenance issues, and ongoing geopolitical tensions in the Middle East and
Africa. For the 12 months ended October 31, 2007, the core Consumer Price Index
(CPI), which excludes food and energy costs, rose 2.2%, which was also its
10-year average rate. 1
Liquidity and financing became difficult to obtain in some corporate credit
markets. In response, the Federal Reserve Board (Fed) lowered the federal funds
target rate 75 basis points to 4.50% from 5.25% during the period. The 10-year
Treasury note yield fell from 4.63% at the beginning of the period to 4.48% on
October 31, 2007.
In mid-July, equity markets set new records amid generally strong first quarter
corporate earnings reports. However, volatility picked up in the second half of
July and in August due to investor concerns about the housing market, lending
environment and mixed second quarter earnings reports. Major stock indexes
recovered from early September losses in the wake of Fed actions mid-month.
1. Source: Bureau of Labor Statistics.
Semiannual Report | 3
The blue chip stocks of the Dow Jones Industrial Average posted a six-month
total return of +7.79%, the broader Standard & Poor's 500 Index (S&P 500)
returned +5.49%, and the technology-heavy NASDAQ Composite Index returned
+13.62%. 2 The energy, information technology and materials sectors performed
particularly well.
2. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price
weighted based on the average market price of 30 blue chip stocks of companies
that are generally industry leaders. The S&P 500 consists of 500 stocks chosen
for market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is one of
the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite
Index measures all NASDAQ domestic and international based common type stocks
listed on The NASDAQ Stock Market. The index is market value weighted and
includes more than 3,000 companies.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31,
2007. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE.
4 | Semiannual Report
Franklin Aggressive Growth Fund
(Franklin Growth Opportunities Fund, effective November 1, 2007)
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Aggressive Growth Fund seeks
capital appreciation by investing substantially in equity securities of
companies demonstrating accelerating growth, increasing profitability, or
above-average growth or growth potential, when compared with the overall
economy.
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
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We are pleased to bring you Franklin Aggressive Growth Fund's semiannual report
for the period ended October 31, 2007.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Aggressive Growth Fund - Class A had a
+24.92% cumulative total return. The Fund outperformed its narrow benchmark, the
Russell 3000(R) Growth Index, which returned +9.85%, and its broad benchmark,
the Standard & Poor's 500 Index (S&P 500), which returned +5.49% for the same
period. 1 You can find the Fund's long-term performance data in the Performance
Summary beginning on page 8.
INVESTMENT STRATEGY
We are research-driven, fundamental investors pursuing an aggressive growth
strategy. As "bottom-up" investors focusing primarily on individual securities,
we choose companies that have clear indicators of future earnings growth and
that present, in our opinion, the best trade-off between that earnings growth,
business and financial risk, and valuation. We rely on a team of analysts to
help provide in-depth industry expertise and use both qualitative and
quantitative analysis to evaluate companies for distinct and sustainable
competitive advantages likely to lead to growth in earnings and/or share price.
Competitive advantages such as a particular product niche, proven technology,
sound financial profits and records, strong management and industry leadership
are all factors we believe may contribute to strong growth potential.
1. Source: Standard & Poor's Micropal. The Russell 3000 Growth Index is market
capitalization weighted and measures performance of those Russell 3000 Index
companies with higher price-to-book ratios and higher forecasted growth values.
The S&P 500 consists of 500 stocks chosen for market size, liquidity and
industry group representation. Each stock's weight in the index is proportionate
to its market value. The S&P 500 is one of the most widely used benchmarks of
U.S. equity performance. The indexes are unmanaged and include reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 42.
Semiannual Report | 5
PORTFOLIO BREAKDOWN
Franklin Aggressive Growth Fund
Based on Total Net Assets as of 10/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Electronic Technology* 21.9%
Technology Services* 13.7%
Health Technology* 10.0%
Communications 7.5%
Finance 6.7%
Commercial Services 6.1%
Retail Trade 5.9%
Consumer Services 5.6%
Consumer Non-Durables 4.9%
Industrial Services 4.7%
Producer Manufacturing 4.1%
Consumer Durables 4.1%
Transportation 1.4%
Energy Minerals 1.0%
Other 1.4%
Short-Term Investments & Other Net Assets 1.0%
* Significant exposure to a single sector may result in greater volatility for
the Fund than a more broadly diversified portfolio. There are specific risks to
investing in technology company stocks, which can be subject to abrupt or
erratic price movements and have been volatile, especially over the short term.
MANAGER'S DISCUSSION
Among the most significant contributors to the Fund's absolute performance for
the six months under review were Google, in the technology services sector, and
Apple and NVIDIA, which are in the electronic technology sector. Shares of
leading Internet search engine provider Google rose sharply this reporting
period as investors welcomed the company's plans to expand beyond its highly
successful core keyword search advertising model into online display advertising
and mobile platforms. Computer hardware, software and electronics device maker
Apple continued to post strong sales for Macintosh computers, iPods and its
recently launched mobile phone venture, iPhone. The iPhone was the company's
biggest 2007 product launch and was well received by consumers. Semiconductor
manufacturer NVIDIA, which designs and builds graphics processors for many of
the major PC makers, saw its revenues rise as its market share grew along with
increased profit margins for its graphics chips. Electronic technology holdings,
as a sector, provided the Fund's top contribution to return.
Our investments in the industrial services, commercial services and health
technology sectors also provided strong absolute results this reporting period.
Among industrial services companies, key contributors included fluid control
specialist FMC Technologies, whose product line includes undersea oil and gas
drilling and production systems; and architectural and engineering firm AECOM
Technology, which provides technical services to government agencies and
corporations for large construction projects. Standouts from commercial services
included expense management software provider Concur Technologies, and Focus
Media Holding, which operates an extensive and growing out-of-home network of
advertising-based media throughout China for more than 3,000 domestic and
international advertisers. Within health technology, most of the Fund's
investments were in the biotechnology industry, where Celgene and Myriad
Genetics were key contributors to our absolute results. Myriad Genetics develops
tests and treatments for various diseases, and Celgene develops innovative drugs
primarily focused on the treatment of cancer.
Despite its strong returns this reporting period, the Fund had some detractors
from absolute performance for the six months under review. Our investment in
Limelight Networks, initiated during the reporting period, was a major
detractor. Limelight offers services for delivering media content, including
video and music files, via the Internet. While demand for Limelight's services
remained strong, the competitive environment increased in the market. The Fund's
shares of Joy Global (sold by period-end), which makes heavy equipment for the
mining industry, fell in value as the company warned that sustained weakness in
the U.S. coal market might negatively impact its fiscal 2007 earnings results.
Our position in NII Holdings, an international mobile network provider within
6 | Semiannual Report
the wireless telecommunications industry, fell in value as the company faced
increased competition and weaker-than-expected subscriber additions,
particularly within its Latin American operations.
By sector, our holdings in the transportation sector weighed on the Fund's
absolute performance for the period. Marine shipper American Commercial Lines
(sold by period-end) was a key detractor. In addition, several stocks within the
retail trade sector also fell in value as investors anticipated reduced consumer
spending for department store holdings such as Kohl's, as well as apparel and
footwear industry holdings such as Nordstrom and Urban Outfitters (sold by
period-end).
Effective November 1, 2007, the Fund's name changed to Franklin Growth
Opportunities Fund. While the Fund's investment goal and strategy remain the
same, we believe the new name better describes the Fund's strategy of seeking
growth opportunities wherever they are located.
Thank you for your continued participation in Franklin Aggressive Growth Fund.
We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Grant Bowers
Grant Bowers
Portfolio Manager
Franklin Aggressive Growth Fund
(Franklin Growth Opportunities Fund,
effective November 1, 2007)
TOP 10 HOLDINGS
Franklin Aggressive Growth Fund
10/31/07
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COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
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Apple Inc. 4.2%
ELECTRONIC TECHNOLOGY
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Google Inc., A 4.1%
TECHNOLOGY SERVICES
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Hansen Natural Corp. 3.4%
CONSUMER NON-DURABLES
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Celgene Corp. 3.0%
HEALTH TECHNOLOGY
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Chipotle Mexican Grill Inc., B 2.7%
CONSUMER SERVICES
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SBA Communications Corp. 2.6%
COMMUNICATIONS
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Gilead Sciences Inc. 2.5%
HEALTH TECHNOLOGY
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FMC Technologies Inc. 2.3%
INDUSTRIAL SERVICES
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NII Holdings 2.2%
COMMUNICATIONS
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Activision Inc. 2.2%
CONSUMER DURABLES
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THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2007, 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 | 7
Performance Summary as of 10/31/07
FRANKLIN AGGRESSIVE 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 INFORMATION
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CLASS A (SYMBOL: FGRAX) CHANGE 10/31/07 4/30/07
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Net Asset Value (NAV) +$4.61 $23.15 $18.54
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CLASS B (SYMBOL: FKABX) CHANGE 10/31/07 4/30/07
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Net Asset Value (NAV) +$4.31 $21.95 $17.64
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CLASS C (SYMBOL: FKACX) CHANGE 10/31/07 4/30/07
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Net Asset Value (NAV) +$4.29 $21.90 $17.61
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CLASS R (SYMBOL: FKARX) CHANGE 10/31/07 4/30/07
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Net Asset Value (NAV) +$4.52 $22.85 $18.33
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ADVISOR CLASS (SYMBOL: FRAAX) CHANGE 10/31/07 4/30/07
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Net Asset Value (NAV) +$4.76 $23.75 $18.99
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8 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
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CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/23/99)
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Cumulative Total Return 1 +24.92% +34.49% +161.99% +137.14%
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Average Annual Total Return 2 +17.74% +26.77% +19.81% +10.10%
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Value of $10,000 Investment 3 $11,774 $12,677 $24,691 $22,351
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Avg. Ann. Total Return (9/30/07) 4 +22.68% +20.65% +9.48%
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Total Annual Operating Expenses 5 1.42%
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CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/23/99)
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Cumulative Total Return 1 +24.43% +33.52% +152.88% +124.59%
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Average Annual Total Return 2 +20.43% +29.52% +20.20% +10.17%
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Value of $10,000 Investment 3 $12,043 $12,952 $25,088 $22,459
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Avg. Ann. Total Return (9/30/07) 4 +25.23% +21.06% +9.55%
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Total Annual Operating Expenses 5 2.12%
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CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/23/99)
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Cumulative Total Return 1 +24.42% +33.60% +152.71% +124.16%
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Average Annual Total Return 2 +23.42% +32.60% +20.37% +10.14%
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Value of $10,000 Investment 3 $12,342 $13,260 $25,271 $22,416
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Avg. Ann. Total Return (9/30/07) 4 +28.30% +21.23% +9.52%
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Total Annual Operating Expenses 5 2.13%
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CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
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Cumulative Total Return 1 +24.71% +34.23% +159.18% +66.25%
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Average Annual Total Return 2 +24.71% +34.23% +20.98% +9.12%
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Value of $10,000 Investment 3 $12,471 $13,423 $25,918 $16,625
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Avg. Ann. Total Return (9/30/07) 4 +29.91% +21.83% +10.03%
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Total Annual Operating Expenses 5 1.63%
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ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/23/99)
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Cumulative Total Return 1 +25.07% +34.87% +165.66% +143.29%
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Average Annual Total Return 2 +25.07% +34.87% +21.58% +11.23%
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Value of $10,000 Investment 3 $12,507 $13,487 $26,566 $24,329
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Avg. Ann. Total Return (9/30/07) 4 +30.51% +22.45% +10.60%
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Total Annual Operating Expenses 5 1.13%
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Semiannual Report | 9
Performance Summary (CONTINUED)
ENDNOTES
THE MANAGER OF THE FUND USES AN AGGRESSIVE GROWTH STRATEGY SO AN INVESTMENT IN
THE FUND INVOLVES A GREATER DEGREE OF RISK. THE FUND MAY BE MORE VOLATILE THAN A
MORE CONSERVATIVE EQUITY FUND, AND IT MAY BE BEST SUITED FOR LONG-TERM
INVESTING. THE FUND'S INVESTMENTS IN SMALLER- AND MIDSIZED-COMPANY STOCKS
INVOLVE SPECIAL RISKS SUCH AS RELATIVELY SMALLER REVENUES, LIMITED PRODUCT LINES
AND SMALLER MARKET SHARE. SMALLER-AND MIDSIZED-COMPANY STOCKS HISTORICALLY HAVE
EXHIBITED GREATER PRICE VOLATILITY THAN LARGER-COMPANY STOCKS, PARTICULARLY OVER
THE SHORT TERM. THE FUND'S PORTFOLIO INCLUDES TECHNOLOGY STOCKS, WHICH CAN BE
HIGHLY VOLATILE AND INVOLVE SPECIAL RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
1. Cumulative total return represents the change in value of an investment over
the periods indicated.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated. 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. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Figures are as stated in the Fund's prospectus current as of the date of this
report.
10 | Semiannual Report
Your Fund's Expenses
FRANKLIN AGGRESSIVE GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table 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 OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
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BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/07 VALUE 10/31/07 PERIOD* 5/1/07-10/31/07
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Actual $1,000 $1,249.20 $ 7.35
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Hypothetical (5% return before expenses) $1,000 $1,018.60 $ 6.60
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CLASS B
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Actual $1,000 $1,244.30 $11.34
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Hypothetical (5% return before expenses) $1,000 $1,015.03 $10.18
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CLASS C
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Actual $1,000 $1,244.20 $11.40
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Hypothetical (5% return before expenses) $1,000 $1,014.98 $10.23
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CLASS R
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Actual $1,000 $1,247.10 $ 8.59
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Hypothetical (5% return before expenses) $1,000 $1,017.50 $ 7.71
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ADVISOR CLASS
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Actual $1,000 $1,250.70 $ 5.77
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Hypothetical (5% return before expenses) $1,000 $1,020.01 $ 5.18
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* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.30%; B: 2.01%; C: 2.02%; R: 1.52%; and Advisor:
1.02%), multiplied by the average account value over the period, multiplied by
184/366 to reflect the one-half year period.
12 | Semiannual Report
Franklin Flex Cap Growth Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Flex Cap Growth Fund seeks
capital appreciation. The Fund invests predominantly in equity securities of
companies that the manager believes have the potential for capital appreciation.
The Fund has flexibility to invest in companies located, headquartered or
operating inside and outside the U.S., across the entire market capitalization
spectrum from small, emerging growth companies to well-established, large cap
companies.
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Flex Cap Growth Fund's semiannual report
for the period ended October 31, 2007.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Flex Cap Growth Fund - Class A had a
+15.10% cumulative total return. The Fund outperformed its narrow benchmark, the
Russell 3000 Growth Index, which returned +9.85%, and its broad benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned +5.49% for the same
period. 1 The Fund also outperformed its peers in the Lipper Multi-Cap Growth
Funds Classification Average, which returned +13.50%. 2 You can find the Fund's
long-term performance data in the Performance Summary beginning on page 16.
1. Source: Standard & Poor's Micropal. The Russell 3000 Growth Index is market
capitalization weighted and measures performance of those Russell 3000 Index
companies with higher price-to-book ratios and higher forecasted growth values.
The S&P 500 consists of 500 stocks chosen for market size, liquidity and
industry group representation. Each stock's weight in the index is proportionate
to its market value. The S&P 500 is one of the most widely used benchmarks of
U.S. equity performance. The indexes are unmanaged and include reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
2. Source: Lipper Inc. The Lipper Multi-Cap Growth Funds Classification Average
is calculated by averaging the total returns of all funds within the Lipper
Multi-Cap Growth Funds classification in the Lipper Open-End underlying funds
universe for the period indicated. Lipper Multi-Cap Growth Funds are defined as
funds that normally invest in companies, of any size, with long-term earnings
expected to grow significantly faster than the earnings of the stocks
represented in the major unmanaged stock indexes. For the six-month period ended
10/31/07, there were 551 funds in this category. Lipper calculations do not
include sales charges or subsidization by a Fund's manager. The Fund's
performance relative to the average may have differed if these or other factors
had been considered. The average includes reinvestment of any income or
distributions. Past performance does not guarantee future results. One cannot
invest directly in the average, nor is the average representative of the Fund's
portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 50.
Semiannual Report | 13
PORTFOLIO BREAKDOWN
Franklin Flex Cap Growth Fund
Based on Total Net Assets as of 10/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Electronic Technology* 25.1%
Technology Services* 11.8%
Health Technology* 11.8%
Finance 7.6%
Communications 7.1%
Retail Trade 5.3%
Consumer Non-Durables 4.1%
Producer Manufacturing 3.6%
Transportation 3.6%
Health Services 3.4%
Commercial Services 3.2%
Process Industries 2.7%
Industrial Services 2.0%
Consumer Services 1.4%
Energy Minerals 1.2%
Other 1.9%
Short-Term Investments & Other Net Assets 4.2%
* Significant exposure to a single sector may result in greater volatility for
the Fund than a more broadly diversified portfolio. There are specific risks to
investing in technology company stocks, which can be subject to abrupt or
erratic price movements and have been volatile, especially over the short term.
INVESTMENT STRATEGY
We are research-driven, fundamental investors pursuing a growth strategy. As
"bottom-up" investors focusing primarily on individual securities, we seek
companies that have identifiable drivers of future earnings growth and that we
believe present a good trade-off between that potential earnings growth,
business and financial risk, and valuation. We believe that examples of
identifiable drivers of future earnings growth are a particular product niche,
proven technology, sound financial profits and records, strong management, and
industry leadership. We rely on a team of analysts to help provide in-depth
industry expertise and use both qualitative and quantitative analysis.
MANAGER'S DISCUSSION
Among the most significant contributors to the Fund's performance relative to
the Russell 3000 Growth Index for the six months under review were computer
hardware, software and electronics device maker Apple, medical monitoring device
manufacturer Masimo, and GPS-based navigational device manufacturer Garmin.
From a sector perspective, our investments in the electronic technology sector
were the largest contributors to relative performance for the reporting period.
Most notably, our stock selection in the telecommunications equipment industry
benefited results, where our positions in the aforementioned Garmin and
navigational systems and software maker Trimble Navigation fared particularly
well. Stock selection in the aerospace and defense industry also underpinned the
Fund's results, led by FLIR Systems, which makes specialized imaging systems for
various governmental and commercial uses, and power generation castings producer
Precision Castparts.
Despite its strong absolute and relative performance, the Fund had a few
significant detractors during the reporting period, including Cognizant
Technology Solutions, an IT consultancy and maintenance software provider for
medium and large businesses, specialty semiconductor manufacturer Microchip
Technology, credit rating agency and financial information provider Moody's
(sold by period-end), and residential and business mortgage lender
CapitalSource.
By sector, the Fund's considerable overweighting in the communications sector
was a major detractor from relative performance. Wireless telecommunications
provider NII Holdings lost value and weighed on performance.
14 | Semiannual Report
The commercial services sector, and specifically our heavily weighted allocation
to financial publishing and services companies, also hindered the Fund's
relative performance for the period. Financial services outsourcing specialist
SEI Investments and the aforementioned Moody's were two key detractors from the
group.
Additionally, the Fund's relative performance was negatively affected by some
holdings in the health technology sector, specifically major pharmaceuticals
industry stocks. Our significantly overweighted investments in diversified drug
and health care product manufacturer Schering-Plough and Swiss pharmaceuticals
and diagnostics provider Roche Holding (not an index component) hampered the
Fund's absolute and relative results.
Thank you for your continued participation in Franklin Flex Cap Growth Fund. We
look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Conrad B. Herrmann
Conrad Herrmann, CFA
Portfolio Manager
Franklin Flex Cap Growth Fund
TOP 10 HOLDINGS
Franklin Flex Cap Growth Fund
10/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Apple Inc. 3.0%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Google Inc., A 2.8%
TECHNOLOGY SERVICES
- --------------------------------------------------------------------------------
Cisco Systems Inc. 2.3%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Gilead Sciences Inc. 2.2%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Hewlett-Packard Co. 2.1%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
American Tower Corp., A 2.1%
COMMUNICATIONS
- --------------------------------------------------------------------------------
FLIR Systems Inc. 2.0%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
T. Rowe Price Group Inc. 2.0%
FINANCE
- --------------------------------------------------------------------------------
Stericycle Inc. 2.0%
HEALTH SERVICES
- --------------------------------------------------------------------------------
Roche Holding AG, ADR (Switzerland) 2.0%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2007, 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 | 15
Performance Summary as of 10/31/07
FRANKLIN FLEX CAP GROWTH FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table 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: FKCGX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$6.80 $51.95 $45.15
- --------------------------------------------------------------------------------
DISTRIBUTIONS (5/1/07-10/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.0245
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FKCBX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$6.23 $48.66 $42.43
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FCIIX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$6.24 $48.76 $42.52
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FRCGX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$6.65 $51.26 $44.61
- --------------------------------------------------------------------------------
DISTRIBUTIONS (5/1/07-10/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.0245
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FKCAX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$6.90 $52.31 $45.41
- --------------------------------------------------------------------------------
DISTRIBUTIONS (5/1/07-10/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.0245
- --------------------------------------------------------------------------------
16 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ------------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +15.10% +23.72% +116.81% +151.24%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +8.49% +16.59% +15.37% +9.00%
- ------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,849 $11,659 $20,438 $23,676
- ------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +16.11% +15.94% +8.30%
- ------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 0.98%
- ------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +14.66% +22.79% +108.89% +114.79%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +10.66% +18.79% +15.65% +9.04%
- ------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,066 $11,879 $20,689 $21,479
- ------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +18.29% +16.23% +8.78%
- ------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.73%
- ------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +14.68% +22.82% +108.91% +133.34%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +13.68% +21.82% +15.88% +8.84%
- ------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,368 $12,182 $20,891 $23,334
- ------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +21.30% +16.44% +8.14%
- ------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.71%
- ------------------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +14.97% +23.42% +114.14% +61.14%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +14.97% +23.42% +16.45% +8.53%
- ------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,497 $12,342 $21,414 $16,114
- ------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +22.93% +17.03% +8.14%
- ------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.23%
- ------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 6 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +15.23% +24.00% +118.49% +153.19%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +15.23% +24.00% +16.92% +9.74%
- ------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,523 $12,400 $21,849 $25,319
- ------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +23.51% +17.50% +9.03%
- ------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 0.73%
- ------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Semiannual Report | 17
Performance Summary (CONTINUED)
THE FUND MAY INVEST A SIGNIFICANT PORTION OF ITS ASSETS IN SECURITIES LINKED TO
THE STATE OF CALIFORNIA, WHICH INVOLVES INCREASED VOLATILITY ASSOCIATED WITH
ECONOMIC OR REGULATORY DEVELOPMENTS IN THE STATE. SMALLER OR RELATIVELY NEW OR
UNSEASONED COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC
CONDITIONS, AND THEIR PROSPECTS FOR GROWTH ARE LESS CERTAIN THAN THOSE OF
LARGER, MORE ESTABLISHED COMPANIES. THE FUND ALSO INVESTS IN TECHNOLOGY STOCKS,
WHICH CAN BE HIGHLY VOLATILE AND INVOLVES SPECIAL RISKS. THE FUND'S PROSPECTUS
ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial
sales charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
1. Cumulative total return represents the change in value of an investment over
the periods indicated.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated. 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. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Figures are as stated in the Fund's prospectus current as of the date of this
report.
6. Effective 8/2/04, the Fund began offering Advisor Class shares, which do not
have sales charges or a Rule 12b-1 plan. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 8/2/04, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge, but reflecting the effect of
the Class A Rule 12b-1 fees; and (b) for periods after 8/1/04, actual Advisor
Class performance is used reflecting all charges and fees applicable to that
class. Since 8/2/04 (commencement of sales), the cumulative and average annual
total returns of Advisor Class shares were +57.24% and +14.96%.
18 | Semiannual Report
Your Fund's Expenses
FRANKLIN FLEX CAP GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table 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 OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/07 VALUE 10/31/07 PERIOD* 5/1/07-10/31/07
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,151.00 $5.03
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.46 $4.72
- ----------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,146.60 $9.06
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.69 $8.52
- ----------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,146.80 $9.01
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.74 $8.47
- ----------------------------------------------------------------------------------------------------------------
CLASS R
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,149.70 $6.38
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.20 $5.99
- ----------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,152.30 $3.68
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.72 $3.46
- ----------------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.93%; B: 1.68%; C: 1.67%; R: 1.18%; and Advisor:
0.68%), multiplied by the average account value over the period, multiplied by
184/366 to reflect the one-half year period.
20 | Semiannual Report
Franklin Small Cap Growth Fund II
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small Cap Growth Fund II seeks
long-term capital growth by investing at least 80% of its net assets in equity
securities of small-capitalization companies with market capitalizations not
exceeding that of the highest market capitalization in the Russell 2000 (R)
Index or $1.5 billion, whichever is greater, at the time of purchase. 1
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This semiannual report for Franklin Small Cap Growth Fund II covers the period
ended October 31, 2007.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Small Cap Growth Fund II - Class A had
a +6.13% cumulative total return. The Fund underperformed its narrow benchmark,
the Russell 2000 Growth Index, which had a return of +8.67%, and outperformed
its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which returned
+5.49% for the same period. 2 You can find the Fund's long-term performance data
in the Performance Summary beginning on page 24.
INVESTMENT STRATEGY
We are research-driven, fundamental investors pursuing a growth strategy. As
"bottom-up" investors focusing primarily on individual securities, we choose
companies that have identifiable drivers of future earnings growth and that
present, in our opinion, the best trade-off between that earnings growth,
business and financial risk, and valuation. We rely on a team of analysts to
help provide in-depth industry expertise and use both qualitative and
quantitative analysis to evaluate companies for distinct and sustainable
competitive advantages likely to lead to growth in earnings and/or share price.
Competitive advantages such as a particular product niche, proven technology,
sound financial profits and records, strong management and industry leadership
are all factors we believe may contribute to strong growth potential.
1. The Russell 2000 Index is market capitalization weighted and measures
performance of the 2,000 smallest companies in the Russell 3000 Index, which
represent approximately 8% of total market capitalization of the Russell 3000
Index.
2. Source: Standard & Poor's Micropal. The Russell 2000 Growth Index is market
capitalization weighted and measures performance of those Russell 2000 Index
companies with higher price-to-book ratios and higher forecasted growth values.
The S&P 500 consists of 500 stocks chosen for market size, liquidity and
industry group representation. Each stock's weight in the index is proportionate
to its market value. The S&P 500 is one of the most widely used benchmarks of
U.S. equity performance. The indexes are unmanaged and include reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 59.
Semiannual Report | 21
PORTFOLIO BREAKDOWN
Franklin Small Cap Growth Fund II
Based on Total Net Assets as of 10/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Electronic Technology* 27.9%
Technology Services* 12.2%
Consumer Services 10.1%
Health Technology* 8.8%
Health Services 7.4%
Finance 5.5%
Industrial Services 3.5%
Retail Trade 3.4%
Energy Minerals 3.3%
Consumer Durables 2.9%
Producer Manufacturing 2.8%
Commercial Services 2.8%
Real Estate Investment Trusts 2.6%
Process Industries 2.1%
Transportation 1.1%
Other 2.0%
Short-Term Investments & Other Net Assets 1.6%
* Significant exposure to a single sector may result in greater volatility for
the Fund than a more broadly diversified portfolio. There are specific risks to
investing in technology company stocks, which can be subject to abrupt or
erratic price movements and have been volatile, especially over the short term.
MANAGER'S DISCUSSION
Among the most significant contributors to the Fund's performance relative to
the Russell 2000 Growth Index for the six months under review were Chipotle
Mexican Grill, which operates a chain of Mexican eateries in almost 30 states;
FLIR Systems, which makes specialized imaging systems for various governmental
and commercial uses; and Power Integrations, which makes high-voltage analog
integrated circuitry and semiconductors found in PCs, cell phones, cable boxes
and other electronic devices.
From a sector perspective, our investments in the electronic technology sector
were the largest contributors to relative performance for the reporting period
mainly due to overweighting and stock selection. Most notably, our stock
selection in the semiconductors, electronic production equipment, and aerospace
and defense industries benefited performance. Among semiconductor companies, our
investments in Microsemi, Silicon Laboratories (not an index component) and
Microtune were standout performers from the group.
Driven by stock selection, the consumer services sector also boosted relative
performance for the period. Campus- and Internet-based adult education
specialist Strayer Education, luxury hotel and tourist train operator
Orient-Express Hotels and horse racing and casino facility operator Penn
National Gaming (sold by period-end) were notable performers.
Our investments in the producer manufacturing sector also contributed to the
Fund's relative performance. Standout performers included Drew Industries, which
manufactures aluminum and vinyl doors, windows and other parts for homes and
recreational vehicles; Manitowoc, a diversified manufacturer involved in
shipbuilding and repairs, cranes for various industrial uses, and refrigeration
products; and fluid-handling equipment maker Flowserve (sold by period-end),
which specializes in mechanical seals, pumps, valves and systems that control
the flow of liquids and gases.
The Fund also had some significant detractors from relative performance during
the six-month period, including Clayton Holdings, which provides
technology-based analysis and risk-management services for lenders, investors
and financial services firms; real estate and mortgage financier RAIT Financial
Trust; Mobile Mini, which manufactures, leases and sells portable storage
containers and mobile offices; and commercial and residential lender NewStar
Financial. All of these holdings were in the finance sector, which was also the
Fund's worst-performing sector on an absolute basis and relative to the
benchmark Russell 2000 Growth Index. Many financial stocks, especially those
related to the beleaguered mortgage and real estate industries, suffered
significant declines in the wake of recent credit, real estate and financial
market turmoil.
22 | Semiannual Report
Stock selection and significant underweighting versus the benchmark index
hindered the Fund's results within the health technology sector. Many of our
investments in the biotechnology, medical specialties and other pharmaceuticals
industries weighed on Fund performance. Related holdings such as Angiotech
Pharmaceuticals (not an index component), American Medical Systems Holdings and
Coley Pharmaceutical Group (sold by period-end) posted double-digit share price
declines for the six months under review.
Stock selection in technology services also detracted from relative performance.
In particular our shares of management consulting and systems integration firm
BearingPoint in the information technology services industry, and network
security provider Entrust in the Internet software and services industry, were
significant drags on the portfolio's results.
Thank you for your continued participation in Franklin Small Cap Growth Fund II.
We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Michael P. McCarthy,
Michael P. McCarthy, CFA
Portfolio Manager
Franklin Small Cap Growth Fund II
TOP 10 HOLDINGS
Franklin Small Cap Growth Fund II
10/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Power Integrations Inc. 2.7%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
FLIR Systems Inc. 2.3%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Microsemi Corp. 2.2%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Sapient Corp. 1.9%
TECHNOLOGY SERVICES
- --------------------------------------------------------------------------------
Chipotle Mexican Grill Inc., B 1.9%
CONSUMER SERVICES
- --------------------------------------------------------------------------------
Bill Barrett Corp. 1.8%
ENERGY MINERALS
- --------------------------------------------------------------------------------
Netlogic Microsystems Inc. 1.8%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
PAREXEL International Corp. 1.7%
HEALTH SERVICES
- --------------------------------------------------------------------------------
Helix Energy Solutions Group Inc. 1.7%
INDUSTRIAL SERVICES
- --------------------------------------------------------------------------------
optionsXpress Holdings Inc. 1.6%
FINANCE
- --------------------------------------------------------------------------------
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Semiannual Report | 23
Performance Summary as of 10/31/07
FRANKLIN SMALL CAP GROWTH FUND II
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: FSGRX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.80 $13.85 $13.05
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FBSGX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.71 $13.06 $12.35
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FCSGX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.71 $13.07 $12.36
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FSSRX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.77 $13.63 $12.86
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FSSAX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.84 $14.18 $13.34
- --------------------------------------------------------------------------------
24 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +6.13% +17.05% +119.86% +53.46%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 0.00% +10.32% +15.67% +5.04%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,000 $11,032 $20,710 $14,464
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +11.30% +16.80% +4.51%
- ---------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.25%
- ---------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +5.75% +16.19% +111.74% +45.46%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +1.75% +12.19% +15.97% +5.12%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,175 $11,219 $20,974 $14,546
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +13.18% +17.11% +4.60%
- ---------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 2.01%
- ---------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +5.74% +16.17% +111.88% +45.56%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +4.74% +15.17% +16.20% +5.13%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,474 $11,517 $21,188 $14,556
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +16.16% +17.33% +4.61%
- ---------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 2.00%
- ---------------------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +5.99% +16.69% +117.28% +53.06%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +5.99% +16.69% +16.79% +7.58%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,599 $11,669 $21,728 $15,306
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +17.80% +17.90% +6.92%
- ---------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.51%
- ---------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +6.30% +17.27% +122.71% +56.79%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +6.30% +17.27% +17.37% +6.18%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,630 $11,727 $22,271 $15,679
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +18.41% +18.52% +5.65%
- ---------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.01%
- ---------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Semiannual Report | 25
Performance Summary (CONTINUED)
ENDNOTES
SMALLER OR NEWER COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC
CONDITIONS. THEIR GROWTH PROSPECTS ARE LESS CERTAIN THAN THOSE OF LARGER, MORE
ESTABLISHED COMPANIES AND THEY CAN BE VOLATILE. THE FUND IS INTENDED FOR
LONG-TERM INVESTORS WHO ARE COMFORTABLE WITH SHORT-TERM FLUCTUATIONS IN SHARE
PRICE. THERE ARE SPECIAL RISKS INVOLVED WITH SIGNIFICANT EXPOSURE TO A
PARTICULAR SECTOR, INCLUDING INCREASED SUSCEPTIBILITY RELATED TO ECONOMIC,
BUSINESS, OR OTHER DEVELOPMENTS AFFECTING THAT SECTOR. THE FUND INCLUDES
INVESTMENTS IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN HIGHLY VOLATILE AND
INVOLVES SPECIAL RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE
MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Cumulative total return represents the change in value of an investment over
the periods indicated.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated. 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. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Figures are as stated in the Fund's prospectus current as of the date of this
report.
26 | Semiannual Report
Your Fund's Expenses
FRANKLIN SMALL CAP GROWTH FUND II
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table 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 | 27
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/07 VALUE 10/31/07 PERIOD* 5/1/07-10/31/07
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,061.30 $ 6.27
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.05 $ 6.14
- ----------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,057.50 $10.14
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.28 $ 9.93
- ----------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,057.40 $10.14
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.28 $ 9.93
- ----------------------------------------------------------------------------------------------------------------
CLASS R
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,059.90 $ 7.56
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,017.80 $ 7.41
- ----------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,063.00 $ 4.98
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.31 $ 4.88
- ----------------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.21%; B: 1.96%; C: 1.96%; R: 1.46%; and Advisor:
0.96%), multiplied by the average account value over the period, multiplied by
184/366 to reflect the one-half year period.
28 | Semiannual Report
Franklin Small-Mid Cap Growth Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small-Mid Cap Growth Fund seeks
long-term capital growth by investing at least 80% of its net assets in equity
securities of small-cap and mid-cap companies. The Fund defines small-cap
companies as those within the market capitalization range of companies in the
Russell 2500(TM) Index at the time of purchase, and mid-cap companies as those
within the market capitalization range of the Russell Midcap(R) Index at the
time of purchase. 1
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Small-Mid Cap Growth Fund's semiannual
report for the period ended October 31, 2007.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Small-Mid Cap Growth Fund - Class A
had a cumulative total return of +11.15%. The Fund outperformed its benchmarks,
the Russell Midcap Growth Index and the Standard & Poor's 500 Index (S&P 500),
which had total returns of +7.11% and +5.49% for the same period. 2 You can find
the Fund's long-term performance data in the Performance Summary beginning on
page 32.
INVESTMENT STRATEGY
We are research-driven, fundamental investors pursuing a growth strategy. As
"bottom-up" investors focusing primarily on individual securities, we choose
companies that have identifiable drivers of future earnings growth and that
present, in our opinion, the best trade-off between that earnings growth,
business and financial risk, and valuation. We rely on a team of analysts to
help provide in-depth industry expertise and use both qualitative and
quantitative analysis to evaluate companies for distinct and sustainable
competitive advantages likely to lead to growth in earnings and/or share price.
Competitive
1. The Russell 2500 Index is market capitalization weighted and measures
performance of the 2,500 smallest companies in the Russell 3000 Index, which
represent approximately 17% of total market capitalization of the Russell 3000
Index. The Russell Midcap Index is market capitalization weighted and measures
performance of the 800 smallest companies in the Russell 1000 Index, which
represent approximately 26% of total market capitalization of the Russell 1000
Index.
2. Source: Standard & Poor's Micropal. The Russell Midcap Growth Index is market
capitalization weighted and measures performance of those Russell Midcap Index
companies with higher price-to-book ratios and higher forecasted growth values.
The S&P 500 consists of 500 stocks chosen for market size, liquidity and
industry group representation. Each stock's weight in the index is proportionate
to its market value. The S&P 500 is one of the most widely used benchmarks of
U.S. equity performance. The indexes are unmanaged and include reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 68.
Semiannual Report | 29
PORTFOLIO BREAKDOWN
Franklin Small-Mid Cap Growth Fund
Based on Total Net Assets as of 10/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Electronic Technology* 23.0%
Health Technology* 9.2%
Producer Manufacturing 7.1%
Technology Services* 7.0%
Communications 6.0%
Finance 5.7%
Health Services 5.7%
Industrial Services 5.5%
Consumer Durables 5.2%
Energy Minerals 5.1%
Consumer Non-Durables 4.5%
Retail Trade 3.7%
Commercial Services 2.9%
Consumer Services 2.2%
Transportation 1.7%
Other 4.5%
Short-Term Investments & Other Net Assets 1.0%
* Significant exposure to a single sector may result in greater volatility for
the Fund than a more broadly diversified portfolio. There are specific risks to
investing in technology company stocks, which can be subject to abrupt or
erratic price movements and have been volatile, especially over the short term.
advantages such as a particular product niche, proven technology, sound
financial profits and records, strong management and industry leadership are all
factors we believe may contribute to strong growth potential.
MANAGER'S DISCUSSION
Among the most significant contributors to the Fund's performance relative to
the Russell Midcap Growth Index for the six months under review were oil and gas
drilling equipment manufacturer National-Oilwell Varco, non-alcoholic beverage
maker Hansen Natural, and FLIR Systems, which makes specialized imaging systems
for various governmental and commercial uses.
From a sector perspective, our investments in electronic technology were the
largest contributors to relative performance for the period under review. Most
notably, overweighted positions in the telecommunications equipment and
aerospace and defense industries benefited relative performance. Within
telecommunications equipment, our shares of GPS-based navigational device
manufacturer Garmin and navigational systems and software maker Trimble
Navigation posted solid returns, while power generation castings producer
Precision Castparts boosted relative performance within the Fund's aerospace and
defense holdings. Similarly, an overweighted position within the computer
communications industry, notably network infrastructure developer Juniper
Networks, benefited the Fund.
Driven by stock selection, the Fund's technology services sector holdings aided
relative results. Alliance Data Systems (sold by period-end) and Global
Payments, in the data processing services industry, as well as Internet software
and service companies Equinix and Omniture (not index components), were strong
contributors.
The health technology sector benefited relative performance mainly due to stock
selection. Two key contributors came from within the medical specialties
industry: Cytyc (sold by period-end), which makes specific diagnostic testing
and screening devices for women's diseases and health conditions; and Waters,
whose high-performance liquid chromatography instruments and mass spectrometers
are frequently used in drug and nutritional development as well as a variety of
environmental and industrial applications.
By contrast, among the Fund's most significant detractors from relative
performance were online brokerage E*TRADE Financial, railcar and construction
equipment manufacturer Trinity Industries, and residential and business mortgage
lender CapitalSource.
30 | Semiannual Report
On a sector basis, finance was a significant detractor relative to the Russell
Midcap Growth Index. In addition to E*TRADE and CapitalSource, other significant
underperformers from the group included real estate investment trusts such as
FelCor Lodging Trust and iStar Financial (not index components), as well as real
estate developer Jones Lang LaSalle.
The Fund's relative results were also pressured by the underperforming
communications sector. This was driven largely by the Fund's overweighting in
the wireless telecommunications industry, where holdings of wireless service
providers NII Holdings, Leap Wireless International and MetroPCS Communications
posted double-digit declines for the six months under review.
In addition, our lone holding in the process industries sector weighed on
relative performance as ethanol producer U.S. BioEnergy, which is not in the
benchmark index, fell sharply during the period.
We continue to follow our investment strategy, focusing on companies that
exhibit what we consider to be clear growth drivers. We invest in those
companies we believe provide the best trade-off between growth opportunity, and
business and valuation risk. Our emphasis continues to be on owning "growth
leaders" that have the opportunity to significantly increase their sales,
earnings and cash flow over a three- to five-year period.
Thank you for your continued participation in Franklin Small-Mid Cap Growth
Fund. We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Edward B. Jamieson
Edward B. Jamieson
Portfolio Manager
Franklin Small-Mid Cap Growth Fund
TOP 10 HOLDINGS
Franklin Small-Mid Cap Growth Fund
10/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
FLIR Systems Inc. 2.7%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
National-Oilwell Varco Inc. 2.6%
INDUSTRIAL SERVICES
- --------------------------------------------------------------------------------
Bill Barrett Corp. 2.4%
ENERGY MINERALS
- --------------------------------------------------------------------------------
Activision Inc. 2.3%
CONSUMER DURABLES
- --------------------------------------------------------------------------------
Hansen Natural Corp. 2.3%
CONSUMER NON-DURABLES
- --------------------------------------------------------------------------------
Harris Corp. 2.1%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Affiliated Managers Group Inc. 2.0%
FINANCE
- --------------------------------------------------------------------------------
AMTEK Inc. 1.9%
PRODUCER MANUFACTURING
- --------------------------------------------------------------------------------
SunPower Corp., A 1.8%
PRODUCER MANUFACTURING
- --------------------------------------------------------------------------------
NII Holdings Inc. 1.7%
COMMUNICATIONS
- --------------------------------------------------------------------------------
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2007, 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 | 31
Performance Summary as of 10/31/07
FRANKLIN SMALL-MID CAP GROWTH FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table 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: FRSGX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.63 $46.17 $41.54
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FBSMX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.29 $44.29 $40.00
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FRSIX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.16 $43.01 $38.85
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FSMRX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.50 $45.46 $40.96
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FSGAX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.77 $46.99 $42.22
- --------------------------------------------------------------------------------
32 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- --------------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +11.15% +25.86% +128.19% +116.78%
- --------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +4.77% +18.63% +16.55% +7.41%
- --------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,477 $11,863 $21,504 $20,431
- --------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +19.20% +17.89% +6.61%
- --------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.00%
- --------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (7/1/02)
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +10.73% +24.90% +119.80% +95.95%
- --------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +6.72% +20.90% +16.85% +13.33%
- --------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,672 $12,090 $21,780 $19,495
- --------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +21.56% +18.20% +13.01%
- --------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.75%
- --------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +10.73% +24.95% +119.93% +101.31%
- --------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +9.73% +23.95% +17.07% +7.25%
- --------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,973 $12,395 $21,993 $20,131
- --------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +24.54% +18.40% +6.45%
- --------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.74%
- --------------------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +10.99% +25.51% +125.30% +56.90%
- --------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +10.99% +25.51% +17.64% +8.04%
- --------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,099 $12,551 $22,530 $15,690
- --------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +26.16% +18.98% +7.67%
- --------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.25%
- --------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +11.30% +26.17% +131.21% +122.57%
- --------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +11.30% +26.17% +18.25% +8.33%
- --------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,130 $12,617 $23,121 $22,257
- --------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +26.80% +19.59% +7.53%
- --------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 0.75%
- --------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Semiannual Report | 33
Performance Summary (CONTINUED)
ENDNOTES
SMALL AND MIDSIZE COMPANY STOCKS CAN BE VOLATILE, ESPECIALLY OVER THE SHORT
TERM. SMALLER OR RELATIVELY NEW COMPANIES CAN BE PARTICULARLY SENSITIVE TO
CHANGING ECONOMIC CONDITIONS AND THEIR GROWTH PROSPECTS ARE LESS CERTAIN THAN
THOSE OF LARGER, MORE ESTABLISHED COMPANIES. THE FUND'S PORTFOLIO INCLUDES
INVESTMENTS IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN HIGHLY VOLATILE AND
INVOLVES SPECIAL RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE
MAIN INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial
sales charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Cumulative total return represents the change in value of an investment over
the periods indicated.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated. 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. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Figures are as stated in the Fund's prospectus current as of the date of this
report.
34 | Semiannual Report
Your Fund's Expenses
FRANKLIN SMALL-MID CAP GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table 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 | 35
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/07 VALUE 10/31/07 PERIOD* 5/1/07-10/31/07
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,111.50 $5.15
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.26 $4.93
- ----------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,107.30 $9.11
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.49 $8.72
- ----------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,107.30 $9.11
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.49 $8.72
- ----------------------------------------------------------------------------------------------------------------
CLASS R
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,109.90 $6.47
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.00 $6.19
- ----------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,113.00 $3.82
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.52 $3.66
- ----------------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.97%; B: 1.72%; C: 1.72%; R: 1.22%; and Advisor:
0.72%), multiplied by the average account value over the period, multiplied by
184/366 to reflect the one-half year period.
36 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN AGGRESSIVE GROWTH FUND
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2007 2006 2005 2004 2003
------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning of
period ......................... $ 18.54 $ 18.30 $ 13.33 $ 12.57 $ 9.50 $ 12.39
------------------------------------------------------------------------------------------
Income from investment
operations a:
Net investment income
(loss) b .................... (0.09) (0.12) (0.15) (0.14) (0.15) (0.13)
Net realized and unrealized
gains (losses) .............. 4.70 0.36 5.12 0.90 3.22 (2.76)
------------------------------------------------------------------------------------------
Total from investment operations .. 4.61 0.24 4.97 0.76 3.07 (2.89)
------------------------------------------------------------------------------------------
Redemption fees ................... -- e -- e -- e -- e -- --
------------------------------------------------------------------------------------------
Net asset value, end of period .... $ 23.15 $ 18.54 $ 18.30 $ 13.33 $ 12.57 $ 9.50
==========================================================================================
Total return c .................... 24.92% 1.31% 37.28% 6.05% 32.32% (23.33)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .......................... 1.30% f 1.38% f 1.39% f 1.51% f 1.62% 1.80%
Net investment income (loss) ...... (0.93)% (0.70)% (0.92)% (1.05)% (1.26)% (1.35)%
SUPPLEMENTAL DATA
Net assets, end of
period (000's) ................. $ 145,678 $ 105,407 $ 113,713 $ 80,611 $ 86,983 $ 67,934
Portfolio turnover rate ........... 70.12% 176.15% 183.31% 157.48% 114.66% 93.49%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 37
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN AGGRESSIVE GROWTH FUND
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2007 2006 2005 2004 2003
------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning
of period ...................... $ 17.64 $ 17.53 $ 12.87 $ 12.22 $ 9.30 $ 12.20
------------------------------------------------------------------------------------------
Income from investment
operations a:
Net investment income
(loss) b .................... (0.16) (0.23) (0.26) (0.23) (0.22) (0.19)
Net realized and unrealized
gains (losses) .............. 4.47 0.34 4.92 0.88 3.14 (2.71)
------------------------------------------------------------------------------------------
Total from investment operations .. 4.31 0.11 4.66 0.65 2.92 (2.90)
------------------------------------------------------------------------------------------
Redemption fees ................... -- e -- e -- e -- e -- --
------------------------------------------------------------------------------------------
Net asset value, end of period .... $ 21.95 $ 17.64 $ 17.53 $ 12.87 $ 12.22 $ 9.30
==========================================================================================
Total return c .................... 24.43% 0.63% 36.21% 5.32% 31.40% (23.77)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .......................... 2.01% f 2.08% f 2.13% f 2.21% f 2.28% 2.47%
Net investment income (loss) ...... (1.64)% (1.40)% (1.66)% (1.75)% (1.92)% (2.02)%
SUPPLEMENTAL DATA
Net assets, end of
period (000's) ................. $ 17,600 $ 15,638 $ 19,508 $ 17,017 $ 18,059 $ 13,100
Portfolio turnover rate ........... 70.12% 176.15% 183.31% 157.48% 114.66% 93.49%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
38 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN AGGRESSIVE GROWTH FUND
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2007 2006 2005 2004 2003
------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning
of period ...................... $ 17.61 $ 17.49 $ 12.84 $ 12.19 $ 9.28 $ 12.18
------------------------------------------------------------------------------------------
Income from investment
operations a:
Net investment income
(loss) b .................... (0.16) (0.23) (0.26) (0.23) (0.22) (0.19)
Net realized and unrealized
gains (losses) .............. 4.45 0.35 4.91 0.88 3.13 (2.71)
------------------------------------------------------------------------------------------
Total from investment operations .. 4.29 0.12 4.65 0.65 2.91 (2.90)
------------------------------------------------------------------------------------------
Redemption fees ................... -- e -- e -- e -- e -- --
------------------------------------------------------------------------------------------
Net asset value, end of period .... $ 21.90 $ 17.61 $ 17.49 $ 12.84 $ 12.19 $ 9.28
==========================================================================================
Total return c .................... 24.42% 0.69% 36.21% 5.33% 31.36% (23.81)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .......................... 2.02% f 2.09% f 2.14% f 2.22% f 2.29% 2.48%
Net investment income (loss) ...... (1.65)% (1.41)% (1.67)% (1.76)% (1.93)% (2.03)%
SUPPLEMENTAL DATA
Net assets, end of
period (000's) ................. $ 39,444 $ 31,518 $ 31,167 $ 24,450 $ 30,054 $ 25,660
Portfolio turnover rate ........... 70.12% 176.15% 183.31% 157.48% 114.66% 93.49%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 39
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN AGGRESSIVE GROWTH FUND
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS R (UNAUDITED) 2007 2006 2005 2004 2003
------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning
of period ...................... $ 18.33 $ 18.12 $ 13.24 $ 12.51 $ 9.47 $ 12.38
------------------------------------------------------------------------------------------
Income from investment
operations a:
Net investment
income (loss) b ............. (0.12) (0.16) (0.19) (0.17) (0.17) (0.14)
Net realized and unrealized
gains (losses) .............. 4.64 0.37 5.07 0.90 3.21 (2.77)
------------------------------------------------------------------------------------------
Total from investment operations .. 4.52 0.21 4.88 0.73 3.04 (2.91)
------------------------------------------------------------------------------------------
Redemption fees ................... -- e -- e -- e -- e -- --
------------------------------------------------------------------------------------------
Net asset value, end of period .... $ 22.85 $ 18.33 $ 18.12 $ 13.24 $ 12.51 $ 9.47
==========================================================================================
Total return c .................... 24.71% 1.16% 36.86% 5.84% 32.10% (23.51)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .......................... 1.52% f 1.59% f 1.64% f 1.72% f 1.79% 1.98%
Net investment income (loss) ...... (1.15)% (0.91)% (1.17)% (1.26)% (1.43)% (1.53)%
SUPPLEMENTAL DATA
Net assets, end of
period (000's) ................. $ 9,484 $ 7,413 $ 5,171 $ 3,041 $ 1,761 $ 608
Portfolio turnover rate ........... 70.12% 176.15% 183.31% 157.48% 114.66% 93.49%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
40 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN AGGRESSIVE GROWTH FUND
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
ADVISOR CLASS (UNAUDITED) 2007 2006 2005 2004 2003
------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning of
period ......................... $ 18.99 $ 18.68 $ 13.58 $ 12.77 $ 9.62 $ 12.51
------------------------------------------------------------------------------------------
Income from investment
operations a:
Net investment income
(loss) b .................... (0.07) (0.07) (0.11) (0.10) (0.11) (0.10)
Net realized and unrealized
gains (losses) .............. 4.83 0.38 5.21 0.91 3.26 (2.79)
------------------------------------------------------------------------------------------
Total from investment operations .. 4.76 0.31 5.10 0.81 3.15 (2.89)
------------------------------------------------------------------------------------------
Redemption fees ................... -- e -- e -- e -- e -- --
------------------------------------------------------------------------------------------
Net asset value, end of period .... $ 23.75 $ 18.99 $ 18.68 $ 13.58 $ 12.77 $ 9.62
==========================================================================================
Total return c .................... 25.07% 1.66% 37.56% 6.34% 32.74% (23.10)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .......................... 1.02% f 1.09% f 1.14% f 1.22% f 1.29% 1.48%
Net investment income (loss) ...... (0.65)% (0.41)% (0.67)% (0.76)% (0.93)% (1.03)%
SUPPLEMENTAL DATA
Net assets, end of
period (000's) ................. $ 108,422 $ 85,486 $ 36,744 $ 22,731 $ 22,374 $ 17,369
Portfolio turnover rate ........... 70.12% 176.15% 183.31% 157.48% 114.66% 93.49%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 41
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN AGGRESSIVE GROWTH FUND COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.0%
COMMON STOCKS 98.6%
COMMERCIAL SERVICES 6.1%
a,b,c Alibaba.com Ltd., 144A ................................. China 249,700 $ 434,941
a Concur Technologies Inc. ............................... United States 180,850 6,517,834
Corporate Executive Board Co. .......................... United States 52,300 3,726,375
a Focus Media Holding Ltd., ADR .......................... China 76,000 4,712,000
a Huron Consulting Group Inc. ............................ United States 61,100 4,269,668
-------------------
19,660,818
-------------------
COMMUNICATIONS 7.5%
America Movil SAB de CV, L, ADR ........................ Mexico 63,700 4,165,343
a Leap Wireless International Inc. ....................... United States 61,000 4,349,910
a NII Holdings Inc. ...................................... United States 123,280 7,150,240
a SBA Communications Corp. ............................... United States 232,560 8,279,136
-------------------
23,944,629
-------------------
CONSUMER DURABLES 4.1%
a Activision Inc. ........................................ United States 294,700 6,969,655
a,b Force Protection Inc., 144A, PIPES ..................... United States 88,400 1,582,360
Nintendo Co. Ltd. ...................................... Japan 7,300 4,550,436
-------------------
13,102,451
-------------------
CONSUMER NON-DURABLES 4.9%
Guess? Inc. ............................................ United States 92,400 4,748,436
a Hansen Natural Corp. ................................... United States 161,000 10,948,000
-------------------
15,696,436
-------------------
CONSUMER SERVICES 5.6%
a Chipotle Mexican Grill Inc., B ......................... United States 70,300 8,669,396
a Panera Bread Co. ....................................... United States 66,700 2,734,033
a Starbucks Corp. ........................................ United States 91,200 2,433,216
Strayer Education Inc. ................................. United States 21,900 4,083,474
-------------------
17,920,119
-------------------
DISTRIBUTION SERVICES 0.5%
a MWI Veterinary Supply Inc. ............................. United States 34,944 1,458,912
-------------------
ELECTRONIC TECHNOLOGY 21.5%
a Apple Inc. ............................................. United States 71,600 13,600,420
a Cisco Systems Inc. ..................................... United States 89,900 2,972,094
a F5 Networks Inc. ....................................... United States 178,200 6,420,546
a FLIR Systems Inc. ...................................... United States 26,400 1,831,896
a FormFactor Inc. ........................................ United States 66,100 2,585,171
Harris Corp. ........................................... United States 90,230 5,464,329
a Juniper Networks Inc. .................................. United States 82,590 2,973,240
a MEMC Electronic Materials Inc. ......................... United States 23,600 1,727,992
a Microsemi Corp. ........................................ United States 82,900 2,205,969
a NVIDIA Corp. ........................................... United States 189,085 6,689,827
a Orbital Sciences Corp. ................................. United States 135,200 3,451,656
Precision Castparts Corp. .............................. United States 28,730 4,304,041
QUALCOMM Inc. .......................................... United States 141,780 6,058,260
42 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN AGGRESSIVE GROWTH FUND COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
ELECTRONIC TECHNOLOGY (CONTINUED)
a Research In Motion Ltd. ................................ Canada 22,300 $ 2,776,573
a Riverbed Technology Inc. ............................... United States 77,500 2,618,725
a Trimble Navigation Ltd. ................................ United States 75,640 3,154,188
-------------------
68,834,927
-------------------
ENERGY MINERALS 1.0%
a Bill Barrett Corp. ..................................... United States 68,100 3,187,080
-------------------
FINANCE 6.7%
BlackRock Inc. ......................................... United States 33,480 6,928,686
CME Group Inc. ......................................... United States 5,680 3,784,300
a E*TRADE Financial Corp. ................................ United States 352,100 3,922,394
The Goldman Sachs Group Inc. ........................... United States 16,350 4,053,492
optionsXpress Holdings Inc. ............................ United States 94,550 2,813,808
-------------------
21,502,680
-------------------
HEALTH SERVICES 0.9%
a Covance Inc. ........................................... United States 36,860 3,040,950
-------------------
HEALTH TECHNOLOGY 10.0%
a Celgene Corp. .......................................... United States 143,700 9,484,200
a Gen-Probe Inc. ......................................... United States 52,200 3,655,044
a Gilead Sciences Inc. ................................... United States 171,160 7,905,881
a Hologic Inc. ........................................... United States 23,400 1,589,562
a Myriad Genetics Inc. ................................... United States 97,390 5,391,510
Roche Holding AG, ADR .................................. Switzerland 46,600 3,981,970
-------------------
32,008,167
-------------------
INDUSTRIAL SERVICES 4.7%
a Aecom Technology Corp. ................................. United States 100,300 3,387,131
a FMC Technologies Inc. .................................. United States 123,780 7,504,781
Schlumberger Ltd. ...................................... United States 43,080 4,160,236
-------------------
15,052,148
-------------------
PRODUCER MANUFACTURING 4.1%
ABB Ltd., ADR .......................................... Switzerland 110,200 3,330,244
AMTEK Inc. ............................................. United States 67,000 3,149,000
a SunPower Corp., A ...................................... United States 52,500 6,639,150
-------------------
13,118,394
-------------------
RETAIL TRADE 5.9%
a Amazon.com Inc. ........................................ United States 33,500 2,986,525
a Dick's Sporting Goods Inc. ............................. United States 89,400 2,983,278
a Kohl's Corp. ........................................... United States 72,420 3,980,928
a,d Lululemon Athletica Inc. ............................... Canada 33,900 1,804,158
The Men's Wearhouse Inc. ............................... United States 40,200 1,698,852
Nordstrom Inc. ......................................... United States 84,100 3,316,904
a Zumiez Inc. ............................................ United States 47,690 1,996,302
-------------------
18,766,947
-------------------
Semiannual Report | 43
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN AGGRESSIVE GROWTH FUND COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
TECHNOLOGY SERVICES 13.7%
a Adobe Systems Inc. ..................................... United States 96,660 $ 4,630,014
a Baidu.com Inc., ADR .................................... China 4,200 1,606,458
a Cognizant Technology Solutions Corp., A ................ United States 125,920 5,220,643
a DealerTrack Holdings Inc. .............................. United States 94,500 4,639,005
a Equinix Inc. ........................................... United States 52,300 6,101,318
a Google Inc., A ......................................... United States 18,390 13,001,730
a Mercadolibre Inc. ...................................... Argentina 56,300 2,515,484
a Omniture Inc. .......................................... United States 186,300 6,364,008
-------------------
44,078,660
-------------------
TRANSPORTATION 1.4%
C.H. Robinson Worldwide Inc. ........................... United States 90,530 4,519,257
-------------------
TOTAL COMMON STOCKS (COST $221,727,470) ................ 315,892,575
-------------------
PREFERRED STOCK (COST $873,300) 0.4%
ELECTRONIC TECHNOLOGY 0.4%
a,e,f Dilithium Networks Inc., depository receipt, D,
pfd., 144A, PIPES ...................................... United States 374,806 1,293,081
-------------------
TOTAL LONG TERM INVESTMENTS (COST $222,600,770) ........ 317,185,656
-------------------
SHORT TERM INVESTMENTS 0.3%
MONEY MARKET FUND (COST $928,684) 0.2%
g Franklin Institutional Fiduciary Trust Money Market
Portfolio, 4.69% ....................................... United States 928,684 928,684
-------------------
h INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED
SECURITIES 0.1%
MONEY MARKET FUND (COST $192,000) 0.1%
i Bank of New York Institutional Cash Reserve
Fund, 5.14% ........................................... United States 192,000 192,000
-------------------
TOTAL INVESTMENTS (COST $223,721,454) 99.3% ........... 318,306,340
OTHER ASSETS, LESS LIABILITIES 0.7% ................... 2,321,397
-------------------
NET ASSETS 100.0% ..................................... $ 320,627,737
===================
See Selected Portfolio Abbreviations on page 72.
a Non-income producing for the twelve months ended October 31, 2007.
b Security was purchased pursuant to Rule 144A under the Securities Act of 1933
and may be sold in transactions exempt from registration only to qualified
institutional buyers or in a public offering registered under the Securities Act
of 1933. These securities have been deemed liquid under guidelines approved by
the Trust's Board of Trustees. At October 31, 2007, the aggregate value of these
securities was $2,017,301, representing 0.63% of net assets.
c A portion or all of the securities purchased on when-issued or delayed
delivery basis. See Note 1(c).
d A portion or all of the security is on loan as of October 31, 2007. See Note
1(e).
e Security has been deemed illiquid because it may not be able to be sold within
seven days. At October 31, 2007, the value of this security was $1,293,081,
representing 0.40% of net assets.
f See Note 8 regarding restricted securities.
g See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
h See Note 1(e) regarding securities on loan.
i The rate shown is the annualized seven-day yield at period end.
44 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN FLEX CAP GROWTH FUND
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2007 2006 2005 2004 2003
------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period ... $ 45.15 $ 42.45 $ 35.26 $ 33.76 $ 25.56 $ 30.71
------------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ...... (0.04) 0.06 0.11 (0.10) (0.09) (0.08)
Net realized and unrealized gains
(losses) ......................... 6.86 2.70 7.08 1.60 8.29 (5.07)
------------------------------------------------------------------------------------------
Total from investment operations ....... 6.82 2.76 7.19 1.50 8.20 (5.15)
------------------------------------------------------------------------------------------
Less distributions from net investment
income .............................. (0.02) (0.06) -- -- -- --
------------------------------------------------------------------------------------------
Redemption fees ........................ -- e -- e -- e -- e -- --
------------------------------------------------------------------------------------------
Net asset value, end of period ......... $ 51.95 $ 45.15 $ 42.45 $ 35.26 $ 33.76 $ 25.56
==========================================================================================
Total return c ......................... 15.10% 6.50% 20.39% 4.44% 32.08% (16.77)%
RATIOS TO AVERAGE NET ASSETS d
Expenses before waiver and payments
by affiliates ....................... 0.95% 0.96% 0.93% 0.96% 1.01% 1.07%
Expenses net of waiver and payments
by affiliates ....................... 0.93% f 0.96% f 0.93% f 0.96% f 1.01% 1.07%
Net investment income (loss) ........... (0.16)% 0.15% 0.27% (0.29)% (0.29)% (0.31)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $2,234,332 $1,977,605 $2,070,364 $1,505,342 $1,456,685 $1,025,348
Portfolio turnover rate ................ 16.55% 62.54% 66.63% 41.91% 39.92% 32.93%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 45
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
-------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2007 2006 2005 2004 2003
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 42.43 $ 40.14 $ 33.59 $ 32.40 $ 24.72 $ 29.92
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................. (0.20) (0.23) (0.19) (0.35) (0.31) (0.26)
Net realized and unrealized gains (losses) ..... 6.43 2.52 6.74 1.54 7.99 (4.94)
-------------------------------------------------------------------------------
Total from investment operations .................. 6.23 2.29 6.55 1.19 7.68 (5.20)
-------------------------------------------------------------------------------
Redemption fees ................................... -- e -- e -- e -- e -- --
-------------------------------------------------------------------------------
Net asset value, end of period .................... $ 48.66 $ 42.43 $ 40.14 $ 33.59 $ 32.40 $ 24.72
===============================================================================
Total return c .................................... 14.66% 5.71% 19.50% 3.67% 31.07% (17.38)%
RATIOS TO AVERAGE NET ASSETS d
Expenses before waiver and payments
by affiliates .................................. 1.70% 1.71% 1.68% 1.70% 1.76% 1.82%
Expenses net of waiver and payments
by affiliates .................................. 1.68% f 1.71% f 1.68% f 1.70% f 1.76% 1.82%
Net investment income (loss) ...................... (0.91)% (0.60)% (0.48)% (1.03)% (1.04)% (1.06)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $123,093 $118,806 $143,477 $136,052 $134,589 $92,632
Portfolio turnover rate ........................... 16.55% 62.54% 66.63% 41.91% 39.92% 32.93%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
46 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
--------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 42.52 $ 40.22 $ 33.66 $ 32.47 $ 24.77 $ 29.98
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................ (0.20) (0.23) (0.18) (0.35) (0.31) (0.26)
Net realized and unrealized gains (losses) .... 6.44 2.53 6.74 1.54 8.01 (4.95)
--------------------------------------------------------------------------------
Total from investment operations ................. 6.24 2.30 6.56 1.19 7.70 (5.21)
--------------------------------------------------------------------------------
Redemption fees .................................. -- e -- e -- e -- e -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................... $ 48.76 $ 42.52 $ 40.22 $ 33.66 $ 32.47 $ 24.77
================================================================================
Total return c ................................... 14.68% 5.72% 19.49% 3.67% 31.09% (17.38)%
RATIOS TO AVERAGE NET ASSETS d
Expenses before waiver and payments
by affiliates ................................. 1.69% 1.69% 1.68% 1.71% 1.76% 1.82%
Expenses net of waiver and payments
by affiliates ................................. 1.67% f 1.69% f 1.68% f 1.71% f 1.76% 1.82%
Net investment income (loss) ..................... (0.90)% (0.58)% (0.48)% (1.04)% (1.04)% (1.06)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $420,661 $371,164 $388,478 $296,868 $298,114 $219,023
Portfolio turnover rate .......................... 16.55% 62.54% 66.63% 41.91% 39.92% 32.93%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 47
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
--------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS R (UNAUDITED) 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $ 44.61 $ 42.01 $ 34.98 $ 33.57 $ 25.49 $ 30.68
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... (0.10) (0.04) 0.01 (0.19) (0.18) (0.16)
Net realized and unrealized gains (losses) ... 6.77 2.66 7.02 1.60 8.26 (5.03)
--------------------------------------------------------------------------------
Total from investment operations ................ 6.67 2.62 7.03 1.41 8.08 (5.19)
--------------------------------------------------------------------------------
Less distributions from net investment income ... (0.02) (0.02) -- -- -- --
--------------------------------------------------------------------------------
Redemption fees ................................. -- e -- e -- e -- e -- --
--------------------------------------------------------------------------------
Net asset value, end of period .................. $ 51.26 $ 44.61 $ 42.01 $ 34.98 $ 33.57 $ 25.49
================================================================================
Total return c .................................. 14.97% 6.25% 20.07% 4.20% 31.70% (16.92)%
RATIOS TO AVERAGE NET ASSETS d
Expenses before waiver and payments
by affiliates ................................ 1.20% 1.21% 1.18% 1.21% 1.26% 1.32%
Expenses net of waiver and payments
by affiliates ................................ 1.18% f 1.21% f 1.18% f 1.21% f 1.26% 1.32%
Net investment income (loss) .................... (0.41)% (0.10)% 0.02% (0.54)% (0.54)% (0.56)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $ 86,149 $ 81,398 $ 91,229 $ 69,103 $ 44,988 $ 15,123
Portfolio turnover rate ......................... 16.55% 62.54% 66.63% 41.91% 39.92% 32.93%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
48 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
-----------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
ADVISOR CLASS (UNAUDITED) 2007 2006 2005 g
-----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................. $ 45.41 $ 42.63 $ 35.32 $ 33.35
-----------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b .................... 0.02 0.16 0.23 (0.01)
Net realized and unrealized gains (losses) ........ 6.90 2.71 7.08 1.98
-----------------------------------------------------------
Total from investment operations ..................... 6.92 2.87 7.31 1.97
-----------------------------------------------------------
Less distributions from net investment income ........ (0.02) (0.09) -- --
-----------------------------------------------------------
Redemption fees ...................................... -- e -- e -- e -- e
-----------------------------------------------------------
Net asset value, end of period ....................... $ 52.31 $ 45.41 $ 42.63 $ 35.32
===========================================================
Total return c ....................................... 15.23% 6.77% 20.67% 5.91%
RATIOS TO AVERAGE NET ASSETS d
Expenses before waiver and payments by affiliates .... 0.70% 0.71% 0.68% 0.71%
Expenses net of waiver and payments by affiliates .... 0.68% f 0.71% f 0.68% f 0.71% f
Net investment income (loss) ......................... 0.09% 0.40% 0.52% (0.04)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .................... $ 350,396 $ 297,856 $ 209,680 $ 71,193
Portfolio turnover rate .............................. 16.55% 62.54% 66.63% 41.91%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period August 2, 2004 (effective date) to April 30, 2005.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 49
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 95.8%
COMMON STOCKS 95.4%
COMMERCIAL SERVICES 3.2%
a Concur Technologies Inc. ................................................. 211,500 $ 7,622,460
FactSet Research Systems Inc. ............................................ 725,000 51,127,000
SEI Investments Co. ...................................................... 1,384,200 43,768,404
--------------
102,517,864
--------------
COMMUNICATIONS 7.1%
America Movil SAB de CV, L, ADR (Mexico) ................................. 790,900 51,716,951
a American Tower Corp., A .................................................. 1,500,000 66,270,000
AT&T Inc. ................................................................ 1,285,300 53,712,687
a NII Holdings Inc. ........................................................ 988,700 57,344,600
--------------
229,044,238
--------------
CONSUMER DURABLES 0.9%
a Activision Inc. .......................................................... 1,200,000 28,380,000
--------------
CONSUMER NON-DURABLES 4.1%
a Hansen Natural Corp. ..................................................... 900,000 61,200,000
PepsiCo Inc. ............................................................. 500,000 36,860,000
The Procter & Gamble Co. ................................................. 469,600 32,646,592
--------------
130,706,592
--------------
CONSUMER SERVICES 1.4%
a eBay Inc. ................................................................ 600,000 21,660,000
The Walt Disney Co. ...................................................... 650,000 22,509,500
--------------
44,169,500
--------------
ELECTRONIC TECHNOLOGY 25.1%
a Agilent Technologies Inc. ................................................ 246,424 9,080,724
a Apple Inc. ............................................................... 500,000 94,975,000
a Cisco Systems Inc. ....................................................... 2,273,900 75,175,134
a FLIR Systems Inc. ........................................................ 939,200 65,171,088
Garmin Ltd. (Cayman Islands) ............................................. 300,000 32,220,000
Harris Corp. ............................................................. 741,500 44,905,240
Hewlett-Packard Co. ...................................................... 1,300,000 67,184,000
a Juniper Networks Inc. .................................................... 1,000,000 36,000,000
a Lam Research Corp. ....................................................... 350,000 17,570,000
Maxim Integrated Products Inc. ........................................... 500,000 13,550,000
Microchip Technology Inc. ................................................ 1,200,000 39,804,000
a Microsemi Corp. .......................................................... 279,200 7,429,512
a NVIDIA Corp. ............................................................. 1,500,000 53,070,000
Precision Castparts Corp. ................................................ 350,000 52,433,500
QUALCOMM Inc. ............................................................ 1,300,000 55,549,000
a Research In Motion Ltd. (Canada) ......................................... 325,000 40,465,750
Rockwell Collins Inc. .................................................... 100,000 7,481,000
Texas Instruments Inc. ................................................... 988,700 32,231,620
a Trimble Navigation Ltd. .................................................. 1,050,000 43,785,000
a Varian Semiconductor Equipment Associates Inc. ........................... 400,000 18,408,000
--------------
806,488,568
--------------
50 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
ENERGY MINERALS 1.2%
Devon Energy Corp. ....................................................... 400,000 $ 37,360,000
--------------
FINANCE 7.6%
Assurant Inc. ............................................................ 300,000 17,532,000
CapitalSource Inc. ....................................................... 1,428,925 26,035,014
CME Group Inc. ........................................................... 90,000 59,962,500
The Goldman Sachs Group Inc. ............................................. 200,000 49,584,000
T. Rowe Price Group Inc. ................................................. 1,000,000 64,240,000
Wells Fargo & Co. ........................................................ 799,900 27,204,599
--------------
244,558,113
--------------
HEALTH SERVICES 3.4%
a Stericycle Inc. .......................................................... 1,087,600 63,439,708
a VCA Antech Inc. .......................................................... 988,700 45,529,635
--------------
108,969,343
--------------
HEALTH TECHNOLOGY 11.4%
a Celgene Corp. ............................................................ 494,300 32,623,800
a Genentech Inc. ........................................................... 400,000 29,652,000
a Gilead Sciences Inc. ..................................................... 1,500,000 69,285,000
Johnson & Johnson ........................................................ 600,000 39,102,000
a,b,c Masimo Corp. ............................................................. 1,043,181 30,938,014
a ResMed Inc. .............................................................. 350,000 14,500,500
Roche Holding AG, ADR (Switzerland) ...................................... 741,500 63,361,175
Schering-Plough Corp. .................................................... 1,800,000 54,936,000
Stryker Corp. ............................................................ 325,000 23,075,000
a Varian Medical Systems Inc. .............................................. 223,300 10,890,341
--------------
368,363,830
--------------
INDUSTRIAL SERVICES 2.0%
Schlumberger Ltd. ........................................................ 250,000 24,142,500
Smith International Inc. ................................................. 600,000 39,630,000
--------------
63,772,500
--------------
PROCESS INDUSTRIES 2.7%
Ecolab Inc. .............................................................. 700,000 33,019,000
Praxair Inc. ............................................................. 642,600 54,929,448
--------------
87,948,448
--------------
PRODUCER MANUFACTURING 3.6%
Danaher Corp. ............................................................ 325,000 27,842,750
a SunPower Corp., A ........................................................ 400,000 50,584,000
United Technologies Corp. ................................................ 494,300 37,858,437
--------------
116,285,187
--------------
REAL ESTATE DEVELOPMENT 1.0%
Jones Lang LaSalle Inc. .................................................. 325,000 30,982,250
--------------
Semiannual Report | 51
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
RETAIL TRADE 5.3%
CVS Caremark Corp. ....................................................... 1,200,000 $ 50,124,000
a Dick's Sporting Goods Inc. ............................................... 1,100,000 36,707,000
PETsMART Inc. ............................................................ 1,000,000 29,950,000
Target Corp. ............................................................. 500,000 30,680,000
a Zumiez Inc. .............................................................. 550,000 23,023,000
--------------
170,484,000
--------------
TECHNOLOGY SERVICES 11.8%
a Adobe Systems Inc. ....................................................... 939,200 44,987,680
a Autodesk Inc. ............................................................ 700,000 34,230,000
a Cognizant Technology Solutions Corp., A .................................. 950,000 39,387,000
a Google Inc., A ........................................................... 128,500 90,849,500
a Internap Network Services Corp. .......................................... 800,000 13,328,000
a Omniture Inc. ............................................................ 600,000 20,496,000
a Oracle Corp. ............................................................. 2,175,000 48,219,750
Paychex Inc. ............................................................. 1,050,000 43,869,000
a Salesforce.com Inc. ...................................................... 494,300 27,863,691
a VeriSign Inc. ............................................................ 500,000 17,045,000
--------------
380,275,621
--------------
TRANSPORTATION 3.6%
C.H. Robinson Worldwide Inc. ............................................. 741,500 37,015,680
Canadian National Railway Co. (Canada) ................................... 600,000 33,594,000
Expeditors International of Washington Inc. .............................. 900,000 45,585,000
--------------
116,194,680
--------------
TOTAL COMMON STOCKS (COST $1,977,265,919) ................................ 3,066,500,734
--------------
PREFERRED STOCKS 0.4%
ELECTRONIC TECHNOLOGY 0.0% d
a,b,c Anda Networks, pfd., D ................................................... 145,772 45,189
--------------
HEALTH TECHNOLOGY 0.4%
a,b,c Fibrogen Inc., pfd., E ................................................... 2,227,171 11,069,041
--------------
TOTAL PREFERRED STOCKS (COST $11,999,998) ................................ 11,114,230
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,989,265,917) ........................ 3,077,614,964
--------------
52 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENT (COST $165,320,521) 5.1%
MONEY MARKET FUND 5.1%
e Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.69% ..... 165,320,521 $ 165,320,521
--------------
TOTAL INVESTMENTS (COST $2,154,586,438) 100.9% ........................... 3,242,935,485
OTHER ASSETS, LESS LIABILITIES (0.9)% .................................... (28,304,789)
--------------
NET ASSETS 100.0% ........................................................ $3,214,630,696
==============
See Selected Portfolio Abbreviations on page 72.
a Non-income producing for the twelve months ended October 31, 2007.
b Security has been deemed illiquid because it may not be able to be sold within
seven days. At October 31, 2007, the aggregate value of these securities was
$42,052,244, representing 1.31% of net assets.
c See Note 8 regarding restricted securities.
d Rounds to less than 0.1% of net assets.
e See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 53
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN SMALL CAP GROWTH FUND II
--------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 13.05 $ 13.90 $ 10.63 $ 10.55 $ 7.46 $ 9.79
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................ (0.06) (0.10) (0.08) (0.09) (0.07) (0.06)
Net realized and unrealized gains (losses) 0.86 0.58 3.35 0.17 3.16 (2.27)
--------------------------------------------------------------------------------
Total from investment operations ................. 0.80 0.48 3.27 0.08 3.09 (2.33)
--------------------------------------------------------------------------------
Less distributions from net realized gains ....... -- (1.33) -- -- -- --
--------------------------------------------------------------------------------
Redemption fees .................................. -- e -- e -- e -- e -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................... $ 13.85 $ 13.05 $ 13.90 $ 10.63 $ 10.55 $ 7.46
================================================================================
Total return c ................................... 6.13% 4.02% 30.76% 0.76% 41.42% (23.80)%
RATIOS TO AVERAGE NET ASSETS d
Expenses ......................................... 1.21% f 1.20% f 1.16% f 1.15% f 1.08% 1.32%
Net investment income (loss) ..................... (0.87)% (0.77)% (0.61)% (0.84)% (0.70)% (0.76)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $499,499 $549,733 $693,084 $765,216 $908,599 $696,642
Portfolio turnover rate .......................... 23.89% 51.49% 44.34% 46.35% 47.08% 34.99%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
54 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND II
--------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 12.35 $ 13.32 $ 10.26 $ 10.27 $ 7.33 $ 9.66
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................ (0.10) (0.18) (0.16) (0.17) (0.15) (0.10)
Net realized and unrealized gains (losses) .... 0.81 0.54 3.22 0.16 3.09 (2.23)
--------------------------------------------------------------------------------
Total from investment operations ................. 0.71 0.36 3.06 (0.01) 2.94 (2.33)
--------------------------------------------------------------------------------
Less distributions from net realized gains ....... -- (1.33) -- -- -- --
--------------------------------------------------------------------------------
Redemption fees .................................. -- e -- e -- e -- e -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................... $ 13.06 $ 12.35 $ 13.32 $ 10.26 $ 10.27 $ 7.33
================================================================================
Total return c ................................... 5.75% 3.27% 29.82% (0.10)% 40.11% (24.12)%
RATIOS TO AVERAGE NET ASSETS d
Expenses ......................................... 1.96% f 1.96% f 1.91% f 1.91% f 1.92% 1.97%
Net investment income (loss) ..................... (1.62)% (1.53)% (1.36)% (1.60)% (1.54)% (1.41)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $77,978 $85,684 $111,458 $105,070 $122,004 $ 96,077
Portfolio turnover rate .......................... 23.89% 51.49% 44.34% 46.35% 47.08% 34.99%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 55
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND II
--------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 12.36 $ 13.33 $ 10.27 $ 10.27 $ 7.33 $ 9.67
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................ (0.10) (0.18) (0.16) (0.17) (0.15) (0.10)
Net realized and unrealized gains (losses) .... 0.81 0.54 3.22 0.17 3.09 (2.24)
--------------------------------------------------------------------------------
Total from investment operations ................. 0.71 0.36 3.06 -- 2.94 (2.34)
--------------------------------------------------------------------------------
Less distributions from net realized gains ....... -- (1.33) -- -- -- --
--------------------------------------------------------------------------------
Redemption fees .................................. -- e -- e -- e -- e -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................... $ 13.07 $ 12.36 $ 13.33 $ 10.27 $ 10.27 $ 7.33
================================================================================
Total return c ................................... 5.74% 3.27% 29.80% --% 40.11% (24.20)%
RATIOS TO AVERAGE NET ASSETS d
Expenses ......................................... 1.96% f 1.95% f 1.92% f 1.91% f 1.92% 1.97%
Net investment income (loss) ..................... (1.62)% (1.52)% (1.37)% (1.60)% (1.54)% (1.41)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $112,297 $120,900 $170,159 $164,117 $200,037 $163,466
Portfolio turnover rate .......................... 23.89% 51.49% 44.34% 46.35% 47.08% 34.99%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
56 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND II
--------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS R (UNAUDITED) 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 12.86 $ 13.75 $ 10.54 $ 10.49 $ 7.45 $ 9.79
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................ (0.07) (0.13) (0.11) (0.12) (0.10) (0.07)
Net realized and unrealized gains (losses) .... 0.84 0.57 3.32 0.17 3.14 (2.27)
--------------------------------------------------------------------------------
Total from investment operations ................. 0.77 0.44 3.21 0.05 3.04 (2.34)
--------------------------------------------------------------------------------
Less distributions from net realized gains ....... -- (1.33) -- -- -- --
--------------------------------------------------------------------------------
Redemption fees .................................. -- e -- e -- e -- e -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................... $ 13.63 $ 12.86 $ 13.75 $ 10.54 $ 10.49 $ 7.45
================================================================================
Total return c ................................... 5.99% 3.77% 30.46% 0.48% 40.81% (23.90)%
RATIOS TO AVERAGE NET ASSETS d
Expenses ......................................... 1.46% f 1.46% f 1.42% f 1.41% f 1.42% 1.47%
Net investment income (loss) ..................... (1.12)% (1.03)% (0.87)% (1.10)% (1.04)% (0.91)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $ 3,997 $ 5,759 $ 6,328 $ 4,392 $ 4,542 $ 2,562
Portfolio turnover rate .......................... 23.89% 51.49% 44.34% 46.35% 47.08% 34.99%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 57
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND II
--------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
ADVISOR CLASS (UNAUDITED) 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 13.34 $ 14.15 $ 10.79 $ 10.69 $ 7.55 $ 9.86
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................ (0.04) (0.07) (0.05) (0.07) (0.05) (0.03)
Net realized and unrealized gains (losses) .... 0.88 0.59 3.41 0.17 3.19 (2.28)
--------------------------------------------------------------------------------
Total from investment operations ................. 0.84 0.52 3.36 0.10 3.14 (2.31)
--------------------------------------------------------------------------------
Less distributions from net realized gains ....... -- (1.33) -- -- -- --
--------------------------------------------------------------------------------
Redemption fees .................................. -- e -- e -- e -- e -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................... $ 14.18 $ 13.34 $ 14.15 $ 10.79 $ 10.69 $ 7.55
================================================================================
Total return c ................................... 6.30% 4.24% 31.14% 0.94% 41.59% (23.43)%
RATIOS TO AVERAGE NET ASSETS d
Expenses ......................................... 0.96% f 0.96% f 0.92% f 0.91% f 0.92% 0.97%
Net investment income (loss) ..................... (0.62)% (0.53)% (0.37)% (0.60)% (0.54)% (0.41)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $248,979 $325,425 $326,475 $235,101 $211,271 $135,529
Portfolio turnover rate .......................... 23.89% 51.49% 44.34% 46.35% 47.08% 34.99%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding
c Total return is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%
58 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
FRANKLIN SMALL CAP GROWTH FUND II SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
COMMON STOCKS 98.4%
COMMERCIAL SERVICES 2.8%
a CoStar Group Inc. ....................................................... 44,900 $ 2,581,750
a Huron Consulting Group Inc. ............................................. 209,300 14,625,884
a LECG Corp. .............................................................. 111,100 1,945,361
a Universal Technical Institute Inc. ...................................... 386,200 7,272,146
------------
26,425,141
------------
COMMUNICATIONS 0.6%
a SBA Communications Corp. ................................................ 151,000 5,375,600
------------
CONSUMER DURABLES 2.9%
a,b Force Protection Inc., 144A, PIPES ...................................... 601,000 10,757,900
a Tenneco Inc. ............................................................ 272,600 8,344,286
a THQ Inc. ................................................................ 315,400 8,544,186
------------
27,646,372
------------
CONSUMER NON-DURABLES 1.0%
a FGX International Holdings Ltd. (Virgin Islands (British)) .............. 422,700 7,228,170
a Hain Celestial Group Inc. ............................................... 61,200 2,145,672
------------
9,373,842
------------
CONSUMER SERVICES 10.1%
a BJ's Restaurants Inc. ................................................... 311,500 6,164,585
a Chipotle Mexican Grill Inc., B .......................................... 142,800 17,610,096
a Gaylord Entertainment Co., A ............................................ 81,700 4,451,016
a Lions Gate Entertainment Corp. .......................................... 953,100 10,198,170
Orient-Express Hotels Ltd., A ........................................... 207,600 13,452,480
a Panera Bread Co. ........................................................ 285,600 11,706,744
a Red Lion Hotels Corp. ................................................... 309,500 3,039,290
a Ruth's Chris Steak House Inc. ........................................... 477,600 6,036,864
a Shuffle Master Inc. ..................................................... 556,600 7,614,288
a Shutterfly Inc. ......................................................... 144,600 4,825,302
Strayer Education Inc. .................................................. 56,800 10,590,928
------------
95,689,763
------------
ELECTRONIC TECHNOLOGY 27.9%
a Arris Group Inc. ........................................................ 604,800 6,955,200
a Atheros Communications .................................................. 318,800 11,189,880
a Compellent Technologies Inc. ............................................ 113,636 1,829,540
a FLIR Systems Inc. ....................................................... 312,200 21,663,558
a FormFactor Inc. ......................................................... 389,600 15,237,256
a Hittite Microwave Corp. ................................................. 181,100 9,100,275
a Ixia .................................................................... 1,437,400 15,035,204
a Microsemi Corp. ......................................................... 772,300 20,550,903
a Microtune Inc. .......................................................... 1,150,100 6,935,103
National Instruments Corp. .............................................. 272,402 8,836,721
a Netlogic Microsystems Inc. .............................................. 498,400 16,546,880
a OpNext Inc. ............................................................. 374,700 4,458,930
a Orbital Sciences Corp. .................................................. 521,400 13,311,342
a Power Integrations Inc. ................................................. 787,300 25,610,869
a Riverbed Technology Inc. ................................................ 261,100 8,822,569
Semiannual Report | 59
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------
FRANKLIN SMALL CAP GROWTH FUND II SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
ELECTRONIC TECHNOLOGY (CONTINUED)
a Silicon Laboratories Inc. ............................................... 348,700 $ 15,238,190
a Stanley Inc. ............................................................ 209,800 5,555,504
a Trimble Navigation Ltd. ................................................. 362,600 15,120,420
a Varian Inc. ............................................................. 140,900 10,411,101
a Varian Semiconductor Equipment Associates Inc. .......................... 247,675 11,398,003
a ViaSat Inc. ............................................................. 425,200 12,968,600
a Xyratex Ltd. (Bermuda) .................................................. 379,900 6,488,692
------------
263,264,740
------------
ENERGY MINERALS 3.3%
a Bill Barrett Corp. ...................................................... 365,800 17,119,440
a Mariner Energy Inc. ..................................................... 544,700 13,617,500
------------
30,736,940
------------
FINANCE 5.5%
a,c Clayton Holdings Inc. ................................................... 1,187,899 5,701,916
East West Bancorp Inc. .................................................. 230,200 7,766,948
Hancock Holding Co. ..................................................... 140,500 5,343,215
a Mobile Mini Inc. ........................................................ 347,700 6,234,261
a NewStar Financial Inc. .................................................. 642,600 6,451,704
optionsXpress Holdings Inc. ............................................. 521,200 15,510,912
UCBH Holdings Inc. ...................................................... 270,300 4,614,021
------------
51,622,977
------------
HEALTH SERVICES 7.4%
a Allscripts Healthcare Solutions Inc. .................................... 503,100 13,935,870
a,d Genoptix Inc. ........................................................... 51,900 1,281,930
a Healthways Inc. ......................................................... 108,900 6,610,230
a PAREXEL International Corp. ............................................. 345,800 15,906,800
a Psychiatric Solutions Inc. .............................................. 296,200 11,729,520
a TriZetto Group Inc. ..................................................... 526,500 8,603,010
a VCA Antech Inc. ......................................................... 253,500 11,673,675
------------
69,741,035
------------
HEALTH TECHNOLOGY 8.8%
a Adams Respiratory Therapeutics Inc. ..................................... 310,700 13,652,158
a American Medical Systems Holdings Inc. .................................. 526,700 6,736,493
a Angiotech Pharmaceuticals Inc. .......................................... 1,666,900 7,884,437
a Cadence Pharmaceuticals Inc. ............................................ 374,300 5,345,004
a Dexcom Inc. ............................................................. 733,800 6,824,340
a Impax Laboratories Inc. ................................................. 301,100 3,236,825
a Keryx Biopharmaceuticals Inc. ........................................... 511,700 5,270,510
a MannKind Corp. .......................................................... 437,400 3,993,462
a The Medicines Co. ....................................................... 312,200 5,978,630
a Myriad Genetics Inc. .................................................... 239,400 13,253,184
a Panacos Pharmaceuticals Inc. ............................................ 299,500 748,750
a Penwest Pharmaceuticals Co. ............................................. 571,600 4,738,564
a Tomotherapy Inc. ........................................................ 249,400 5,454,378
------------
83,116,735
------------
60 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------
FRANKLIN SMALL CAP GROWTH FUND II SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
INDUSTRIAL SERVICES 3.5%
a Dril-Quip Inc. .......................................................... 94,700 $ 5,050,351
a Helix Energy Solutions Group Inc. ....................................... 342,400 15,836,000
a Superior Energy Services Inc. ........................................... 325,900 12,084,372
------------
32,970,723
------------
MUTUAL FUNDS 0.4%
Kohlberg Capital Corp. .................................................. 314,400 4,049,472
------------
PROCESS INDUSTRIES 2.1%
FMC Corp. ............................................................... 212,200 12,201,500
Minerals Technologies Inc. .............................................. 107,900 7,576,738
------------
19,778,238
------------
PRODUCER MANUFACTURING 2.8%
a Drew Industries Inc. .................................................... 384,000 15,198,720
Manitowoc Co. Inc. ...................................................... 234,700 11,561,322
------------
26,760,042
------------
REAL ESTATE INVESTMENT TRUSTS 2.6%
FelCor Lodging Trust Inc. ............................................... 600,900 12,582,846
LaSalle Hotel Properties ................................................ 162,200 6,702,104
RAIT Financial Trust .................................................... 581,400 5,290,740
------------
24,575,690
------------
RETAIL TRADE 3.4%
Big 5 Sporting Goods Corp. .............................................. 324,900 5,799,465
a Hibbett Sports Inc. ..................................................... 289,900 6,838,741
a Tractor Supply Co. ...................................................... 181,100 7,504,784
a Ulta Salon Cosmetics & Fragrance Inc. ................................... 56,800 1,942,560
a Zumiez Inc. ............................................................. 228,200 9,552,452
------------
31,638,002
------------
TECHNOLOGY SERVICES 12.2%
BearingPoint Inc. ....................................................... 974,900 4,669,771
a Demandtec Inc. .......................................................... 400 7,224
a Entrust Inc. ............................................................ 1,239,000 2,539,950
e Heartland Payment Systems Inc. .......................................... 308,200 9,246,000
a Internap Network Services Corp. ......................................... 717,600 11,955,216
Marchex Inc., B ......................................................... 804,400 9,081,676
a MICROS Systems Inc. ..................................................... 187,600 13,473,432
a Nuance Communications Inc. .............................................. 617,500 13,652,925
a Omniture Inc. ........................................................... 141,300 4,826,808
a Quest Software Inc. ..................................................... 800,000 13,920,000
a RightNow Technologies Inc. .............................................. 519,400 10,398,388
a Sapient Corp. ........................................................... 2,581,700 18,071,900
a Voltaire Ltd. (Israel) .................................................. 452,200 3,210,620
------------
115,053,910
------------
TRANSPORTATION 1.1%
a Allegiant Travel Co. .................................................... 281,700 10,146,834
------------
TOTAL COMMON STOCKS (COST $720,546,764) ................................. 927,966,056
------------
Semiannual Report | 61
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------
FRANKLIN SMALL CAP GROWTH FUND II SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 1.5%
MONEY MARKET FUND (COST $11,134,994) 1.2%
f Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.69% .... 11,134,994 $ 11,134,994
------------
g INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.3%
MONEY MARKET FUND (COST $2,556,000) 0.3%
h Bank of New York Institutional Cash Reserve Fund, 5.14% ................. 2,556,000 2,556,000
------------
TOTAL INVESTMENTS (COST $734,237,758) 99.9% ............................. 941,657,050
OTHER ASSETS, LESS LIABILITIES 0.1% ..................................... 1,092,403
------------
NET ASSETS 100.0% ....................................................... $942,749,453
============
See Selected Portfolio Abbreviations on page 72.
a Non-income producing for the twelve months ended October 31, 2007.
b Security was purchased pursuant to Rule 144A under the Securities Act of 1933
and may be sold in transactions exempt from registration only to qualified
institutional buyers or in a public offering registered under the Securities Act
of 1933. These securities have been deemed liquid under guidelines approved by
the Trust's Board of Trustees. At October 31, 2007, the value of this security
was $10,757,900, representing 1.14% of net assets.
c See Note 9 regarding holdings of 5% voting securities.
d A portion or all of the securities purchased on a when-issued or delayed
delivery basis. See Note 1(c).
e A portion or all of the security is on loan as of October 31, 2007. See Note
1(e).
f See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
g See Note 1(e) regarding securities on loan.
h The rate shown is the annualized seven-day yield at period end.
62 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN SMALL-MID CAP GROWTH FUND
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2007 2006 2005 2004 2003
------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .. $ 41.54 $ 40.42 $ 31.31 $ 29.69 $ 23.14 $ 28.85
------------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ..... (0.27) (0.13) -- g (0.08) (0.14) (0.09)
Net realized and unrealized gains
(losses) ........................ 4.90 4.09 9.15 1.70 6.69 (5.62)
------------------------------------------------------------------------------------------
Total from investment operations ...... 4.63 3.96 9.15 1.62 6.55 (5.71)
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income .............. -- -- (0.04) -- -- --
Net realized gains ................. -- (2.84) -- -- -- --
------------------------------------------------------------------------------------------
Total distributions ................... -- (2.84) (0.04) -- -- --
------------------------------------------------------------------------------------------
Redemption fees ....................... -- e -- e -- e -- e -- e --
------------------------------------------------------------------------------------------
Net asset value, end of period ........ $ 46.17 $ 41.54 $ 40.42 $ 31.31 $ 29.69 $ 23.14
==========================================================================================
Total return c ........................ 11.15% 10.38% 29.21% 5.46% 28.31% (19.79)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .............................. 0.97% f 0.98% f 0.96% f 0.97% f 0.98% 1.02%
Net investment income (loss) .......... (0.53)% (0.33)% --% h (0.27)% (0.51)% (0.41)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $5,532,410 $5,619,694 $6,532,284 $6,636,792 $7,355,269 $5,791,141
Portfolio turnover rate ............... 31.04% 52.76% 39.84% 42.96% 52.84% 36.47%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
g Amount rounds to less than $(0.01) per share.
h Rounds to less than (0.01)%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 63
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
--------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2007 2006 2005 2004 2003 g
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 40.00 $ 39.31 $ 30.65 $ 29.28 $ 23.00 $ 24.33
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................ (0.43) (0.40) (0.27) (0.31) (0.36) (0.23)
Net realized and unrealized gains (losses) .... 4.72 3.93 8.93 1.68 6.64 (1.10)
--------------------------------------------------------------------------------
Total from investment operations ................. 4.29 3.53 8.66 1.37 6.28 (1.33)
--------------------------------------------------------------------------------
Less distributions from net realized gains ....... -- (2.84) -- -- -- --
--------------------------------------------------------------------------------
Redemption fees .................................. -- e -- e -- e -- e -- e --
--------------------------------------------------------------------------------
Net asset value, end of period ................... $ 44.29 $ 40.00 $ 39.31 $ 30.65 $ 29.28 $ 23.00
================================================================================
Total return c ................................... 10.73% 9.53% 28.25% 4.68% 27.30% (5.47)%
RATIOS TO AVERAGE NET ASSETS d
Expenses ......................................... 1.72% f 1.73% f 1.71% f 1.72% f 1.73% 1.77%
Net investment income (loss) ..................... (1.28)% (1.08)% (0.75)% (1.02)% (1.26)% (1.16)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $ 34,168 $ 32,570 $ 36,911 $ 31,733 $ 26,161 $ 7,601
Portfolio turnover rate .......................... 31.04% 52.76% 39.84% 42.96% 52.84% 36.47%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period July 1, 2002 (effective date) to April 30, 2003.
64 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
--------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 38.85 $ 38.25 $ 29.82 $ 28.49 $ 22.37 $ 28.09
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................ (0.41) (0.39) (0.26) (0.31) (0.34) (0.26)
Net realized and unrealized gains (losses) .... 4.57 3.83 8.69 1.64 6.46 (5.46)
--------------------------------------------------------------------------------
Total from investment operations ................. 4.16 3.44 8.43 1.33 6.12 (5.72)
--------------------------------------------------------------------------------
Less distributions from net realized gains ....... -- (2.84) -- -- -- --
--------------------------------------------------------------------------------
Redemption fees .................................. -- e -- e -- e -- e -- e --
--------------------------------------------------------------------------------
Net asset value, end of period ................... $ 43.01 $ 38.85 $ 38.25 $ 29.82 $ 28.49 $ 22.37
================================================================================
Total return c ................................... 10.73% 9.56% 28.27% 4.67% 27.36% (20.36)%
RATIOS TO AVERAGE NET ASSETS d
Expenses ......................................... 1.72% f 1.72% f 1.71% f 1.72% f 1.71% 1.77%
Net investment income (loss) ..................... (1.28)% (1.07)% (0.75)% (1.02)% (1.24)% (1.16)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $684,131 $653,529 $728,710 $654,549 $762,602 $639,524
Portfolio turnover rate .......................... 31.04% 52.76% 39.84% 42.96% 52.84% 36.47%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 65
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
--------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS R (UNAUDITED) 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 40.96 $ 39.98 $ 31.04 $ 29.50 $ 23.06 $ 28.81
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................ (0.32) (0.23) (0.08) (0.15) (0.22) (0.17)
Net realized and unrealized gains (losses) .... 4.82 4.05 9.04 1.69 6.66 (5.58)
--------------------------------------------------------------------------------
Total from investment operations ................. 4.50 3.82 8.96 1.54 6.44 (5.75)
--------------------------------------------------------------------------------
Less distributions from:
Net investment income ......................... -- -- (0.02) -- -- --
Net realized gains ............................ -- (2.84) -- -- -- --
--------------------------------------------------------------------------------
Total distributions .............................. -- (2.84) (0.02) -- -- --
--------------------------------------------------------------------------------
Redemption fees .................................. -- e -- e -- e -- e -- e --
--------------------------------------------------------------------------------
Net asset value, end of period ................... $ 45.46 $ 40.96 $ 39.98 $ 31.04 $ 29.50 $ 23.06
================================================================================
Total return c ................................... 10.99% 10.11% 28.88% 5.22% 27.93% (19.96)%
RATIOS TO AVERAGE NET ASSETS d
Expenses ......................................... 1.22% f 1.23% f 1.21% f 1.22% f 1.23% 1.27%
Net investment income (loss) ..................... (0.78)% (0.58)% (0.25)% (0.52)% (0.76)% (0.66)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $116,239 $118,387 $ 93,916 $ 54,139 $ 41,404 $ 15,309
Portfolio turnover rate .......................... 31.04% 52.76% 39.84% 42.96% 52.84% 36.47%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
66 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
ADVISOR CLASS (UNAUDITED) 2007 2006 2005 2004 2003
------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .. $ 42.22 $ 40.93 $ 31.71 $ 29.99 $ 23.32 $ 29.00
------------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ..... (0.28) (0.03) 0.10 -- e (0.07) (0.04)
Net realized and unrealized gains
(losses) ........................ 5.05 4.16 9.26 1.72 6.74 (5.64)
------------------------------------------------------------------------------------------
Total from investment operations ...... 4.77 4.13 9.36 1.72 6.67 (5.68)
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income .............. -- -- (0.14) -- -- --
Net realized gains ................. -- (2.84) -- -- -- --
------------------------------------------------------------------------------------------
Total distributions ................... -- (2.84) (0.14) -- -- --
------------------------------------------------------------------------------------------
Redemption fees ....................... -- e -- e -- e -- e -- e --
------------------------------------------------------------------------------------------
Net asset value, end of period ........ $ 46.99 $ 42.22 $ 40.93 $ 31.71 $ 29.99 $ 23.32
==========================================================================================
Total return c ........................ 11.30% 10.65% 29.55% 5.74% 28.60% (19.59)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .............................. 0.72% f 0.73% f 0.71% f 0.72% f 0.73% 0.77%
Net investment income (loss) .......... (0.28)% (0.08)% 0.25% (0.02)% (0.26)% (0.16)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $1,064,388 $ 803,365 $ 794,395 $ 347,518 $ 320,154 $ 266,723
Portfolio turnover rate ............... 31.04% 52.76% 39.84% 42.96% 52.84% 36.47%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 67
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.0%
COMMON STOCKS 98.9%
COMMERCIAL SERVICES 2.9%
FactSet Research Systems Inc. .......................................... 1,378,100 $ 97,183,612
Robert Half International Inc. ......................................... 2,036,800 61,287,312
SEI Investments Co. .................................................... 1,808,400 57,181,608
--------------
215,652,532
--------------
COMMUNICATIONS 6.0%
a Crown Castle International Corp. ....................................... 2,013,900 82,710,873
a Leap Wireless International Inc. ....................................... 1,083,200 77,242,992
a MetroPCS Communications Inc. ........................................... 2,989,700 67,268,250
a NII Holdings Inc. ...................................................... 2,239,340 129,881,720
a SBA Communications Corp. ............................................... 2,526,900 89,957,640
a TeleCorp PCS Inc., Escrow Account ...................................... 4,569,500 --
--------------
447,061,475
--------------
CONSUMER DURABLES 5.2%
a Activision Inc. ........................................................ 7,332,200 173,406,530
a,b,c Force Protection Inc., 144A, PIPES ..................................... 4,311,500 77,175,850
a NVR Inc. ............................................................... 106,060 50,458,045
a Scientific Games Corp., A .............................................. 2,308,900 83,466,735
--------------
384,507,160
--------------
CONSUMER NON-DURABLES 4.5%
Guess? Inc. ............................................................ 1,897,800 97,527,942
a Hansen Natural Corp. ................................................... 2,514,200 170,965,600
Wolverine World Wide Inc. .............................................. 2,493,310 63,928,468
--------------
332,422,010
--------------
CONSUMER SERVICES 2.1%
a Chipotle Mexican Grill Inc., B ......................................... 741,700 91,466,444
International Game Technology .......................................... 1,437,900 62,706,819
--------------
154,173,263
--------------
DISTRIBUTION SERVICES 0.7%
a Henry Schein Inc. ...................................................... 844,000 50,555,600
--------------
ELECTRONIC TECHNOLOGY 23.0%
a F5 Networks Inc. ....................................................... 2,787,600 100,437,228
a,d FLIR Systems Inc. ...................................................... 2,934,800 203,645,772
a,b,c FormFactor Inc. ........................................................ 3,067,000 119,950,370
Garmin Ltd. (Cayman Islands) ........................................... 527,100 56,610,540
Harris Corp. ........................................................... 2,634,600 159,551,376
Intersil Corp., A ...................................................... 1,779,800 53,999,132
a Juniper Networks Inc. .................................................. 1,533,300 55,198,800
a Lam Research Corp. ..................................................... 1,088,000 54,617,600
a Logitech International SA, (Switzerland) ............................... 2,700,400 95,378,128
Maxim Integrated Products Inc. ......................................... 2,330,000 63,143,000
Microchip Technology Inc. .............................................. 1,332,700 44,205,659
a,b Microsemi Corp. ........................................................ 4,300,000 114,423,000
a Network Appliance Inc. ................................................. 2,916,600 91,843,734
68 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
ELECTRONIC TECHNOLOGY (CONTINUED)
a Orbital Sciences Corp. ................................................. 2,454,900 $ 62,673,597
Precision Castparts Corp. .............................................. 790,810 118,471,246
Rockwell Collins Inc. .................................................. 1,061,471 79,408,646
a Silicon Laboratories Inc. .............................................. 2,014,200 88,020,540
a Trimble Navigation Ltd. ................................................ 2,347,360 97,884,912
a VeriFone Holdings Inc. ................................................. 987,000 48,787,410
--------------
1,708,250,690
--------------
ENERGY MINERALS 5.1%
a,b Bill Barrett Corp. ..................................................... 3,733,000 174,704,400
a Mariner Energy Inc. .................................................... 1,502,800 37,570,000
Noble Energy Inc. ...................................................... 1,071,700 82,027,918
a Southwestern Energy Co. ................................................ 1,701,800 88,034,114
--------------
382,336,432
--------------
FINANCE 5.7%
a Affiliated Managers Group Inc. ......................................... 1,153,300 151,716,615
CapitalSource Inc. ..................................................... 4,907,682 89,417,966
a E*TRADE Financial Corp. ................................................ 4,935,100 54,977,014
East West Bancorp Inc. ................................................. 1,885,750 63,625,205
optionsXpress Holdings Inc. ............................................ 2,267,030 67,466,813
--------------
427,203,613
--------------
HEALTH SERVICES 5.7%
a Allscripts Healthcare Solutions Inc. ................................... 1,925,530 53,337,181
a Cerner Corp. ........................................................... 1,275,200 75,950,912
a Community Health Systems Inc. .......................................... 508,164 16,733,841
a Coventry Health Care Inc. .............................................. 1,228,500 74,090,835
a Express Scripts Inc. ................................................... 1,831,000 115,536,100
Pharmaceutical Product Development Inc. ................................ 2,070,000 87,436,800
--------------
423,085,669
--------------
HEALTH TECHNOLOGY 9.2%
a Adams Respiratory Therapeutics Inc. .................................... 1,505,400 66,147,276
a,b American Medical Systems Holdings Inc. ................................. 3,689,900 47,193,821
C. R. Bard Inc. ........................................................ 1,317,700 110,172,897
a Endo Pharmaceuticals Holdings Inc. ..................................... 1,567,200 45,918,960
a Gen-Probe Inc. ......................................................... 731,841 51,243,507
a Hologic Inc. ........................................................... 818,930 55,629,915
a Keryx Biopharmaceuticals Inc. .......................................... 1,449,200 14,926,760
a Myriad Genetics Inc. ................................................... 628,500 34,793,760
a PDL BioPharma Inc. ..................................................... 1,707,000 36,188,400
a,d Stereotaxis Inc. ....................................................... 1,463,200 22,533,280
a Varian Medical Systems Inc. ............................................ 1,360,470 66,350,122
a Vertex Pharmaceuticals Inc. ............................................ 339,070 10,965,524
a Waters Corp. ........................................................... 1,569,600 120,827,808
--------------
682,892,030
--------------
Semiannual Report | 69
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
INDUSTRIAL SERVICES 5.5%
a FMC Technologies Inc. .................................................. 1,994,756 $ 120,942,056
a National-Oilwell Varco Inc. ............................................ 2,668,692 195,455,002
Smith International Inc. ............................................... 1,432,900 94,643,045
--------------
411,040,103
--------------
PROCESS INDUSTRIES 0.2%
a U.S. BioEnergy Corp. ................................................... 1,653,000 12,496,680
--------------
PRODUCER MANUFACTURING 7.1%
AMTEK Inc. ............................................................. 2,968,500 139,519,500
a Mettler-Toledo International Inc. (Switzerland) ........................ 1,001,500 106,509,525
a,e,f Mirapoint Inc., 144A ................................................... 682,128 --
a SunPower Corp., A ...................................................... 1,047,200 132,428,912
a Terex Corp. ............................................................ 1,041,800 77,322,396
Trinity Industries Inc. ................................................ 1,921,400 69,439,396
--------------
525,219,729
--------------
REAL ESTATE DEVELOPMENT 1.0%
Jones Lang LaSalle Inc. ................................................ 802,800 76,530,924
--------------
REAL ESTATE INVESTMENT TRUSTS 1.7%
FelCor Lodging Trust Inc. .............................................. 2,072,500 43,398,150
iStar Financial Inc. ................................................... 2,642,800 80,631,828
--------------
124,029,978
--------------
RETAIL TRADE 3.7%
a Dick's Sporting Goods Inc. ............................................. 2,176,400 72,626,468
The Men's Wearhouse Inc. ............................................... 1,428,900 60,385,314
Nordstrom Inc. ......................................................... 845,500 33,346,520
PETsMART Inc. .......................................................... 2,028,260 60,746,387
a Tractor Supply Co. ..................................................... 1,160,200 48,078,688
--------------
275,183,377
--------------
TECHNOLOGY SERVICES 7.0%
a Cognizant Technology Solutions Corp., A ................................ 2,661,200 110,333,352
a Equinix Inc. ........................................................... 644,400 75,175,704
Global Payments Inc. ................................................... 1,721,000 81,850,760
a Internap Network Services Corp. ........................................ 1,943,400 32,377,044
a Nuance Communications Inc. ............................................. 4,473,600 98,911,296
a Omniture Inc. .......................................................... 1,374,200 46,942,672
a Salesforce.com Inc. .................................................... 411,300 23,184,981
a VeriSign Inc. .......................................................... 1,587,200 54,107,648
--------------
522,883,457
--------------
TRANSPORTATION 1.7%
C.H. Robinson Worldwide Inc. ........................................... 1,776,000 88,657,920
Expeditors International of Washington Inc. ............................ 788,100 39,917,265
--------------
128,575,185
--------------
70 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
UTILITIES 0.9%
International Power PLC (United Kingdom) ............................... 6,343,700 $ 64,484,268
--------------
TOTAL COMMON STOCKS (COST $5,146,781,740) .............................. 7,348,584,175
--------------
PREFERRED STOCKS 0.0% g
ELECTRONIC TECHNOLOGY 0.0% g
a,e,f Anda Networks, pfd., D ................................................. 364,431 112,974
--------------
PRODUCER MANUFACTURING 0.0% g
a,e,f Mirapoint Inc., pfd. ................................................... 301,660 132,730
--------------
TOTAL PREFERRED STOCKS (COST $5,561,391) ............................... 245,704
--------------
CONVERTIBLE PREFERRED STOCKS 0.1%
CONSUMER SERVICES 0.1%
a,e,f Foveon Inc., cvt. pfd., D, 144A ........................................ 1,792,573 2,591,164
a,e,f Foveon Inc., cvt. pfd., E, 144A ........................................ 2,597,593 5,270,049
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $16,635,019) .................. 7,861,213
--------------
TOTAL LONG TERM INVESTMENTS (COST $5,168,978,150) ...................... 7,356,691,092
--------------
SHORT TERM INVESTMENTS 1.8%
MONEY MARKET FUND (COST $121,961,952) 1.6%
h Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.69% ... 121,961,952 121,961,952
--------------
i INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.2%
MONEY MARKET FUND (COST $13,809,000) 0.2%
j Bank of New York Institutional Cash Reserve Fund, 5.14% ................ 13,809,000 13,809,000
--------------
TOTAL INVESTMENTS (COST $5,304,749,102) 100.8% ......................... 7,492,462,044
OTHER ASSETS, LESS LIABILITIES (0.8)% .................................. (61,125,439)
--------------
NET ASSETS 100.0% ...................................................... $7,431,336,605
==============
See Selected Portfolio Abbreviations on page 72.
a Non-income producing for the twelve months ended October 31, 2007.
b See Note 9 regarding holdings of 5% voting securities.
c Security was purchased pursuant to Rule 144A under the Securities Act of 1933
and may be sold in transactions exempt from registration only to qualified
institutional buyers or in a public offering registered under the Securities Act
of 1933. These securities have been deemed liquid under guidelines approved by
the Trust's Board of Directors. At October 31, 2007, the value of this security
was $77,175,850, representing 1.04% of net assets.
d A portion or all of the security is on loan as of October 31, 2007. See Note
1(e).
e Security has been deemed illiquid because it may not be able to be sold within
seven days. At October 31, 2007, the aggregate value of these securities was
$8,106,917, representing 0.11% of net assets.
f See Note 8 regarding restricted securities.
g Rounds to less than 0.1% of net assets.
h See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
i See Note 1(e) regarding securities on loan.
j The rate shown is the annualized seven-day yield at period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 71
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED)
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
PIPES - Private Investment in Public Equity Security
72 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 2007 (unaudited)
----------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND
----------------------------------------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ......................... $ 222,600,770 $ 1,989,265,917 $ 703,444,654 $ 4,744,509,697
Cost - Non-controlled affiliated issuers (Note 9) ... -- -- 17,102,110 424,468,453
Cost - Sweep Money Fund (Note 7) .................... 928,684 165,320,521 11,134,994 121,961,952
Cost - Money Market Fund ............................ 192,000 -- 2,556,000 13,809,000
----------------------------------------------------------------------
Total cost of investments ........................... $ 223,721,454 $ 2,154,586,438 $ 734,237,758 $ 5,304,749,102
======================================================================
Value - Unaffiliated issuers ........................ $ 317,185,656 $ 3,077,614,964 $ 922,264,140 $ 6,823,243,651
Value - Non-controlled affiliated issuers (Note 9) .. -- -- 5,701,916 533,447,441
Value - Sweep Money Fund (Note 7) ................... 928,684 165,320,521 11,134,994 121,961,952
Value - Money Market Fund ........................... 192,000 -- 2,556,000 13,809,000
----------------------------------------------------------------------
Total value of investments a ........................ 318,306,340 3,242,935,485 941,657,050 7,492,462,044
Cash .................................................. -- -- -- 257,813
Receivables:
Investment securities sold .......................... 3,920,953 25,933,105 15,001,428 51,301,710
Capital shares sold ................................. 1,854,093 4,940,685 510,009 7,407,925
Dividends ........................................... 13,889 1,320,512 80,301 688,073
Other assets .......................................... 527,941 -- 12,732 --
----------------------------------------------------------------------
Total assets ...................................... 324,623,216 3,275,129,787 957,261,520 7,552,117,565
----------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ..................... 2,830,545 50,568,080 7,756,258 64,953,195
Capital shares redeemed ............................. 493,170 6,108,787 2,313,014 33,606,287
Affiliates .......................................... 300,576 2,421,627 969,651 5,463,559
Unaffiliated transfer agent fees .................... 142,905 1,242,681 777,265 2,233,420
Funds advanced by custodian ........................... -- -- 132 --
Payable upon return of securities loaned .............. 192,000 -- 2,556,000 13,809,000
Accrued expenses and other liabilities ................ 36,283 157,916 139,747 715,499
----------------------------------------------------------------------
Total liabilities ................................. 3,995,479 60,499,091 14,512,067 120,780,960
----------------------------------------------------------------------
Net assets, at value ............................ $ 320,627,737 $ 3,214,630,696 $ 942,749,453 $ 7,431,336,605
======================================================================
Net assets consist of:
Paid-in capital ....................................... $ 360,953,189 $ 2,084,832,420 $ 577,415,579 $ 4,171,000,494
Undistributed net investment income (loss) ............ (1,292,327) (3,999,663) (4,921,529) (20,920,479)
Net unrealized appreciation (depreciation) ............ 94,584,886 1,088,349,047 207,419,292 2,187,712,942
Accumulated net realized gain (loss) .................. (133,618,011) 45,448,892 162,836,111 1,093,543,648
----------------------------------------------------------------------
Net assets, at value ............................ $ 320,627,737 $ 3,214,630,696 $ 942,749,453 $ 7,431,336,605
======================================================================
a Includes securities loaned ............................. $ 196,914 -- $ 2,556,000 $ 13,734,057
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 73
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2007 (unaudited)
----------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND
----------------------------------------------------------------------
CLASS A:
Net assets, at value .................................. $ 145,677,811 $ 2,234,331,845 $ 499,498,646 $ 5,532,409,514
======================================================================
Shares outstanding .................................... 6,292,039 43,013,190 36,063,162 119,829,924
======================================================================
Net asset value per share a ........................... $ 23.15 $ 51.95 $ 13.85 $ 46.17
======================================================================
Maximum offering price per share (net asset value
per share / 94.25%) ................................. $ 24.56 $ 55.12 $ 14.69 $ 48.99
======================================================================
CLASS B:
Net assets, at value .................................. $ 17,599,873 $ 123,092,589 $ 77,977,563 $ 34,168,296
======================================================================
Shares outstanding .................................... 801,781 2,529,893 5,971,332 771,452
======================================================================
Net asset value and maximum offering price
per share a ......................................... $ 21.95 $ 48.66 $ 13.06 $ 44.29
======================================================================
CLASS C:
Net assets, at value .................................. $ 39,443,556 $ 420,661,336 $ 112,297,090 $ 684,131,472
======================================================================
Shares outstanding .................................... 1,800,743 8,626,828 8,592,924 15,904,832
======================================================================
Net asset value and maximum offering price
per share a ......................................... $ 21.90 $ 48.76 $ 13.07 $ 43.01
======================================================================
CLASS R:
Net assets, at value .................................. $ 9,484,044 $ 86,148,651 $ 3,996,867 $ 116,238,964
======================================================================
Shares outstanding .................................... 414,991 1,680,621 293,232 2,556,763
======================================================================
Net asset value and maximum offering price
per share a ......................................... $ 22.85 $ 51.26 $ 13.63 $ 45.46
======================================================================
ADVISOR CLASS:
Net assets, at value .................................. $ 108,422,453 $ 350,396,275 $ 248,979,287 $ 1,064,388,359
======================================================================
Shares outstanding .................................... 4,565,844 6,698,498 17,556,702 22,653,014
======================================================================
Net asset value and maximum offering price
per share a ......................................... $ 23.75 $ 52.31 $ 14.18 $ 46.99
======================================================================
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
74 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the six months ended October 31, 2007 (unaudited)
-----------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND
-----------------------------------------------------------------
Investment income:
Dividends: (net of foreign taxes)
Unaffiliated issuers ...................................... $ 325,783 $ 8,698,883 $ 1,457,377 $ 12,378,008
Non-controlled affiliated issuers (Note 9) ................ -- -- -- 464,960
Sweep Money Fund (Note 7) ................................. 135,161 2,626,343 273,196 2,778,385
Interest .................................................... -- 463 580 57,201
Income from securities loaned - net ......................... 24,672 64,963 100,431 149,511
-----------------------------------------------------------------
Total investment income ................................. 485,616 11,390,652 1,831,584 15,828,065
-----------------------------------------------------------------
Expenses:
Management fees (Note 3a) ................................... 654,449 6,628,756 2,614,178 16,227,950
Administrative fees (Note 3b) ............................... 265,600 -- 1,065,541 --
Distribution fees: (Note 3c)
Class A ................................................... 162,835 2,588,069 641,430 6,929,217
Class B ................................................... 78,945 590,285 406,223 164,881
Class C ................................................... 167,153 1,915,002 576,236 3,310,174
Class R ................................................... 19,993 206,333 13,761 302,689
Transfer agent fees (Note 3e) ............................... 336,210 3,031,811 1,185,398 9,020,687
Custodian fees (Note 4) ..................................... 5,339 28,070 11,969 110,970
Reports to shareholders ..................................... 34,471 239,798 125,891 369,349
Registration and filing fees ................................ 36,488 67,136 68,359 151,555
Professional fees ........................................... 17,537 32,757 20,743 53,778
Trustees' fees and expenses ................................. 1,314 26,392 7,773 59,026
Other ....................................................... 4,600 328,885 16,176 48,695
-----------------------------------------------------------------
Total expenses .......................................... 1,784,934 15,683,294 6,753,678 36,748,971
Expense reductions (Note 4) ............................. (511) (1,455) (565) (427)
Expenses waived/paid by affiliates (Note 3f) -- (293,647) -- --
-----------------------------------------------------------------
Net expenses .......................................... 1,784,423 15,388,192 6,753,113 36,748,544
-----------------------------------------------------------------
Net investment income (loss) ........................ (1,298,807) (3,997,540) (4,921,529) (20,920,479)
-----------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated Issuers .................................... 12,584,575 82,515,804 108,235,420 518,417,701
Non-controlled affiliated issuers (Note 9) .............. -- -- -- 1,366,472
Foreign currency transactions ............................. (8,954) -- -- 33,438
-----------------------------------------------------------------
Net realized gain (loss) ............................ 12,575,621 82,515,804 108,235,420 519,817,611
-----------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................... 49,609,697 342,824,004 (42,947,801) 262,069,595
Translation of assets and liabilities denominated in
foreign currencies ...................................... 556 -- -- --
-----------------------------------------------------------------
Net change in unrealized appreciation (depreciation) ........ 49,610,253 342,824,004 (42,947,801) 262,069,595
-----------------------------------------------------------------
Net realized and unrealized gain (loss) ........................ 62,185,874 425,339,808 65,287,619 781,887,206
-----------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ............................................. $ 60,887,067 $ 421,342,268 $ 60,366,090 $ 760,966,727
=================================================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 75
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-------------------------------------------------------------------------
FRANKLIN AGGRESSIVE FRANKLIN FLEX CAP
GROWTH FUND GROWTH FUND
-------------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED OCTOBER 31, 2007 YEAR ENDED
(UNAUDITED) APRIL 30, 2007 (UNAUDITED) APRIL 30, 2007
-------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ....................... $ (1,298,807) $ (1,735,359) $ (3,997,540) $ 1,063,071
Net realized gain (loss) from investments and
foreign currency transactions .................... 12,575,621 5,779,240 82,515,804 155,318,535
Net change in unrealized appreciation
(depreciation) on investments and translation
of assets and liabilities denominated in
foreign currencies ............................... 49,610,253 2,601,548 342,824,004 17,121,276
-------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations .................... 60,887,067 6,645,429 421,342,268 173,502,882
-------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ............................................ -- -- (1,059,539) (2,590,377)
Class R ............................................ -- -- (43,796) (31,880)
Advisor Class ...................................... -- -- (161,537) (689,783)
-------------------------------------------------------------------------
Total distributions to shareholders .................. -- -- (1,264,872) (3,312,040)
-------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ............................................ 13,541,810 (9,162,668) (36,643,968) (213,191,173)
Class B ............................................ (1,547,200) (3,780,075) (11,918,058) (30,582,659)
Class C ............................................ 432,900 279,209 (3,857,875) (36,808,204)
Class R ............................................ 248,642 2,016,694 (6,603,116) (14,456,927)
Advisor Class ...................................... 1,587,017 43,161,590 6,737,149 68,440,245
-------------------------------------------------------------------------
Total capital share transactions ..................... 14,263,169 32,514,750 (52,285,868) (226,598,718)
-------------------------------------------------------------------------
Redemption fees ...................................... 13,986 957 9,124 8,359
-------------------------------------------------------------------------
Net increase (decrease) in net assets .......... 75,164,222 39,161,136 367,800,652 (56,399,517)
Net assets:
Beginning of period .................................. 245,463,515 206,302,379 2,846,830,044 2,903,229,561
-------------------------------------------------------------------------
End of period ........................................ $ 320,627,737 $ 245,463,515 $ 3,214,630,696 $ 2,846,830,044
=========================================================================
Undistributed net investment income (loss)
included in net assets:
End of period ...................................... $ (1,292,327) $ 6,480 $ (3,999,663) $ 1,262,749
=========================================================================
76 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-------------------------------------------------------------------------
FRANKLIN SMALL CAP FRANKLIN SMALL-MID CAP
GROWTH FUND II GROWTH FUND
-------------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED OCTOBER 31, 2007 YEAR ENDED
(UNAUDITED) APRIL 30, 2007 (UNAUDITED) APRIL 30, 2007
-------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ....................... $ (4,921,529) $ (9,577,948) $ (20,920,479) $ (27,283,400)
Net realized gain (loss) from investments
and foreign currency transactions ................ 108,235,420 140,281,066 519,817,611 699,240,769
Net change in unrealized appreciation
(depreciation) on investments .................... (42,947,801) (102,034,052) 262,069,595 (23,627,634)
-------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations .................... 60,366,090 28,669,066 760,966,727 648,329,735
-------------------------------------------------------------------------
Distributions to shareholders from:
Net realized gains:
Class A .......................................... -- (54,986,996) -- (396,182,023)
Class B .......................................... -- (9,457,325) -- (2,356,258)
Class C .......................................... -- (13,365,094) -- (48,066,828)
Class R .......................................... -- (591,340) -- (8,369,958)
Advisor Class .................................... -- (29,874,687) -- (51,154,142)
-------------------------------------------------------------------------
Total distributions to shareholders .................. -- (108,275,442) -- (506,129,209)
-------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .......................................... (80,326,157) (101,711,711) (661,867,405) (1,022,578,329)
Class B .......................................... (12,142,492) (17,641,525) (1,773,751) (4,688,884)
Class C .......................................... (14,996,498) (36,691,357) (36,925,962) (81,677,506)
Class R .......................................... (2,060,133) (170,452) (14,871,289) 20,580,598
Advisor Class .................................... (95,592,360) 15,813,676 158,201,623 (12,559,860)
-------------------------------------------------------------------------
Total capital share transactions ..................... (205,117,640) (140,401,369) (557,236,784) (1,100,923,981)
-------------------------------------------------------------------------
Redemption fees ...................................... 1,126 4,293 61,271 53,592
-------------------------------------------------------------------------
Net increase (decrease) in
net assets ................................... (144,750,424) (220,003,452) 203,791,214 (958,669,863)
Net assets:
Beginning of period .................................. 1,087,499,877 1,307,503,329 7,227,545,391 8,186,215,254
-------------------------------------------------------------------------
End of period ........................................ $ 942,749,453 $1,087,499,877 $ 7,431,336,605 $ 7,227,545,391
-------------------------------------------------------------------------
Distributions in excess of net investment
income included in net assets:
End of period ...................................... $ (4,921,529) $ -- $ (20,920,479) $ --
=========================================================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 77
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (Trust) is registered under the Investment Company Act
of 1940, as amended, (1940 Act) as an open-end investment company, consisting of
ten separate funds. All funds included in this report (Funds) are diversified.
The financial statements of the remaining funds in the Trust are presented
separately. The Funds offer five classes of shares: Class A, Class B, Class C,
Class R, and Advisor Class. Each class of shares differs by its initial sales
load, contingent deferred sales charges, distribution fees, voting rights on
matters affecting a single class and its exchange privilege.
The Franklin Small Cap Growth Fund II was closed to new investors effective July
9, 2002.
On September 18, 2007, the Trust's Board of Trustees approved a proposal to
change the name of Franklin Aggressive Growth Fund to Franklin Growth
Opportunities Fund, effective November 1, 2007.
The following summarizes the Funds' significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Trust has procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by
78 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
the fund. The investment manager monitors price movements following the close of
trading in foreign stock markets through a series of country specific market
proxies (such as baskets of American Depository Receipts, futures contracts and
exchange traded funds). These price movements are measured against established
trigger thresholds for each specific market proxy to assist in determining if an
event has occurred. If such an event occurs, the securities may be valued using
fair value procedures, which may include the use of independent pricing
services. All security valuation procedures are approved by the Trust's Board of
Trustees.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Trust's Board of Trustees.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS
The Funds may purchase securities on a when-issued or delayed delivery basis,
with payment and delivery scheduled for a future date. These transactions are
subject to market fluctuations and are subject to the risk that the value at
delivery may be more or less than the trade date purchase price. Although the
Funds will generally purchase these securities with the intention of holding the
securities, they may sell the securities before the settlement date. Sufficient
assets have been segregated for these securities.
Semiannual Report | 79
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. FOREIGN CURRENCY CONTRACTS
When the Funds purchase or sell foreign securities they may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
E. SECURITIES LENDING
The Funds may loan securities to certain brokers through a securities lending
agent for which they receive initial cash collateral against the loaned
securities in an amount equal to at least 102% of the market value of the loaned
securities. Collateral is maintained over the life of the loan in an amount not
less than 100% of the market value of loaned securities, as determined at the
close of fund business each day; any additional collateral required due to
changes in security values is delivered to the fund on the next business day.
The collateral is invested in short-term instruments as noted in the Statement
of Investments. The fund receives interest income from the investment of cash
collateral, adjusted by lender fees and broker rebates. The fund bears the risk
of loss with respect to the investment of the collateral and the securities
loaned. The securities lending agent has agreed to indemnify the fund in the
case of default of any securities borrower.
F. INCOME TAXES
No provision has been made for U.S. income taxes because it is each fund's
policy to qualify as a regulated investment company under the Internal Revenue
Code and to distribute to shareholders substantially all of its taxable income
and net realized gains.
G. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Dividend income is
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Funds are notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States of
America. These differences may be permanent or temporary. Permanent
80 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
differences are reclassified among capital accounts to reflect their tax
character. These reclassifications have no impact on net assets or the results
of operations. Temporary differences are not reclassified, as they may reverse
in subsequent periods.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class. Differences in per share
distributions, by class, are generally due to differences in class specific
expenses.
Distributions received by the Trust from certain securities may be a return of
capital (ROC). Such distributions reduce the cost basis of the securities, and
any distributions in excess of the cost basis are recognized as capital gains.
H. 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.
I. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the funds and accounted for as an addition to paid-in
capital.
J. 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.
Semiannual Report | 81
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At October 31, 2007, there were an unlimited number of shares authorized
(without par value). Transactions in the Funds' shares were as follows:
-----------------------------------------------------------------
FRANKLIN FRANKLIN
AGGRESSIVE GROWTH FUND FLEX CAP GROWTH FUND
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
CLASS A SHARES:
Six months ended October 31, 2007
Shares sold ........................ 1,252,071 $ 26,369,809 4,038,118 $ 193,637,371
Shares issued in reinvestment
of distributions ................ -- -- 18,748 864,855
Shares redeemed .................... (644,482) (12,827,999) (4,841,204) (231,146,194)
-----------------------------------------------------------------
Net increase (decrease) ............ 607,589 $ 13,541,810 (784,338) $ (36,643,968)
=================================================================
Year ended April 30, 2007
Shares sold ........................ 1,439,647 $ 25,226,865 8,485,071 $ 352,610,680
Shares issued in reinvestment
of distributions ................ -- -- 49,920 2,157,532
Shares redeemed .................... (1,970,580) (34,389,533) (13,503,990) (567,959,385)
-----------------------------------------------------------------
Net increase (decrease) ............ (530,933) $ (9,162,668) (4,968,999) $ (213,191,173)
=================================================================
CLASS B SHARES:
Six months ended October 31, 2007
Shares sold ........................ 31,095 $ 627,815 91,221 $ 4,169,515
Shares redeemed .................... (115,665) (2,175,015) (361,327) (16,087,573)
-----------------------------------------------------------------
Net increase (decrease) ............ (84,570) $ (1,547,200) (270,106) $ (11,918,058)
=================================================================
Year ended April 30, 2007
Shares sold ........................ 73,515 $ 1,225,983 91,261 $ 3,584,497
Shares redeemed .................... (300,150) (5,006,058) (865,451) (34,167,156)
-----------------------------------------------------------------
Net increase (decrease) ............ (226,635) $ (3,780,075) (774,190) $ (30,582,659)
=================================================================
CLASS C SHARES:
Six months ended October 31, 2007
Shares sold ........................ 212,342 $ 4,263,781 710,007 $ 32,290,572
Shares redeemed .................... (201,762) (3,830,881) (811,942) (36,148,447)
-----------------------------------------------------------------
Net increase (decrease) ............ 10,580 $ 432,900 (101,935) $ (3,857,875)
=================================================================
Year ended April 30, 2007
Shares sold ........................ 556,467 $ 9,330,339 1,233,577 $ 48,625,278
Shares redeemed .................... (548,163) (9,051,130) (2,162,839) (85,433,482)
-----------------------------------------------------------------
Net increase (decrease) ............ 8,304 $ 279,209 (929,262) $ (36,808,204)
=================================================================
CLASS R SHARES:
Six months ended October 31, 2007
Shares sold ........................ 74,428 $ 1,528,860 179,462 $ 8,507,471
Shares issued in reinvestment
of distributions ................ -- -- 959 43,684
Shares redeemed .................... (63,966) (1,280,218) (324,340) (15,154,271)
-----------------------------------------------------------------
Net increase (decrease) ............ 10,462 $ 248,642 (143,919) $ (6,603,116)
=================================================================
Year ended April 30, 2007
Shares sold ........................ 234,993 $ 4,037,779 410,766 $ 16,932,262
Shares issued in reinvestment
of distributions ................ -- -- 743 31,742
Shares redeemed .................... (115,853) (2,021,085) (758,468) (31,420,931)
-----------------------------------------------------------------
Net increase (decrease) ............ 119,140 $ 2,016,694 (346,959) $ (14,456,927)
=================================================================
82 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-----------------------------------------------------------------
FRANKLIN FRANKLIN
AGGRESSIVE GROWTH FUND FLEX CAP GROWTH FUND
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
ADVISOR CLASS SHARES:
Six months ended October 31, 2007
Shares sold ........................ 228,092 $ 4,925,790 282,947 $ 13,558,377
Shares issued in reinvestment
of distributions ................ -- -- 3,465 160,799
Shares redeemed .................... (162,956) (3,338,773) (146,749) (6,982,027)
-----------------------------------------------------------------
Net increase (decrease) ............ 65,136 $ 1,587,017 139,663 $ 6,737,149
=================================================================
Year ended April 30, 2007
Shares sold ........................ 2,882,354 $ 49,364,281 2,893,712 $ 123,038,695
Shares issued in reinvestment
of distributions ................ -- -- 15,840 687,926
Shares redeemed .................... (348,285) (6,202,691) (1,269,489) (55,286,376)
-----------------------------------------------------------------
Net increase (decrease) ............ 2,534,069 $ 43,161,590 1,640,063 $ 68,440,245
=================================================================
-----------------------------------------------------------------
FRANKLIN FRANKLIN
SMALL CAP GROWTH FUND II SMALL-MID CAP GROWTH FUND
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
CLASS A SHARES:
Six months ended October 31, 2007
Shares sold ........................ 2,146,776 $ 28,504,956 11,147,879 $ 483,979,500
Shares redeemed .................... (8,224,516) (108,831,113) (26,596,564) (1,145,846,905)
-----------------------------------------------------------------
Net increase (decrease) ............ (6,077,740) $ (80,326,157) (15,448,685) $ (661,867,405)
=================================================================
Year ended April 30, 2007
Shares sold ........................ 6,601,245 $ 84,054,237 23,221,061 $ 901,953,205
Shares issued in reinvestment
of distributions ................ 4,022,258 49,634,667 8,628,896 332,212,487
Shares redeemed .................... (18,348,107) (235,400,615) (58,200,426) (2,256,744,021)
-----------------------------------------------------------------
Net increase (decrease) ............ (7,724,604) $ (101,711,711) (26,350,469) $(1,022,578,329)
=================================================================
CLASS B SHARES:
Six months ended October 31, 2007
Shares sold ........................ 28,437 $ 361,892 31,234 $ 1,315,247
Shares redeemed .................... (996,777) (12,504,384) (73,982) (3,088,998)
-----------------------------------------------------------------
Net increase (decrease) ............ (968,340) $ (12,142,492) (42,748) $ (1,773,751)
=================================================================
Year ended April 30, 2007
Shares sold ........................ 67,198 $ 796,471 38,764 $ 1,457,181
Shares issued in reinvestment
of distributions ................ 704,083 8,244,812 58,200 2,163,878
Shares redeemed .................... (2,196,607) (26,682,808) (221,805) (8,309,943)
-----------------------------------------------------------------
Net increase (decrease) ............ (1,425,326) $ (17,641,525) (124,841) $ (4,688,884)
=================================================================
Semiannual Report | 83
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-----------------------------------------------------------------
FRANKLIN FRANKLIN
SMALL CAP GROWTH FUND II SMALL-MID CAP GROWTH FUND
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
CLASS C SHARES:
Six months ended October 31, 2007
Shares sold ........................ 84,825 $ 1,064,955 546,194 $ 22,142,939
Shares redeemed .................... (1,276,598) (16,061,453) (1,463,718) (59,068,901)
-----------------------------------------------------------------
Net increase (decrease) ............ (1,191,773) $ (14,996,498) (917,524) $ (36,925,962)
=================================================================
Year ended April 30, 2007
Shares sold ........................ 324,860 $ 3,897,185 1,093,536 $ 39,872,961
Shares issued in reinvestment
of distributions ................ 1,020,013 11,954,555 1,121,575 40,488,859
Shares redeemed .................... (4,323,598) (52,543,097) (4,443,643) (162,039,326)
-----------------------------------------------------------------
Net increase (decrease) ............ (2,978,725) $ (36,691,357) (2,228,532) $ (81,677,506)
=================================================================
CLASS R SHARES:
Six months ended October 31, 2007
Shares sold ........................ 42,331 $ 554,672 477,072 $ 20,480,996
Shares redeemed .................... (197,074) (2,614,805) (810,726) (35,352,285)
-----------------------------------------------------------------
Net increase (decrease) ............ (154,743) $ (2,060,133) (333,654) $ (14,871,289)
=================================================================
Year ended April 30, 2007
Shares sold ........................ 155,318 $ 1,957,827 1,479,310 $ 56,718,701
Shares issued in reinvestment
of distributions ................ 48,590 591,340 216,659 8,230,890
Shares redeemed .................... (216,160) (2,719,619) (1,154,391) (44,368,993)
-----------------------------------------------------------------
Net increase (decrease) ............ (12,252) $ (170,452) 541,578 $ 20,580,598
=================================================================
ADVISOR CLASS SHARES:
Six months ended October 31, 2007
Shares sold ........................ 2,310,049 $ 31,413,926 6,593,927 $ 287,155,432
Shares redeemed .................... (9,145,250) (127,006,286) (2,967,107) (128,953,809)
-----------------------------------------------------------------
Net increase (decrease) ............ (6,835,201) $ (95,592,360) 3,626,820 $ 158,201,623
=================================================================
Year ended April 30, 2007
Shares sold ........................ 4,241,617 $ 55,466,570 7,266,710 $ 286,200,648
Shares issued in reinvestment
of distributions ................ 2,227,334 28,086,677 942,970 36,860,696
Shares redeemed .................... (5,147,534) (67,739,571) (8,592,362) (335,621,204)
-----------------------------------------------------------------
Net increase (decrease) ............ 1,321,417 $ 15,813,676 (382,682) $ (12,559,860)
=================================================================
84 | Semiannual Report
Franklin Strategic Series
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 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 Flex Cap Growth Fund and the Franklin Small-Mid Cap Growth Fund pay
an investment management fee to Advisers based on the average daily net assets
of each of the funds as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
0.440% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% In excess of $15 billion
The Franklin Aggressive Growth Fund pays an investment management fee to
Advisers based on the average daily net assets of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.500% Up to and including $500 million
0.400% Over $500 million, up to and including $1 billion
0.350% Over $1 billion, up to and including $1.5 billion
0.300% Over $1.5 billion, up to and including $6.5 billion
0.275% Over $6.5 billion, up to and including $11.5 billion
0.250% Over $11.5 billion, up to and including $16.5 billion
0.240% Over $16.5 billion, up to and including $19 billion
0.230% Over $19 billion, up to and including $21.5 billion
0.220% In excess of $21.5 billion
Semiannual Report | 85
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES (CONTINUED)
The Franklin Small Cap Growth Fund II pays an investment management fee to
Advisers based on the average daily net assets of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.550% Up to and including $500 million
0.450% Over $500 million, up to and including $1 billion
0.400% Over $1 billion, up to and including $1.5 billion
0.350% Over $1.5 billion, up to and including $6.5 billion
0.325% Over $6.5 billion, up to and including $11.5 billion
0.300% Over $11.5 billion, up to and including $16.5 billion
0.290% Over $16.5 billion, up to and including $19 billion
0.280% Over $19 billion, up to and including $21.5 billion
0.270% In excess of $21.5 billion
B. ADMINISTRATIVE FEES
The Franklin Aggressive Growth Fund and the Franklin Small Cap Growth Fund II
pay an administrative fee to FT Services of 0.20% per year of the average daily
net assets of each of the funds.
Under an agreement with Advisers, FT Services provides administrative services
to the Franklin Flex Cap Growth Fund and the Franklin Small-Mid Cap Growth Fund.
The fee is paid by Advisers based on average daily net assets, and is not an
additional expense of the funds.
C. DISTRIBUTION FEES
The Trust's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the funds' Class A reimbursement distribution plans, the
funds reimburse Distributors for costs incurred in connection with the
servicing, sale and distribution of each fund's shares up to the maximum annual
plan rate for each class. Under the Class A reimbursement distribution plans,
costs exceeding the maximum for the current plan year cannot be reimbursed in
subsequent periods.
In addition, under the Funds' compensation distribution plans, the Funds pay
Distributors for costs incurred in connection with the servicing, sale and
distribution of each fund's shares up to the maximum annual plan rate for each
class.
86 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
-----------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND
-----------------------------------------------------------
Reimbursement Plans:
Class A .................................. 0.35% 0.25% -- 0.25%
Compensation Plans:
Class A .................................. -- -- 0.35% --
Class B .................................. 1.00% 1.00% 1.00% 1.00%
Class C .................................. 1.00% 1.00% 1.00% 1.00%
Class R .................................. 0.50% 0.50% 0.50% 0.50%
For Class A, the Franklin Small Cap Growth Fund II pays Distributors up to 0.35%
when the fund is open to new investors and up to 0.25% when the fund is closed
to new investors.
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 FRANKLIN
AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND
-----------------------------------------------------------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers ... $ 31,616 $ 363,013 $ 5,989 $ 196,286
Contingent deferred sales charges
retained .............................. $ 10,752 $ 55,005 $ 15,440 $ 27,340
E. TRANSFER AGENT FEES
For the period ended October 31, 2007, 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
AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND
-----------------------------------------------------------
Transfer agent fees ...................... $ 231,770 $ 1,833,998 $ 537,201 $ 5,192,467
F. WAIVER AND EXPENSE REIMBURSEMENTS
The Franklin Flex Cap Growth Fund incurred interest and penalties on deficiency
dividend which FT Services voluntarily agreed to reimburse as noted in the
Statement of Operations.
Semiannual Report | 87
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with their custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Funds' custodian expenses. During the period ended October 31, 2007, the
custodian fees were reduced as noted in the Statements of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At April 30, 2007, the capital loss carryforwards were as
follows:
--------------------------------
FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP
GROWTH FUND GROWTH FUND
--------------------------------
Capital loss carryforwards expiring in:
2010 ................................................ $ 97,952,500 $ --
2011 ................................................ 47,112,100 35,901,783
--------------------------------
$ 145,064,600 $ 35,901,783
================================
For tax purposes, realized currency losses occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At April 30, 2007, the Franklin Flex Cap Growth Fund deferred
realized currency losses of $15,320.
At October 31, 2007, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
--------------------------------
FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP
GROWTH FUND GROWTH FUND
--------------------------------
Cost of investments .................................... $ 225,254,964 $2,155,731,509
================================
Unrealized appreciation ................................ $ 96,950,895 $1,098,243,526
Unrealized depreciation ................................ (3,899,519) (11,039,550)
--------------------------------
Net unrealized appreciation (depreciation) ............. $ 93,051,376 $1,087,203,976
================================
--------------------------------
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND II GROWTH FUND
--------------------------------
Cost of investments .................................... $ 735,828,125 $5,314,429,847
================================
Unrealized appreciation ................................ $ 277,842,398 $2,310,045,174
Unrealized depreciation ................................ (72,013,473) (132,012,977)
--------------------------------
Net unrealized appreciation (depreciation) ............. $ 205,828,925 $2,178,032,197
================================
88 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INCOME TAXES (CONTINUED)
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended October 31, 2007, were as follows:
---------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND
---------------------------------------------------------------
Purchases ...................... $195,866,800 $474,037,073 $247,287,026 $2,209,828,685
Sales .......................... $184,239,332 $575,963,041 $452,259,209 $2,679,388,896
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (Sweep Money Fund), an open-end investment company managed by
Advisers. Management fees paid by the Funds are reduced on assets invested in
the Sweep Money Fund, in an amount not to exceed the management and
administrative fees paid by the Sweep Money Fund.
8. RESTRICTED SECURITIES
The Funds may invest in securities that are restricted under the Securities Act
of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed
upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Funds may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
Semiannual Report | 89
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. RESTRICTED SECURITIES (CONTINUED)
At October 31, 2007, the funds held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Trust's Board of Trustees as reflecting fair value,
as follows:
- ----------------------------------------------------------------------------------------------------------------
ACQUISITION
SHARES ISSUER DATE COST VALUE
- ----------------------------------------------------------------------------------------------------------------
FRANKLIN AGGRESSIVE GROWTH FUND
374,806 Dilithium Networks Inc., depository receipt, D,
pfd., 144A, PIPES .................................. 7/13/06 $ 873,300 $ 1,293,081
============
TOTAL RESTRICTED SECURITIES (0.40% of Net Assets)
FRANKLIN FLEX CAP GROWTH FUND
145,772 Anda Networks, pfd., D ................................ 3/24/00 $ 2,000,000 $ 45,189
2,227,171 Fibrogen Inc., pfd., E ................................ 5/19/00 9,999,998 11,069,041
1,043,181 Masimo Corp. .......................................... 5/15/00 3,824,997 30,938,014
------------
TOTAL RESTRICTED SECURITIES (1.31% of Net Assets) ........................... $ 42,052,244
============
FRANKLIN SMALL-MID CAP GROWTH FUND
364,431 Anda Networks, pfd., D ................................ 3/24/00 $ 5,000,000 $ 112,974
1,792,573 Foveon Inc., cvt. pfd., D, 144A ....................... 4/08/02 13,999,995 2,591,164
2,597,593 Foveon Inc., cvt. pfd., E, 144A ....................... 5/31/05 2,635,024 5,270,049
682,128 Mirapoint Inc., 144A .................................. 9/09/99 4,999,998 --
301,660 Mirapoint Inc., pfd ................................... 7/07/05 561,391 132,730
------------
TOTAL RESTRICTED SECURITIES (0.11% of Net Assets) ........................... $ 8,106,917
============
9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The 1940 Act defines "affiliated companies" to include investments in portfolio
companies in which a fund owns 5% or more of the outstanding voting securities.
Investments in "affiliated companies" for the Franklin Small Cap Growth Fund II
and the Franklin Small-Mid Cap Growth Fund for the period ended October 31,
2007, were as shown below.
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER NUMBER
OF SHARES OF SHARES
HELD AT HELD AT REALIZED
BEGINNING GROSS GROSS END OF VALUE AT INVESTMENT CAPITAL
NAME OF ISSUER OF PERIOD ADDITIONS REDUCTIONS PERIOD END OF PERIOD INCOME GAIN (LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN SMALL CAP GROWTH FUND II
NON-CONTROLLED AFFILIATES
Clayton Holdings Inc. ....................... 736,799 451,100 -- 1,187,899 $ 5,701,916 $ -- $ --
--------------------------------------
TOTAL AFFILIATED SECURITIES (0.60% of Net Assets) .......................................... $ 5,701,916 $ -- $ --
======================================
90 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER NUMBER
OF SHARES OF SHARES
HELD AT HELD AT REALIZED
BEGINNING GROSS GROSS END OF VALUE AT INVESTMENT CAPITAL
NAME OF ISSUER OF PERIOD ADDITIONS REDUCTIONS PERIOD END OF PERIOD INCOME GAIN (LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN SMALL-MID CAP GROWTH FUND
NON-CONTROLLED AFFILIATES
Allscripts Healthcare Solutions Inc. ....... 3,259,900 -- 1,334,370 1,925,530 a $ -- $ 5,709,221
American Medical Systems Holdings Inc. ..... 3,689,900 -- -- 3,689,900 $ 47,193,821 -- --
Bill Barrett Corp. ......................... 1,611,800 2,121,200 -- 3,733,000 174,704,400 -- --
Force Protection Inc., 144A, PIPES ......... 4,316,100 -- 4,600 4,311,500 77,175,850 -- 23,275
FormFactor Inc. ............................ 1,917,400 1,149,600 -- 3,067,000 119,950,370 -- --
Microsemi Corp. ............................ 5,279,800 577,200 1,557,000 4,300,000 114,423,000 -- (5,194,558)
Wolverine World Wide Inc. .................. 2,824,210 -- 330,900 2,493,310 a 464,960 828,534
----------------------------------------
TOTAL AFFILIATED SECURITIES (7.18% of Net Assets) ........................................ $ 533,447,441 $ 464,960 $ 1,366,472
========================================
a As of October 31, 2007, no longer an affiliate.
10. REGULATORY AND LITIGATION MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), relating to certain practices in the mutual fund industry,
including late trading, market timing and marketing support payments to
securities dealers who sell fund shares ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
On June 6, 2007, the SEC posted for public comment the proposed plan of
distribution for the market timing settlement. Once the SEC approves the final
plan of distribution, disbursements of settlement monies will be made promptly
to individuals who were shareholders of the designated funds during the relevant
period, in accordance with the terms and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits relate to the industry
practices referenced above.
Semiannual Report | 91
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
10. REGULATORY AND LITIGATION MATTERS (CONTINUED)
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Trust, it is
committed to making the Trust or its shareholders whole, as appropriate.
11. NEW ACCOUNTING PRONOUNCEMENTS
The Funds adopted Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" (FIN 48), on October 31, 2007. FIN 48
clarifies the accounting for uncertainty in tax positions taken or expected to
be taken in a tax return. FIN 48 provides guidance on the measurement,
recognition, classification and disclosure of tax positions, along with
accounting for the related interest and penalties. The Funds have reviewed the
tax positions for open tax years (tax years ended April 30, 2005 - 2007) and
have determined that the implementation of FIN 48 did not have a material impact
on the Funds' financial statements.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
(SFAS 157), which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Trust believes the adoption of SFAS 157
will have no material impact on its financial statements.
92 | Semiannual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Trust has established Proxy Voting Policies and Procedures (Policies) that
the Trust uses to determine how to vote proxies relating to portfolio
securities. Shareholders may view the Trust's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Trust's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Trust files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
Semiannual Report | 93
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN (R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON FUNDS
INTERNATIONAL
Mutual European 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 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund 1
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small Cap Growth Fund II 2
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin Balance Sheet Investment Fund 1
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 1
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio (R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 8
Colorado
Connecticut
Florida 8
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 7
Michigan 7
Minnesota 7
Missouri
New Jersey
New York 8
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance
Products Trust 9
1. The fund is open only to existing shareholders and select retirement plans.
2. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
3. The fund is a continuously offered, closed-end fund. Shares may be purchased
daily; there is no daily redemption. However, each quarter, pending board
approval, the fund will authorize the repurchase of 5%-25% of the outstanding
number of shares. Investors may tender all or a portion of their shares during
the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy remained the
same.
6. For investors subject to the alternative minimum tax, a small portion of fund
dividends may be taxable. Distributions of capital gains are generally taxable.
7. The fund invests primarily in insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA) and
limited-term, intermediate-term and money market portfolios (CA and NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
05/07 Not part of the semiannual report
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INVESTMENTS San Mateo, CA 94403-1906
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SEMI ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN STRATEGIC SERIES
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN (R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
FSS1 S2007 12/07
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
OCTOBER 31, 2007
- --------------------------------------------------------------------------------
Franklin Biotechnology
Discovery Fund
Franklin Global
Communications Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Technology Fund
- --------------------------------------------------------------------------------
SEMIANNUAL REPORT AND SHAREHOLDER LETTER SECTOR
- --------------------------------------------------------------------------------
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THIS DOCUMENT
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FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
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.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]
Not part of the semiannual report
Contents
SHAREHOLDER LETTER ....................................................... 1
SEMIANNUAL REPORT
Economic and Market Overview ............................................. 3
Franklin Biotechnology Discovery Fund .................................... 5
Franklin Global Communications Fund ...................................... 12
Franklin Global Health Care Fund ......................................... 19
Franklin Natural Resources Fund .......................................... 26
Franklin Technology Fund ................................................. 34
Financial Highlights and Statements of Investments ....................... 42
Financial Statements ..................................................... 73
Notes to Financial Statements ............................................ 82
Shareholder Information .................................................. 96
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Semiannual Report
Economic and Market Overview
During the six-month period ended October 31, 2007, the U.S. economy grew
solidly. Growth was supported by relatively low core inflation, consumer
spending, some improving economic data and corporate earnings reports.
Counterbalancing these positive factors were mixed inflation signals, diminished
liquidity in the financial markets and concerns about a national housing market
decline and its potential spillover effects.
The unemployment rate increased from 4.5% at the beginning of the period to 4.7%
in October 2007. 1 Although consumer confidence in July neared a six-year high,
it declined through period-end and the pace of consumer spending slowed as
worries about the housing slump and high gasoline prices made individuals more
cautious. Oil prices established a new record high in October, crossing $94 per
barrel in response to perceived tight supply and high demand for oil, refinery
maintenance issues, and ongoing geopolitical tensions in the Middle East and
Africa. For the 12 months ended October 31, 2007, the core Consumer Price Index
(CPI), which excludes food and energy costs, rose 2.2%, which was also its
10-year average rate. 1
Liquidity and financing became difficult to obtain in some corporate credit
markets. In response, the Federal Reserve Board (Fed) lowered the federal funds
target rate 75 basis points to 4.50% from 5.25% during the period. The 10-year
Treasury note yield fell from 4.63% at the beginning of the period to 4.48% on
October 31, 2007.
In mid-July, equity markets set new records amid generally strong first quarter
corporate earnings reports. However, volatility picked up in the second half of
July and in August due to investor concerns about the housing market, lending
environment and mixed second quarter earnings reports. Major stock indexes
recovered from early September losses in the wake of Fed actions mid-month.
1. Source: Bureau of Labor Statistics.
Semiannual Report | 3
The blue chip stocks of the Dow Jones Industrial Average posted a six-month
total return of +7.79%, the broader Standard & Poor's 500 Index (S&P 500)
returned +5.49%, and the technology-heavy NASDAQ Composite Index returned
+13.62%. 2 The energy, information technology and materials sectors performed
particularly well.
2. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price
weighted based on the average market price of 30 blue chip stocks of companies
that are generally industry leaders. The S&P 500 consists of 500 stocks chosen
for market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is one of
the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite
Index measures all NASDAQ domestic and international based common type stocks
listed on The NASDAQ Stock Market. The index is market value weighted and
includes more than 3,000 companies.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31,
2007. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE.
4 | Semiannual Report
Franklin Biotechnology Discovery Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Biotechnology Discovery Fund
seeks capital appreciation by investing at least 80% of its net assets in
securities of biotechnology companies and discovery research firms located in
the U.S. and other countries.
- --------------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin Biotechnology Discovery Fund
Based on Total Net Assets as of 10/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Biotechnology ........................................................ 78.0%
Other Pharmaceuticals ................................................ 14.3%
Medical Specialties .................................................. 4.2%
Short-Term Investments & Other Net Assets ............................ 3.5%
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- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This semiannual report for Franklin Biotechnology Discovery Fund covers the
period ended October 31, 2007.
PERFORMANCE OVERVIEW
Franklin Biotechnology Discovery Fund - Class A posted a +2.01% cumulative total
return for the six months under review. The Fund underperformed its narrow
benchmark, the NASDAQ Biotechnology Index, and its broad benchmark, the Standard
& Poor's 500 Index (S&P 500), which returned +5.96% and +5.49% for the same
period. 1 For comparison, the NASDAQ Composite
1. Source: Standard & Poor's Micropal. The NASDAQ Biotechnology Index contains
companies primarily engaged in using biomedical research for the discovery or
development of novel treatments or cures for human disease, which also meet
other eligibility criteria. The NASDAQ Biotechnology Index is calculated under a
modified capitalization-weighted methodology. Prior to 10/1/98, index returns
are based on price appreciation; after 10/1/98, returns include reinvested
dividends. The S&P 500 consists of 500 stocks chosen for market size, liquidity
and industry group representation. Each stock's weight in the index is
proportionate to its market value. The S&P 500 includes reinvested dividends and
is one of the most widely used benchmarks of U.S. equity performance. The
indexes are unmanaged. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 43.
Semiannual Report | 5
TOP 10 HOLDINGS
Franklin Biotechnology Discovery Fund
10/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Gilead Sciences Inc. 10.7%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Celgene Corp. 8.2%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Genzyme Corp. 7.2%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Genentech Inc. 7.0%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Amgen Inc. 6.9%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
PDL BioPharma Inc. 4.5%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Myriad Genetics Inc. 2.3%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Biogen Idec Inc. 2.2%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Helicos Biosciences Corp. 2.2%
OTHER PHARMACEUTICALS
- --------------------------------------------------------------------------------
Pharmion Corp. 2.0%
OTHER PHARMACEUTICALS
- --------------------------------------------------------------------------------
Index had a six-month return of +13.62%. 2 You can find the Fund's long-term
performance data in the Performance Summary beginning on page 8.
INVESTMENT STRATEGY
The Fund is managed using a bottom-up approach to individual stock selection,
with a focus on fundamental analysis and primary research. We look for
biotechnology, biopharmaceutical and platform technology companies that possess
products with favorable competitive profiles, large market opportunities and
strong intellectual property, supported by thoughtful clinical and market
development strategies. Our assessment of these products is based on extensive
primary research and due diligence and includes, but is not limited to, a
thorough review of medical literature, consultation of community and academic
physicians, and attendance at scientific meetings and symposia. Additionally, we
favor companies with excellent management, strong financial characteristics and
attractive valuations.
MANAGER'S DISCUSSION
During the six months under review, the Fund's investment in Biogen Idec, which
specializes in drugs for neurological and autoimmune disorders and cancer, was a
major contributor to absolute Fund performance. The Fund also benefited from the
strong performance of three of its core biotechnology holdings: Celgene, which
develops drugs primarily for cancer and inflammatory diseases; Gilead Sciences,
whose specialties include HIV/AIDS therapies and hepatitis drugs; and Genzyme,
whose focus is on rare genetic disorders, cancer and kidney disease, and organ
transplants.
Other holdings that helped performance included biotechnology companies Myriad
Genetics and Sequenom, as well as new Fund holding Helicos Biosciences in the
other pharmaceuticals industry. Myriad Genetics focuses on the development and
marketing of therapeutic and molecular diagnostic products. The company analyzes
genes and their mutations to develop treatments for diseases such as cancer,
Alzheimer's and AIDS. Likewise, Sequenom's patented MassARRAY sequencing system
is used to analyze genetic variations.
2. Source: The NASDAQ Composite Index measures NASDAQ domestic and international
based common type stocks listed on The NASDAQ Stock Market. The index is market
value weighted and includes more than 3,000 companies. The index is unmanaged
and includes reinvested dividends. One cannot invest directly in an index, nor
is an index representative of the Fund's portfolio.
6 | Semiannual Report
Helicos Biosciences also develops genetic analysis technologies. Another
significant individual contributor to absolute return was Pharmion, in the
pharmaceuticals industry. Pharmion's stock price soared after a late-stage trial
of the company's drug Vidaza extended the life of patients with blood disorders.
The Fund, however, had some detractors from performance during the review
period. Among the most significant detractors from Fund performance were
investments in biotechnology companies PDL BioPharma, ViroPharma and Genentech.
Shares of PDL BioPharma fell sharply after the company announced the termination
of its Nuvion ulcerative colitis trial and a strategic shift in company focus.
In the other pharmaceuticals industry, negative returns from Sepracor and
Somaxon Pharmaceuticals also hindered Fund performance during the review period.
Sepracor reported a drop in second-quarter profits attributed to increased
research and development and marketing costs. However, at period-end, our
outlook for the company remained positive as our analysis indicated that the
company was fundamentally sound. We were also optimistic about Sepracor's
agreement with GlaxoSmithKline to market its sleeping aid Lunesta to the
European Union.
Thank you for your continued participation in Franklin Biotechnology Discovery
Fund. We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Evan McCulloch
Evan McCulloch, CFA
Portfolio Manager
Franklin Biotechnology Discovery Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2007, 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 | 7
Performance Summary as of 10/31/07
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. 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: FBDIX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.29 $65.82 $64.53
- --------------------------------------------------------------------------------
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES THE SALES CHARGE. AVERAGE ANNUAL TOTAL RETURNS
AND VALUE OF $10,000 INVESTMENT INCLUDE THE MAXIMUM SALES CHARGE. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE
WITHIN SEVEN DAYS OF PURCHASE.
- -----------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.01% +12.92% +94.30% +162.87%
- -----------------------------------------------------------------------------------------------
Average Annual Total Return 3 -3.86% +6.42% +12.86% +9.50%
- -----------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $9,614 $10,642 $18,312 $24,780
- -----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 5 +11.18% +13.56% +8.69%
- -----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 1.37%
- -----------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
8 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
THE FUND IS A NONDIVERSIFIED FUND THAT CONCENTRATES IN A SINGLE SECTOR, WHICH
INVOLVES RISKS SUCH AS PATENT CONSIDERATIONS, PRODUCT LIABILITY, GOVERNMENT
REGULATORY REQUIREMENTS AND REGULATORY APPROVAL FOR NEW DRUGS AND MEDICAL
PRODUCTS. BIOTECHNOLOGY COMPANIES ARE OFTEN SMALL AND/OR RELATIVELY NEW. SMALLER
COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGES IN ECONOMIC CONDITIONS AND
HAVE LESS CERTAIN GROWTH PROSPECTS THAN LARGER, MORE ESTABLISHED COMPANIES AND
CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM. THE FUND MAY ALSO INVEST IN
FOREIGN COMPANIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND
POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. THE FUND'S PROSPECTUS ALSO
INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
1. Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total returns
would have been lower.
2. Cumulative total return represents the change in value of an investment over
the periods indicated.
3. Average annual total return represents the average annual change in value of
an investment over the periods indicated. Six-month return has not been
annualized.
4. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated.
5. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
6. Figures are as stated in the Fund's prospectus current as of the date of this
report.
Semiannual Report | 9
Your Fund's Expenses
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
10 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/07 VALUE 10/31/07 PERIOD* 5/1/07-10/31/07
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,020.10 $6.60
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.60 $6.60
- --------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month annualized expense
ratio of 1.30%, multiplied by the average account value over the period,
multiplied by 184/366 to reflect the one-half year period.
Semiannual Report | 11
Franklin Global Communications Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Global Communications Fund seeks
total return, without undue risk (total return consists of capital appreciation
and current dividend and interest income), by investing at least 80% of its net
assets in equity securities of companies that are involved in the development,
manufacture or sale of communications services and communications equipment.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
GEOGRAPHIC BREAKDOWN
Franklin Global Communications Fund
Based on Total Net Assets as of 10/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Americas 69.8%
Asia 19.6%
Europe 5.8%
Middle East & Africa 0.4%
Short-Term Investments & Other Net Assets 4.4%
We are pleased to bring you Franklin Global Communications Fund's semiannual
report for the period ended October 31, 2007.
PERFORMANCE OVERVIEW
Franklin Global Communications Fund - Class A posted a +24.93% cumulative total
return for the six months under review. The Fund outperformed its narrow
benchmark, the Bloomberg World Communications Index, and its broad benchmark,
the Standard & Poor's 500 Index (S&P 500), which returned +16.49% and +5.49% for
the same period.1 The Fund outperformed the Lipper Telecommunications Funds
Classification Average's +13.17% return for the same six-month period.2 You can
find the Fund's long-term performance data in the Performance Summary beginning
on page 15.
INVESTMENT STRATEGY
We use a fundamental, research-driven approach, focusing primarily on individual
securities to choose companies we believe are positioned to grow earnings and
cash flow at a faster pace than is implied by the security's current valuation.
1. Source: Standard & Poor's Micropal. The Bloomberg World Communications Index
is a market capitalization-weighted index designed to measure equity performance
of the communications sector of the Bloomberg World Index. The S&P 500 consists
of 500 stocks chosen for market size, liquidity and industry group
representation. Each stock's weight in the index is proportionate to its market
value. The S&P 500 is one of the most widely used benchmarks of U.S. equity
performance. The indexes are unmanaged and include reinvested dividends. One
cannot invest directly in an index, nor is an index representative of the Fund's
portfolio.
2. Source: Lipper Inc. The Lipper Telecommunications Funds Classification
Average is calculated by averaging the total return of all funds within the
Lipper Telecommunications Funds classification in the Lipper Open-End underlying
fund universe for the period indicated. Lipper Telecommunications Funds are
defined as funds that invest at least 65% of their assets in the equity
securities of domestic and foreign companies engaged in the development,
manufacture or sale of telecommunications services or equipment. For the six
months ended 10/31/07, there were 44 funds in this category. Lipper calculations
do not include sales charges or expense subsidization by the Fund's manager.
Fund performance relative to the average may have differed if these or other
factors had been considered. Past performance does not guarantee future results.
The average includes reinvestment of any income or distributions. One cannot
invest directly in the average, nor is the average representative of the Fund's
portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 49.
12 | Semiannual Report
We consider a company's market price relative to our evaluation of its long-term
earnings, asset value and cash flow potential. The quality of the management
team and the company's strategic position within its industry are also major
considerations in our investment process. We also consider investment themes
that we believe may have possible effects on the communications sector and
individual companies.
MANAGER'S DISCUSSION
During the six months under review, we continued to favor wireless over
wire-line as we believed strong industry growth trends would continue. Wireless
access in less developed countries with low wireless service penetration rates,
or the number of users, grew more rapidly than many industry analysts expected.
Many of these markets continued to hold the potential for strong wireless
growth. Relative global economic stability, combined with the rollout of prepaid
wireless plans, also fueled industry growth.
Among the top contributors to Fund performance were wireless telecommunications
companies China Mobile and America Movil. China Mobile posted strong earnings
due to robust subscriber growth rates during the review period. The company is
the leading wireless services provider in China with more than 65% market share
of subscribers. America Movil, one of Latin America's dominant wireless services
providers, also benefited from a growing subscriber base in Mexico and Brazil.
Another significant contributor to Fund returns during the six months was
diversified communications and media company Rogers Communications, Canada's
largest wireless voice and data communications provider. The Fund also benefited
from its investments in Apple and Google as both companies' stock prices rose
following strong earnings growth. Other key contributors included Japanese game
maker Nintendo and Swedish mobile phone maker Nokia.
Despite its positive performance, the Fund had some detractors from performance
during the review period. In particular, Fund performance was hurt by the Fund's
investments in digital content provider Limelight Networks, which we bought and
sold during the reporting period, and Mexican broadcaster Grupo Televisa. Other
holdings that detracted from Fund performance included positions in NII Holdings
and MetroPCS Communications, both of which suffered from increased competition
and slower-than-expected subscription growth rates.
PORTFOLIO BREAKDOWN
Franklin Global Communications Fund
Based on Total Net Assets as of 10/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Wireless Communications 28.5%
Major Telecommunications 10.6%
Internet Software & Services 10.4%
Telecommunications Equipment 10.2%
Recreational Products 7.7%
Specialty Telecommunications 6.8%
Computer Communications 5.2%
Computer Processing Hardware 4.7%
Other 11.5%
Short-Term Investments & Other Net Assets 4.4%
Semiannual Report | 13
TOP 10 HOLDINGS
Franklin Global Communications Fund
10/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
Rogers Communications Inc., B 5.4%
WIRELESS COMMUNICATIONS, CANADA
- --------------------------------------------------------------------------------
China Mobile (Hong Kong) Ltd., ADR 5.0%
WIRELESS COMMUNICATIONS, CHINA
- --------------------------------------------------------------------------------
America Movil SAB de CV, L, ADR 5.0%
WIRELESS COMMUNICATIONS, MEXICO
- --------------------------------------------------------------------------------
Apple Inc. 4.7%
COMPUTER PROCESSING HARDWARE, U.S.
- --------------------------------------------------------------------------------
Google Inc., A 4.3%
INTERNET SOFTWARE & SERVICES, U.S.
- --------------------------------------------------------------------------------
Nintendo Co. Ltd. 4.1%
RECREATIONAL PRODUCTS, JAPAN
- --------------------------------------------------------------------------------
MetroPCS Communications Inc. 3.8%
WIRELESS COMMUNICATIONS, U.S.
- --------------------------------------------------------------------------------
American Tower Corp., A 3.3%
SPECIALTY TELECOMMUNICATIONS, U.S.
- --------------------------------------------------------------------------------
Bharti Airtel Ltd. 3.3%
MAJOR TELECOMMUNICATIONS, INDIA
- --------------------------------------------------------------------------------
NII Holdings Inc. 3.3%
WIRELESS COMMUNICATIONS, U.S.
- --------------------------------------------------------------------------------
Thank you for your continued participation in Franklin Global Communications
Fund. We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Grant Bowers
Grant Bowers
Portfolio Manager
Franklin Global Communications Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2007, 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.
14 | Semiannual Report
Performance Summary as of 10/31/07
FRANKLIN GLOBAL COMMUNICATIONS 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: FRGUX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.33 $16.69 $13.36
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: N/A) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.10 $15.76 $12.66
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FRUTX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.11 $15.78 $12.67
- --------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN
SEVEN DAYS OF PURCHASE.
- -----------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +24.93% +42.77% +199.98% +68.59%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +17.70% +34.60% +23.12% +4.74%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,770 $13,460 $28,289 $15,885
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +32.55% +24.54% +3.67%
- -----------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.44%
- -----------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +24.39% +41.73% +189.25% +34.09%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +20.39% +37.73% +23.50% +3.38%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $12,039 $13,773 $28,725 $13,409
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +35.53% +24.99% +2.70%
- -----------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 2.18%
- -----------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +24.45% +41.78% +188.75% +56.46%
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +23.45% +40.78% +23.62% +4.58%
- -----------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $12,345 $14,078 $28,875 $15,646
- -----------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +38.62% +25.08% +3.51%
- -----------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 2.19%
- -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Semiannual Report | 15
Performance Summary (CONTINUED)
ENDNOTES
INVESTING IN A NONDIVERSIFIED, GLOBAL FUND CONCENTRATING IN A SINGLE SECTOR
INVOLVES SPECIAL RISKS, INCLUDING EXPOSURE TO CURRENCY FLUCTUATIONS; POLITICAL
UNCERTAINTIES AND GREATER RISK OF ADVERSE ECONOMIC, POLITICAL AND REGULATORY
DEVELOPMENTS AFFECTING COMMUNICATIONS COMPANIES. INVESTING IN DEVELOPING MARKETS
INVOLVES HEIGHTENED RISKS RELATED TO THE SAME FACTORS. THE FUND INVESTS IN THE
TECHNOLOGY SECTOR, WHICH HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS.
SMALLER OR RELATIVELY NEW OR UNSEASONED COMPANIES CAN BE PARTICULARLY SENSITIVE
TO CHANGING ECONOMIC CONDITIONS, AND THEIR PROSPECTS FOR GROWTH ARE LESS CERTAIN
THAN LARGER COMPANIES. INVESTORS SHOULD EXPECT FLUCTUATION IN THE VALUE OF THEIR
INVESTMENT, ESPECIALLY OVER THE SHORT TERM. THE FUND'S PROSPECTUS ALSO INCLUDES
A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
1. Cumulative total return represents the change in value of an investment over
the periods indicated.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated. Six-month return has not been
annualized.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Figures are as stated in the Fund's prospectus current as of the date of this
report.
16 | Semiannual Report
Your Fund's Expenses
FRANKLIN GLOBAL COMMUNICATIONS FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Semiannual Report | 17
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/07 VALUE 10/31/07 PERIOD* 5/1/07-10/31/07
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,249.30 $ 7.18
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.75 $ 6.44
- ----------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,243.90 $11.39
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.98 $10.23
- ----------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,244.50 $11.40
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.98 $10.23
- ----------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.27%; B: 2.02%; and C: 2.02%), multiplied by the
average account value over the period, multiplied by 184/366 to reflect the
one-half year period.
18 | Semiannual Report
Franklin Global Health Care Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Global Health Care Fund seeks
capital appreciation by investing at least 80% of its net assets in equity
securities of health care companies located throughout the world.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
GEOGRAPHIC BREAKDOWN
Franklin Global Health Care Fund
Based on Total Net Assets as of 10/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
U.S. 74.6%
Switzerland 9.5%
Germany 3.7%
Brazil 3.7%
U.K. 1.4%
Israel 1.1%
China 1.0%
Short-Term Investments & Other Net Assets 5.0%
We are pleased to bring you Franklin Global Health Care Fund's semiannual report
for the period ended October 31, 2007.
PERFORMANCE OVERVIEW
Franklin Global Health Care Fund - Class A posted a +7.72% cumulative total
return for the six months under review. The Fund outperformed its narrow
benchmark, the Standard & Poor's 500 Health Care Index and its broad benchmark,
the Standard & Poor's 500 Index (S&P 500), which returned +0.91% and +5.49% for
the same period. 1 The Fund also outperformed its peers as measured by the
Lipper Health/Biotechnology Funds Classification Average, which returned +3.87%
for the same period. 2
For the five-year period ended October 31, 2007, Franklin Global Health Care
Fund - Class A posted a cumulative total return of +86.67% compared with the S&P
500 Health Care Index's +45.01% and the S&P 500's +91.53% cumulative total
returns. 1 Fund performance was comparable to that of its Lipper peer group,
which returned +84.09% for the same five-year period. 2 You can find more of the
Fund's long-term performance data in the Performance Summary beginning on page
22.
1. Source: Standard & Poor's Micropal. The Standard & Poor's 500 Health Care
Index includes all the companies in the health care industry that are in the S&P
500. 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. As of 10/31/07, the Fund's Class A five-year average
annual total return not including sales charges was +13.30%, compared with the
+13.88% and +7.72% five-year average annual total returns of the S&P 500 and the
S&P 500 Health Care Index. The indexes are unmanaged and include reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
2. Source: Lipper Inc. The Lipper Health/Biotechnology Funds Classification
Average is calculated by averaging the total returns of all funds within the
Lipper Health/Biotechnology Funds classification in the Lipper Open-End
underlying fund universe for the period indicated. As of 10/31/07, the Fund's
Class A five-year average annual total return not including sales charges was
+13.30%, compared with the +12.65% five-year average annual total return of the
Lipper Health/Biotechnology Funds Classification Average. Lipper
Health/Biotechnology Funds are defined as funds that invest primarily in
domestic and foreign companies engaged in health care, medicine and
biotechnology. For the six-month and five-year periods ended 10/31/07 there were
202 and 138 funds in this category. Lipper calculations do not include sales
charges or expense subsidization by the Fund's manager. Fund performance
relative to the average may have differed if these or other factors had been
considered. Past performance does not guarantee future results. The average
includes reinvestment of any income or distributions. One cannot invest directly
in the average, nor is the average representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 55.
Semiannual Report | 19
PORTFOLIO BREAKDOWN
Franklin Global Health Care Fund
Based on Total Net Assets as of 10/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Major Pharmaceuticals 31.4%
Medical Specialties 16.3%
Biotechnology 14.3%
Services to the Health Industry 9.1%
Managed Health Care 6.7%
Other Pharmaceuticals 5.1%
Hospital & Nursing Management 3.3%
Medical & Nursing Services 3.2%
Medical Distributors 2.7%
Other 2.9%
Short-Term Investments & Other Net Assets 5.0%
INVESTMENT STRATEGY
We use a fundamental, research-driven approach, focusing primarily on individual
securities to choose companies we believe are positioned for rapid revenue,
earnings or asset growth. We look for companies with competitive advantages such
as a proprietary technology, economies of scale or captive customers, and strong
management. We use bottom-up analysis to derive an intrinsic value for the
security, which we compare to the market price to help us assess whether there
is potential for meaningful capital appreciation.
MANAGER'S DISCUSSION
During the six months under review, our bottom-up, research-driven approach to
investing led us to look for health care investment opportunities around the
world that were not necessarily represented in the Fund's benchmark, the S&P 500
Health Care Index. As a result, many of the Fund's strongest contributors to
performance were not index components.
During the reporting period, the Fund benefited from stock selection,
particularly in the medical specialties industry. The Fund's investment in
medical device maker Cytyc was a leading contributor to Fund performance
relative to the S&P 500 Health Care Index. 3 Cytyc's product line includes a
range of cancer and women's health applications, including cervical cancer and
preterm birth screening, and early-stage breast cancer radiation therapy. Late
in the review period, the company completed its merger with Hologic, forming one
of the world's largest women's health technology companies. Other industry
holdings that performed well and contributed to the Fund's relative results were
dental equipment maker Dentsply International; 3 Chinese medical devices
provider Mindray Medical International; 3 and analytical instrument maker
Waters.
On an individual security basis, the Fund's investment in Masimo was a major
contributor to absolute and relative performance during the review period. 3 The
Fund invested in the company prior to its initial public offering in August
2007. Masimo's highly regarded proprietary signal extraction technology (SET)
noninvasively monitors arterial blood-oxygen saturation levels and pulse rates
in patients.
Stock selection in the other pharmaceuticals industry more than offset the
negative effect of an overweighted industry allocation. Industry holding WuXi
PharmaTech was a strong contributor to relative performance during the review
period. 3 The China-based company is a leading provider of research
3. Not part of the S&P 500 Health Care Index.
20 | Semiannual Report
and development and discovery chemistry services to major global pharmaceutical
and biotechnology companies. In the biotechnology industry, the Fund benefited
from its investments in genetics and molecular technology companies Myriad
Genetics and Sequenom. 3 Myriad Genetics focuses on the development and
marketing of therapeutic and molecular diagnostic products. The company analyzes
genes and their mutations to develop treatments for such diseases as cancer,
Alzheimer's and AIDS. Likewise, Sequenom's patented MassARRAY sequencing system
is used to analyze genetic variations. Conversely, the Fund's decision not to
invest in drug developer Forest Laboratories, which was an index component, was
positive for the Fund's relative returns as the company's stock price fell
during the reporting period.
Despite the Fund's positive performance, there were some detractors from
results. The Fund's relative performance suffered from stock selection in the
major pharmaceuticals industry. In particular, large positions in Roche Holding
and Novartis lost value and detracted from Fund returns. 3 An underweighted
allocation to Merck & Co. hindered relative performance. Other detractors
included biotechnology industry holdings ViroPharma, PDL BioPharma, as well as
Labopharm (sold during the reporting period) in the other pharmaceuticals
industry. 3 The Fund's relative performance was also hurt by its investments in
health services companies Lifepoint Hospitals and Brookdale Senior Living.
Thank you for your continued participation in Franklin Global Health Care Fund.
We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Matthew Willey
Matthew Willey, CFA
Portfolio Manager
Franklin Global Health Care Fund
TOP 10 HOLDINGS
Franklin Global Health Care Fund
10/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
Roche Holding AG 5.6%
MAJOR PHARMACEUTICALS, SWITZERLAND
- --------------------------------------------------------------------------------
Schering-Plough Corp. 5.5%
MAJOR PHARMACEUTICALS, U.S.
- --------------------------------------------------------------------------------
Johnson & Johnson 4.4%
MAJOR PHARMACEUTICALS, U.S.
- --------------------------------------------------------------------------------
WellPoint Inc. 4.2%
MANAGED HEALTH CARE, U.S.
- --------------------------------------------------------------------------------
Novartis AG 3.9%
MAJOR PHARMACEUTICALS, SWITZERLAND
- --------------------------------------------------------------------------------
Merck KGaA 3.7%
MAJOR PHARMACEUTICALS, GERMANY
- --------------------------------------------------------------------------------
Masimo Corp. 3.5%
MEDICAL SPECIALTIES, U.S.
- --------------------------------------------------------------------------------
Pfizer Inc. 3.5%
MAJOR PHARMACEUTICALS, U.S.
- --------------------------------------------------------------------------------
Pharmaceutical Product
Development Inc. 3.0%
SERVICES TO THE HEALTH INDUSTRY, U.S.
- --------------------------------------------------------------------------------
Thermo Fisher Scientific Inc. 2.4%
MEDICAL SPECIALTIES, U.S.
- --------------------------------------------------------------------------------
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2007, 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 | 21
Performance Summary as of 10/31/07
FRANKLIN GLOBAL HEALTH CARE 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: FKGHX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.98 $27.90 $25.92
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FGHBX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.78 $26.28 $24.50
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FGIIX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.76 $26.02 $24.26
- --------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN
SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +7.72% +17.90% +86.67% +59.59%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +1.53% +11.13% +11.96% +4.17%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,153 $11,113 $17,595 $15,041
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +8.85% +11.01% +3.18%
- ---------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.31%
- ---------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +7.27% +16.96% +79.74% +71.97%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.27% +12.96% +12.19% +6.33%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,327 $11,296 $17,774 $17,197
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +10.61% +11.25% +5.98%
- ---------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 2.05%
- ---------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +7.30% +16.99% +79.75% +48.22%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +6.30% +15.99% +12.44% +4.01%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,630 $11,599 $17,975 $14,822
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +13.62% +11.50% +3.02%
- ---------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 2.05%
- ---------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
22 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
INVESTING IN A NONDIVERSIFIED, GLOBAL FUND CONCENTRATING IN A SINGLE INDUSTRY
INVOLVES SPECIAL RISKS SUCH AS EXPOSURE TO CURRENCY FLUCTUATION, POLITICAL
UNCERTAINTY AND INCREASED SUSCEPTIBILITY TO ECONOMIC, POLITICAL AND REGULATORY
DEVELOPMENTS AFFECTING HEALTH CARE COMPANIES. THE FUND INVESTS IN BIOTECHNOLOGY
COMPANIES, WHICH ARE OFTEN SMALL OR RELATIVELY NEW, AND IN THE TECHNOLOGY
SECTOR, WHICH HAS BEEN ONE OF THE MARKET'S MOST VOLATILE SECTORS. THE FUND'S
INVESTMENTS IN SMALLER-COMPANY STOCKS CAN BE VOLATILE, ESPECIALLY OVER THE SHORT
TERM. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT
RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
1. Cumulative total return represents the change in value of an investment over
the periods indicated.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated. Six-month return has not been
annualized.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Figures are as stated in the Fund's prospectus current as of the date of this
report.
Semiannual Report | 23
Your Fund's Expenses
FRANKLIN GLOBAL HEALTH CARE FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table 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.
24 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/07 VALUE 10/31/07 PERIOD* 5/1/07-10/31/07
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,077.20 $ 6.32
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.05 $ 6.14
- ----------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,072.70 $10.21
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.28 $ 9.93
- ----------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,073.00 $10.21
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.28 $ 9.93
- ----------------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.21%; B: 1.96%; and C: 1.96%), multiplied by the
average account value over the period, multiplied by 184/366 to reflect the
one-half year period.
Semiannual Report | 25
Franklin Natural Resources Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Natural Resources Fund seeks
high total return (total return consists of both capital appreciation and
current dividend and interest income) by investing at least 80% of its net
assets in equity and debt securities of companies that own, produce, refine,
process, transport and market natural resources and companies that provide
related services.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin Natural Resources Fund
Based on Total Net Assets as of 10/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Energy Minerals 45.4%
Industrial Services 28.9%
Non-Energy Minerals 15.4%
Process Industries 5.9%
Transportation 0.7%
Producer Manufacturing 0.6%
Short-Term Investments & Other Net Assets 3.1%
We are pleased to bring you Franklin Natural Resources Fund's semiannual report
for the period ended October 31, 2007.
PERFORMANCE OVERVIEW
Franklin Natural Resources Fund - Class A posted a +24.42% cumulative total
return for the six months under review. The Fund outperformed its narrow
benchmark, the Goldman Sachs Natural Resources Index and its broad benchmark,
the Standard & Poor's 500 Index (S&P 500), which returned +22.47% and +5.49% for
the same period. 1 You can find the Fund's long-term performance data in the
Performance Summary beginning on page 30.
INVESTMENT STRATEGY
We use a fundamental, research-driven approach to identify industries in the
natural resources sector that we believe offer the strongest underlying
attributes including, but not limited to, favorable supply and demand
characteristics, barriers to entry, and pricing power. Within those industries,
we seek to identify individual companies that appear to offer the best total
return potential. The Fund's holdings are typically concentrated in the energy
sector, but also include investments in the metals and mining, chemicals, paper
and forest products, and other related sectors.
1. Sources: Goldman Sachs; Standard & Poor's Micropal. The Goldman Sachs Natural
Resources Index is a modified capitalization-weighted index that includes
companies involved in extractive industries (mining), energy, forestry services,
producers of pulp and paper, and owners and operators of timber tracts or
plantations. The S&P 500 consists of 500 stocks chosen for market size,
liquidity and industry group representation. Each stock's weight in the index is
proportionate to its market value. The S&P 500 is one of the most widely used
benchmarks of U.S. equity performance. The indexes are unmanaged and include
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 61.
26 | Semiannual Report
MANAGER'S DISCUSSION
During the six months under review, the Fund benefited from the strong
performance of its investments in nearly every sector as commodity prices rose
and robust global demand continued to absorb incremental supply. For example,
crude oil prices set a new high, rising above $94 per barrel in October, up from
approximately $64 per barrel at the end of April, largely due to growing demand
and a contra-seasonal inventory decline. In particular, several of the Fund's
oilfield services and base metals holdings were strong contributors to the
Fund's positive absolute and relative performance. Conversely, U.S. natural gas
prices, often a major factor in the performance of domestic exploration and
production stocks, were stagnant by comparison due to growing production and
rising storage levels. After two years of relatively mild winters in the U.S.,
we believe weather-driven demand could influence crude oil and natural gas
prices over the next several months.
The metals markets were mixed during the reporting period as prices for precious
metals such as gold and platinum strengthened considerably due to strong global
demand and U.S. dollar weakness. However, base metals prices were flat to down
and aluminum prices declined as concerns related to U.S. and global economic
growth mounted.
During the six months under review, leading drilling equipment and services
supplier National Oilwell Varco, subsea production and processing systems
provider FMC Technologies, gold producer Barrick Gold, and oil and gas
exploration and production company Occidental Petroleum were among the Fund's
top contributors to performance. All four of these companies were also among the
Fund's top 10 holdings. After more than 20 years of lackluster industry
investment, National Oilwell Varco continued to benefit from recent efforts to
increase drilling capacity, particularly for shallow and deep-water offshore
drilling. FMC, a leader in its field, is developing new offerings that can
separate oil, natural gas, water and sand, which we believe could significantly
boost the company's long-term revenue and earnings growth. In addition, our
positive outlook for both companies was supported by significant order backlogs.
Barrick Gold, one of the world's largest gold mining companies, was a clear
beneficiary of rising gold prices. Occidental Petroleum, a large, oil-focused
exploration and production company with operations in the U.S., Latin America
and the Middle East, also performed well during the review period. Each of these
investments illustrates our strategy of investing in companies with relatively
stable, core production or revenue generation capabilities while also offering
upside potential from industry trends, new technology deployment or exploration
and development.
GEOGRAPHIC BREAKDOWN
Franklin Natural Resources Fund
Based on Total Net Assets as of 10/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
North America 82.8%
Europe 5.5%
Latin America 4.0%
Australia & New Zealand 2.9%
Middle East & Africa 0.9%
Asia 0.8%
Short-Term Investments & Other Net Assets 3.1%
Semiannual Report | 27
TOP 10 HOLDINGS
Franklin Natural Resources Fund
10/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
Occidental Petroleum Corp. 3.9%
ENERGY MINERALS, U.S.
- --------------------------------------------------------------------------------
Exxon Mobil Corp. 3.7%
ENERGY MINERALS, U.S.
- --------------------------------------------------------------------------------
ConocoPhilips 3.4%
ENERGY MINERALS, U.S.
- --------------------------------------------------------------------------------
Halliburton Co. 3.3%
INDUSTRIAL SERVICES, U.S.
- --------------------------------------------------------------------------------
Chevron Corp. 2.9%
ENERGY MINERALS, U.S.
- --------------------------------------------------------------------------------
Helix Energy Solutions Group Inc. 2.9%
INDUSTRIAL SERVICES, U.S.
- --------------------------------------------------------------------------------
Devon Energy Corp. 2.9%
ENERGY MINERALS, U.S.
- --------------------------------------------------------------------------------
Barrick Gold Corp. 2.8%
NON-ENERGY MINERALS, CANADA
- --------------------------------------------------------------------------------
FMC Technologies Inc. 2.8%
INDUSTRIAL SERVICES, U.S.
- --------------------------------------------------------------------------------
Southwestern Energy Co. 2.7%
ENERGY MINERALS, U.S.
- --------------------------------------------------------------------------------
On a sector basis, industrial services helped the Fund's absolute performance.
Notably, the Fund benefited from its oilfield services and equipment industry
investments, where the aforementioned National Oilwell Varco and FMC
Technologies were strong performers. Another sector holding, Flotek Industries,
whose focus is on oilfield specialty chemicals and logistics, and downhole
drilling and production tools was a key contributor to Fund returns.
Within the energy minerals sector, Occidental Petroleum benefited from its focus
on secondary oil recovery, also known as enhanced or extraordinary oil recovery
(EOR), which can prolong production in maturing oil fields. Occidental Petroleum
is a leader in domestic EOR, and as oil fields age and global demand outstrips
supply, EOR is considered an alternative to the high costs and difficulties
often associated with drilling for and finding new reserves. Integrated oil
company ConocoPhillips was another energy minerals sector contributor that
performed well despite weaker refining margins.
Several of the Fund's non-energy minerals sector holdings were strong
contributors to Fund returns during the reporting period such as the
aforementioned Barrick Gold and Brazil-based Companhia Vale do Rio Doce (CVRD).
Shares of CVRD, the world's leading iron miner, rose during the reporting
period, benefiting from strong demand and rising iron prices.
Despite the Fund's positive return, there were some detractors from performance.
By sector, process industries detracted from the Fund's results. A position in
US BioEnergy, an ethanol producer, hurt Fund performance as ethanol prices fell.
Rapid supply growth and weaker-than-expected demand was largely due to lack of
distribution infrastructure and the stalled Senate energy bill, which may
mandate increased blending. At period-end, we no longer held US BioEnergy as we
were concerned that these issues would continue to negatively influence the
company's stock price. Within energy minerals, select holdings were negatively
impacted by company-specific factors such as Kodiak Oil and Gas's disappointing
drilling results and GeoMet's ongoing legal dispute with CNX Gas, which seemed
to discourage the company's potential acquirers. At period-end, the Fund no
longer held Kodiak Oil and Gas.
28 | Semiannual Report
In the non-energy minerals sector, shares of Uranium One also declined in value
due to a drop in the reported price of uranium spot sales.
Thank you for your continued participation in Franklin Natural Resources Fund.
We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Frederick G. Fromm
Frederick G. Fromm, CFA
Portfolio Manager
Franklin Natural Resources Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2007, 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 | 29
Performance Summary as of 10/31/07
FRANKLIN NATURAL RESOURCES 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: FRNRX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$9.25 $ 47.09 $ 37.84
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FNCRX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$9.04 $ 46.62 $ 37.58
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FNRAX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$9.79 $ 49.50 $ 39.71
- --------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN
FIRST YEAR ONLY; ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE
ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- --------------------------------------------------------------------------------------------------
CLASS A 1 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +24.42% +48.87% +290.26% +242.36%
- --------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +17.26% +40.30% +29.76% +12.43%
- --------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,726 $14,030 $36,784 $32,271
- --------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 5 +41.22% +28.82% +11.37%
- --------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 1.05%
- --------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR INCEPTION (9/1/05)
- --------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +24.02% +47.85% +63.20%
- --------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +23.02% +46.85% +25.39%
- --------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $12,302 $14,685 $16,320
- --------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 5 +47.76% +22.97%
- --------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 1.78%
- --------------------------------------------------------------------------------------------------
ADVISOR CLASS 1 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +24.60% +49.27% +297.31% +265.81%
- --------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +24.60% +49.27% +31.77% +13.85%
- --------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $12,460 $14,927 $39,731 $36,581
- --------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 5 +50.26% +30.83% +12.78%
- --------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 0.78%
- --------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
30 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
INVESTING IN A FUND CONCENTRATING IN THE NATURAL RESOURCES SECTOR INVOLVES
SPECIAL RISKS, INCLUDING THOSE RELATED TO INCREASED SUSCEPTIBILITY TO ADVERSE
ECONOMIC AND REGULATORY DEVELOPMENTS AFFECTING THE SECTOR. THE FUND MAY ALSO
INVEST IN FOREIGN STOCKS, WHICH INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND
POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. SMALLER-COMPANY STOCKS CAN ALSO
INVOLVE SPECIAL RISKS ASSOCIATED WITH SMALLER REVENUES AND MARKET SHARE, AND
MORE LIMITED PRODUCT LINES, AND CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM.
THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial
sales charge; thus actual total returns may differ.
CLASS C: These shares have higher annual fees and expenses than Class A
shares.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
1. Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total returns
would have been lower.
2. Cumulative total return represents the change in value of an investment over
the periods indicated.
3. Average annual total return represents the average annual change in value of
an investment over the periods indicated. Six-month return has not been
annualized.
4. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated.
5. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
6. Figures are as stated in the Funds prospectus current as of the date of this
report.
Semiannual Report | 31
Your Fund's Expenses
FRANKLIN NATURAL RESOURCES FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table 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.
32 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/07 VALUE 10/31/07 PERIOD* 5/1/07-10/31/07
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,244.20 $5.53
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.21 $4.98
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,240.20 $9.40
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.74 $8.47
- --------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,246.00 $3.78
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.77 $3.40
- --------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.98%; C: 1.67%; and Advisor: 0.67%), multiplied
by the average account value over the period, multiplied by 184/366 to reflect
the one-half year period.
Semiannual Report | 33
Franklin Technology Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Technology Fund seeks capital
appreciation by investing at least 80% of its net assets in equity securities of
companies expected to benefit from the development, advancement and use of
technology.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Technology Fund's semiannual report for the
period ended October 31, 2007.
PERFORMANCE OVERVIEW
Franklin Technology Fund - Class A posted a +17.67% cumulative total return for
the six months under review. The Fund outperformed its broad benchmark, the
NASDAQ Composite Index and its narrow benchmark, the Merrill Lynch (ML) 100
Technology Index, which returned +13.62% and +12.24% for the same period. 1 You
can find the Fund's long-term performance data in the Performance Summary
beginning on page 37.
INVESTMENT STRATEGY
We use a fundamental, research-driven approach, focusing primarily on individual
securities to choose companies we believe are positioned for rapid revenue,
earnings or asset growth. We look for companies with distinct and sustainable
competitive advantages such as a particular marketing niche, proven technology,
strong management and industry leadership.
1. Source: Standard & Poor's Micropal. The NASDAQ Composite Index measures all
NASDAQ domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than 3,000
companies. The ML 100 Technology Index is an equal-dollar weighted index of 100
stocks designed to measure the performance of a cross section of large, actively
traded technology stocks and American Depositary Receipts. The index was
developed with a base value of 200 as of 1/30/98. The indexes are unmanaged and
include reinvested dividends. One cannot invest directly in an index, nor is an
index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 69.
34 | Semiannual Report
MANAGER'S DISCUSSION
During the six months under review, many of the Fund's notable contributors to
relative performance were not components of the Fund's benchmark, the ML 100
Technology Index, which underscored the significance of our bottom-up,
research-driven approach to investing. In particular, the Fund benefited from
stock selection in the semiconductors industry as we believed that many
chipmakers were benefiting from industry-wide cyclical strength, low inventory
levels and solid demand. Among the Fund's semiconductor holdings that
contributed to relative performance during the review period were
SiliconLaboratories, Microtune (sold during the reporting period) and Power
Integrations. 2
Within the electrical products industry, leading solar panel maker SunPower was
another key contributor to relative performance as many alternative energy
companies were considered attractive by investors as oil prices continued to
rise during the reporting period. 2 The Fund's relative returns were boosted by
overweighted positions in Apple and Google as both companies' stocks soared to
record highs during the review period. Although computers remain central to
Apple's primary business and are the company's principal revenue source, sales
of its digital music player, the iPod, were also impressive. On an absolute
basis, Research In Motion, maker of the wireless handheld Blackberry device, was
a major contributor to Fund performance as its stock price generated
triple-digit returns during the reporting period.
Despite the Fund's positive returns, there were some detractors from
performance. An underweighted position and stock selection in the computer
peripherals industry hindered the Fund's relative return, where the Fund's
investment in wireless communications company NII Holdings detracted from Fund
performance. 2 Disappointing results from online video content providers Akamai
Technology and Limelight Networks, 2 which we bought and sold during the
reporting period, in the Internet software and services industry, also weighed
on relative Fund performance during the reporting period as did an underweighted
position in navigational device maker Garmin.
2. Not part of the ML 100 Technology Index.
PORTFOLIO BREAKDOWN
Franklin Technology Fund
Based on Total Net Assets as of 10/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Semiconductors 15.6%
Telecommunications Equipment 13.3%
Internet Software & Services 10.8%
Packaged Software 8.9%
Computer Communications 8.1%
Computer Processing Hardware 5.2%
Specialty Telecommunications 5.1%
Data Processing Services 4.8%
Computer Peripherals 3.8%
Information Technology Services 2.8%
Biotechnology 2.7%
Electronic Equipment & Instruments 2.6%
Wireless Communications 2.6%
Electrical Products 2.1%
Other 10.1%
Short-Term Investment & Other Net Assets 1.5%
Semiannual Report | 35
TOP 10 EQUITY HOLDINGS
Franklin Technology Fund
10/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Google Inc., A 3.6%
INTERNET SOFTWARE & SERVICES
- --------------------------------------------------------------------------------
Microsemi Corp. 3.5%
SEMICONDUCTORS
- --------------------------------------------------------------------------------
American Tower Corp., A 3.1%
SPECIALTY TELECOMMUNICATIONS
- --------------------------------------------------------------------------------
Cisco Systems Inc. 3.0%
COMPUTER COMMUNICATIONS
- --------------------------------------------------------------------------------
Microchip Technology Inc. 3.0%
SEMICONDUCTORS
- --------------------------------------------------------------------------------
Research In Motion Ltd. 2.8%
TELECOMMUNICATIONS EQUIPMENT
- --------------------------------------------------------------------------------
Agilent Technologies Inc. 2.6%
ELECTRONIC EQUIPMENT & INSTRUMENTS
- --------------------------------------------------------------------------------
Apple Inc. 2.4%
COMPUTER PROCESSING HARDWARE
- --------------------------------------------------------------------------------
QUALCOMM Inc. 2.4%
TELECOMMUNICATIONS EQUIPMENT
- --------------------------------------------------------------------------------
Cognizant Technology Solutions Corp., A 2.3%
INFORMATION TECHNOLOGY SERVICES
- --------------------------------------------------------------------------------
Thank you for your continued participation in Franklin Technology Fund. We look
forward to serving your future investment needs.
/s/ J.P. Scandalios
[PHOTO OMITTED]
J.P. Scandalios
Franklin Technology Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2007, 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.
36 | Semiannual Report
Performance Summary as of 10/31/07
FRANKLIN TECHNOLOGY 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: FTCAX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.03 $ 6.86 $ 5.83
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: N/A) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.97 $ 6.55 $ 5.58
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FFTCX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.97 $ 6.53 $ 5.56
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FTERX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.02 $ 6.81 $ 5.79
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FRTCX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.07 $ 7.04 $ 5.97
- --------------------------------------------------------------------------------
Semiannual Report | 37
Performance Summary (CONTINUED)
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +17.67% +30.42% +138.19% -31.40%
- ------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +10.82% +22.94% +17.52% -5.65%
- ------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,082 $12,294 $22,418 $6,466
- ------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 5 +20.30% +20.09% -6.35%
- ------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 1.89%
- ------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +17.17% +29.45% +130.63% -34.50%
- ------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +13.17% +25.45% +17.99% -5.48%
- ------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,317 $12,545 $22,863 $6,550
- ------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 5 +22.68% +20.59% -6.20%
- ------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 2.54%
- ------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +17.24% +29.56% +130.74% -34.70%
- ------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +16.24% +28.56% +18.20% -5.52%
- ------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,624 $12,856 $23,074 $6,530
- ------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 5 +25.79% +20.70% -6.24%
- ------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 2.54%
- ------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +17.62% +30.21% +137.28% +27.77%
- ------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +17.62% +30.21% +18.86% +4.29%
- ------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,762 $13,021 $23,728 $6,792
- ------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 5 +27.42% +21.40% +3.41%
- ------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 2.04%
- ------------------------------------------------------------------------------------------------
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +17.92% +30.86% +142.76% -29.60%
- ------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +17.92% +30.86% +19.41% -4.57%
- ------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,792 $13,086 $24,276 $7,040
- ------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 5 +28.21% +21.92% -5.29%
- ------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 1.54%
- ------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
38 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
TECHNOLOGY STOCKS HAVE HISTORICALLY BEEN VOLATILE IN PRICE, ESPECIALLY OVER THE
SHORT TERM, DUE TO THE RAPID PACE OF PRODUCT CHANGE AND DEVELOPMENT. BECAUSE THE
FUND FOCUSES EXCLUSIVELY ON TECHNOLOGY COMPANIES, IT CARRIES GREATER RISKS OF
ADVERSE ECONOMIC, POLITICAL OR REGULATORY DEVELOPMENTS AFFECTING THESE COMPANIES
THAN A MORE BROADLY INVESTED FUND. THE FUND'S INVESTMENTS IN SMALLER-COMPANY
STOCKS ALSO INVOLVE SPECIAL RISKS, SUCH AS RELATIVELY SMALL REVENUES, LIMITED
PRODUCT LINES AND SMALL MARKET SHARE. THE FUND MAY INVEST UP TO 35% OF ITS
ASSETS IN FOREIGN COMPANIES, WHICH MAY BE AFFECTED BY POLITICAL UNCERTAINTY AND
CURRENCY FLUCTUATIONS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE
MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Past expense reductions by the Fund's manager and administrator increased the
Fund's total returns. If the manager and administrator had not taken this
action, the Fund's total returns would have been lower.
2. Cumulative total return represents the change in value of an investment over
the periods indicated.
3. Average annual total return represents the average annual change in value of
an investment over the periods indicated. Six-month return has not been
annualized.
4. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated.
5. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
6. Figures are as stated in the Fund's prospectus current as of the date of this
report.
Semiannual Report | 39
Your Fund's Expenses
FRANKLIN TECHNOLOGY FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table 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.
40 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/07 VALUE 10/31/07 PERIOD* 5/1/07-10/31/07
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,176.70 $ 8.81
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,017.04 $ 8.16
- ---------------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,171.70 $12.50
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,013.62 $11.59
- ---------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,172.40 $12.50
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,013.62 $11.59
- ---------------------------------------------------------------------------------------------------------
CLASS R
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,176.20 $ 9.79
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.14 $ 9.07
- ---------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,179.20 $ 7.07
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.65 $ 6.55
- ---------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.61%; B: 2.29%; C: 2.29%; R: 1.79%; and Advisor:
1.29%), multiplied by the average account value over the period, multiplied by
184/366 to reflect the one-half year period.
Semiannual Report | 41
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
-------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2007 2006 2005 2004 2003
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 64.53 $ 56.44 $ 46.05 $ 53.26 $ 37.26 $ 42.72
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................. (0.33) (0.57) (0.59) (0.58) (0.55) (0.44)
Net realized and unrealized gains (losses) ..... 1.62 8.66 10.98 (6.63) 16.55 (5.02)
-------------------------------------------------------------------------------
Total from investment operations .................. 1.29 8.09 10.39 (7.21) 16.00 (5.46)
-------------------------------------------------------------------------------
Redemption fees ................................... -- e -- e -- e -- e -- --
-------------------------------------------------------------------------------
Net asset value, end of period .................... $ 65.82 $ 64.53 $ 56.44 $ 46.05 $ 53.26 $ 37.26
===============================================================================
Total return c .................................... 2.01% 14.39% 22.50% (13.54)% 42.98% (12.80)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .......................................... 1.30% f 1.35% f 1.25% f 1.29% f 1.28% 1.57%
Net investment income (loss) ...................... (1.06)% (1.01)% (1.06)% (1.17)% (1.17)% (1.28)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $420,751 $457,390 $510,700 $485,909 $683,439 $510,107
Portfolio turnover rate ........................... 14.98% 42.08% 37.38% 34.34% 59.39% 47.36%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
42 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND COUNTRY SHARES/WARRANTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 96.5%
COMMON STOCKS AND WARRANTS 95.2%
BIOTECHNOLOGY 76.7%
a Advanced Life Sciences Holdings Inc. ............................ United States 474,700 $ 773,761
a AEterna Zentaris Inc. ........................................... Canada 328,500 634,005
a Affymax Inc. .................................................... United States 74,000 2,105,300
a Ambrilla Biopharma Inc. ......................................... Canada 300,700 429,981
a Amgen Inc. ...................................................... United States 497,500 28,909,725
a Amicus Therapeutics Inc. ........................................ United States 64,179 1,056,386
a ARIAD Pharmaceuticals Inc. ...................................... United States 952,700 4,858,770
a Array BioPharma Inc. ............................................ United States 89,000 996,800
a Avexa Ltd. ...................................................... Australia 6,369,424 4,331,409
a Biogen Idec Inc. ................................................ United States 124,961 9,302,097
a BioMarin Pharmaceutical Inc. .................................... United States 193,900 5,376,847
a Cadence Pharmaceuticals Inc. .................................... United States 157,100 2,243,388
a Cardiome Pharma Corp. ........................................... Canada 414,328 4,296,581
a Celgene Corp. ................................................... United States 520,900 34,379,400
a Cephalon Inc. ................................................... United States 42,500 3,133,950
a Critical Therapeutics Inc. ...................................... United States 453,180 906,360
a,b,c Critical Therapeutics Inc., wts., 10/26/11 ...................... United States 279,590 156,570
a Exelixis Inc. ................................................... United States 170,300 1,873,300
a Genentech Inc. .................................................. United States 398,000 29,503,740
a,d Gentium SpA, ADR ................................................ Italy 183,500 3,981,950
a Genzyme Corp. ................................................... United States 397,300 30,182,881
a Gilead Sciences Inc. ............................................ United States 972,900 44,938,251
a Human Genome Sciences Inc. ...................................... United States 290,100 2,744,346
a Idenix Pharmaceuticals Inc. ..................................... United States 254,900 660,191
a Indevus Pharmaceuticals Inc. .................................... United States 1,006,900 7,753,130
a InterMune Inc. .................................................. United States 61,400 1,223,088
a,d Ista Pharmaceuticals Inc. ....................................... United States 347,900 2,386,594
a Keryx Biopharmaceuticals Inc. ................................... United States 661,000 6,808,300
a Kosan Biosciences Inc. .......................................... United States 1,183,591 6,024,478
a,d MannKind Corp. .................................................. United States 211,300 1,929,169
a The Medicines Co. ............................................... United States 291,700 5,586,055
a Medicure Inc. ................................................... Canada 531,700 512,496
a Millipore Corp. ................................................. United States 14,100 1,094,865
a Myriad Genetics Inc. ............................................ United States 176,100 9,748,896
a Onyx Pharmaceuticals Inc. ....................................... United States 160,400 7,492,284
a Orexigen Therapeutics Inc. ...................................... United States 270,900 3,965,976
a Panacos Pharmaceuticals Inc. .................................... United States 280,400 701,000
a PDL BioPharma Inc. .............................................. United States 899,000 19,058,800
a Renovis Inc. .................................................... United States 774,700 2,734,691
a Seattle Genetics Inc. ........................................... United States 131,900 1,584,119
a Sequenom Inc. ................................................... United States 607,200 5,895,912
a Sirtris Pharmaceuticals Inc. .................................... United States 102,300 1,735,008
a Vanda Pharmaceuticals Inc. ...................................... United States 99,900 1,498,500
a VaxGen Inc. ..................................................... United States 826,000 949,900
a Vertex Pharmaceuticals Inc. ..................................... United States 234,500 7,583,730
Semiannual Report | 43
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND COUNTRY SHARES/WARRANTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND WARRANTS (CONTINUED)
BIOTECHNOLOGY (CONTINUED)
a Vion Pharmaceuticals Inc. ....................................... United States 1,052,900 $ 715,972
a ViroPharma Inc. ................................................. United States 307,800 2,650,158
a XenoPort Inc. ................................................... United States 103,300 5,069,964
----------------------
322,479,074
----------------------
MEDICAL SPECIALTIES 4.2%
a AMAG Pharmaceuticals Inc. ....................................... United States 55,100 3,600,785
Applera Corp. - Applied Biosystems Group ........................ United States 29,200 1,084,488
a Cypress Bioscience Inc. ......................................... United States 192,200 2,592,778
a,b,c MacroChem Corp. ................................................. United States 2,250,000 1,584,000
a,d Nektar Therapeutics ............................................ United States 176,100 1,053,078
a Penwest Pharmaceuticals Co. ..................................... United States 369,400 3,062,326
a Repros Therapeutics Inc. ........................................ United States 364,100 4,511,199
----------------------
17,488,654
----------------------
OTHER PHARMACEUTICALS 14.3%
a Allos Therapeutics Inc. ......................................... United States 298,240 1,735,757
a ArQule Inc. ..................................................... United States 642,209 5,041,341
a Biodel Inc. ..................................................... United States 113,200 1,915,344
a CollaGenex Pharmaceuticals Inc. ................................. United States 224,300 2,290,103
a CytRx Corp. ..................................................... United States 4,800 18,144
a,e CytRx Corp., 144A ............................................... United States 443,000 1,674,540
a Endo Pharmaceuticals Holdings Inc. .............................. United States 95,600 2,801,080
a Helicos Biosciences Corp. United States 642,400 9,083,536
a Inspire Pharmaceuticals Inc. .................................... United States 668,123 4,169,088
a Iomai Corp. ..................................................... United States 288,600 525,252
a Labopharm Inc. .................................................. Canada 258,200 380,148
a Nuvo Research Inc. .............................................. Canada 6,886,000 984,652
a Nuvo Research Inc., wts., 2/01/49 ............................... Canada 3,443,000 --
a,e Oculus Innovative Sciences Inc., 144A ........................... United States 250,000 1,900,000
a Pharmion Corp. .................................................. United States 178,800 8,603,856
a POZEN Inc. ...................................................... United States 178,081 1,666,838
a Sepracor Inc. ................................................... United States 164,100 4,519,314
a Somaxon Pharmaceuticals Inc. .................................... United States 349,000 3,123,550
Teva Pharmaceutical Industries Ltd., ADR ........................ Israel 117,900 5,188,779
a VIVUS Inc. ...................................................... United States 938,800 4,684,613
----------------------
60,305,935
----------------------
TOTAL COMMON STOCKS AND WARRANTS (COST $279,863,191) ............ 400,273,663
----------------------
PREFERRED STOCK (COST $5,065,937) 1.3%
BIOTECHNOLOGY 1.3%
a,b,c Fibrogen Inc., pfd., E .......................................... United States 1,128,271 5,607,506
----------------------
TOTAL LONG TERM INVESTMENTS (COST $284,929,128) ................. 405,881,169
----------------------
44 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND COUNTRY SHARES/WARRANTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 4.1%
MONEY MARKET FUND (COST $14,311,262) 3.4%
f Franklin Institutional Fiduciary Trust Money Market Portfolio,
4.69% ......................................................... United States 14,311,262 $ 14,311,262
----------------------
g INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES
0.7%
MONEY MARKET FUND (COST $3,136,000) 0.7%
h Bank of New York Institutional Cash Reserve Fund, 5.14% ......... United States 3,136,000 3,136,000
----------------------
TOTAL INVESTMENTS (COST $302,376,390) 100.6% .................... 423,328,431
OTHER ASSETS, LESS LIABILITIES (0.6)% ........................... (2,577,899)
----------------------
NET ASSETS 100.0% ............................................... $ 420,750,532
======================
See Selected Portfolio Abbreviations on page 72.
a Non-income producing for the twelve months ended October 31, 2007.
b Security has been deemed illiquid because it may not be able to be sold within
seven days. At October 31, 2007, the aggregate value of these securities was
$7,348,076, representing 1.75% of net assets.
c See Note 8 regarding restricted securities.
d A portion or all of the security is on loan as of October 31, 2007. See Note
1(e).
e 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 October 31, 2007, the aggregate value of these
securities was $3,574,540, representing 0.85% of net assets.
f See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
g See Note 1(e) regarding securities on loan.
h The rate shown is the annualized seven-day yield at period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 45
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN GLOBAL COMMUNICATIONS FUND
-------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2007 2006 2005 2004 2003
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 13.36 $ 11.46 $ 7.94 $ 7.63 $ 5.92 $ 6.85
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................ (0.02) (0.11) (0.04) -- e -- e -- e
Net realized and unrealized gains (losses) .... 3.35 2.01 3.66 0.33 1.71 (0.93)
-------------------------------------------------------------------------------
Total from investment operations ................. 3.33 1.90 3.62 0.33 1.71 (0.93)
-------------------------------------------------------------------------------
Less distributions from net investment income .... -- -- (0.10) (0.02) -- --
-------------------------------------------------------------------------------
Redemption fees .................................. -- e -- e -- e -- e -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................... $ 16.69 $ 13.36 $ 11.46 $ 7.94 $ 7.63 $ 5.92
===============================================================================
Total return c ................................... 24.93% 16.58% 45.70% 4.32% 28.89% (13.58)%
RATIOS TO AVERAGE NET ASSETS d
Expenses ......................................... 1.27% 1.42% f 1.40% f 1.47% f 1.47% 1.67%
Net investment income (loss) ..................... (0.31)% (0.96)% (0.40)% 0.04% (0.03)% (0.05)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $102,737 $ 74,026 $ 69,746 $ 49,926 $ 59,702 $ 53,722
Portfolio turnover rate .......................... 38.14% 121.15% 149.34% 171.40% 137.83% 94.95%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
46 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GLOBAL COMMUNICATIONS FUND
-------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2007 2006 2005 2004 2003
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 12.66 $ 10.94 $ 7.59 $ 7.33 $ 5.73 $ 6.67
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................ (0.07) (0.19) (0.11) (0.05) (0.05) (0.04)
Net realized and unrealized gains (losses) .... 3.17 1.91 3.48 0.31 1.65 (0.90)
-------------------------------------------------------------------------------
Total from investment operations ................. 3.10 1.72 3.37 0.26 1.60 (0.94)
-------------------------------------------------------------------------------
Less distributions from net investment income .... -- -- (0.02) -- -- --
-------------------------------------------------------------------------------
Redemption fees .................................. -- e -- e -- e -- e -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................... $ 15.76 $ 12.66 $ 10.94 $ 7.59 $ 7.33 $ 5.73
===============================================================================
Total return c ................................... 24.39% 15.71% 44.57% 3.69% 27.75% (14.09)%
RATIOS TO AVERAGE NET ASSETS d
Expenses ......................................... 2.02% 2.16% f 2.14% f 2.21% f 2.22% 2.36%
Net investment income (loss) ..................... (1.06)% (1.70)% (1.14)% (0.70)% (0.78)% (0.74)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $ 4,484 $ 3,636 $ 3,517 $ 2,663 $ 3,170 $ 2,690
Portfolio turnover rate .......................... 38.14% 121.15% 149.34% 171.40% 137.83% 94.95%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 47
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GLOBAL COMMUNICATIONS FUND
-------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2007 2006 2005 2004 2003
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 12.67 $ 10.96 $ 7.60 $ 7.34 $ 5.74 $ 6.69
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................ (0.08) (0.19) (0.11) (0.05) (0.05) (0.05)
Net realized and unrealized gains (losses) .... 3.19 1.90 3.50 0.31 1.65 (0.90)
-------------------------------------------------------------------------------
Total from investment operations ................. 3.11 1.71 3.39 0.26 1.60 (0.95)
-------------------------------------------------------------------------------
Less distributions from net investment income .... -- -- (0.03) -- -- --
-------------------------------------------------------------------------------
Redemption fees .................................. -- e -- e -- e -- e -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................... $ 15.78 $ 12.67 $ 10.96 $ 7.60 $ 7.34 $ 5.74
===============================================================================
Total return c ................................... 24.45% 15.69% 44.61% 3.54% 27.87% (14.20)%
RATIOS TO AVERAGE NET ASSETS d
Expenses ......................................... 2.02% 2.17% f 2.15% f 2.22% f 2.22% 2.47%
Net investment income (loss) ..................... (1.06)% (1.71)% (1.15)% (0.71)% (0.78)% (0.85)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $ 24,202 $ 13,572 $ 10,287 $ 7,054 $ 8,633 $ 7,377
Portfolio turnover rate .......................... 38.14% 121.15% 149.34% 171.40% 137.83% 94.95%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
48 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GLOBAL COMMUNICATIONS FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 95.6%
COMMON STOCKS 95.3%
ADVERTISING/MARKETING SERVICES 1.9%
a Focus Media Holding Ltd., ADR ........................................... China 39,500 $ 2,449,000
---------------
AEROSPACE & DEFENSE 1.1%
a Orbital Sciences Corp. .................................................. United States 55,700 1,422,021
---------------
BROADCASTING 1.9%
Citadel Broadcasting Co. ................................................ United States 2,943 12,949
Grupo Televisa SA, ADR .................................................. Mexico 84,000 2,087,400
a XM Satellite Radio Holdings Inc., A ..................................... United States 28,500 378,480
---------------
2,478,829
---------------
CABLE/SATELLITE TELEVISION 0.2%
a Comcast Corp. ........................................................... United States 10,000 210,500
---------------
COMPUTER COMMUNICATIONS 5.2%
a Cisco Systems Inc. ...................................................... United States 34,400 1,137,264
a F5 Networks Inc. ........................................................ United States 72,900 2,626,587
a Juniper Networks Inc. ................................................... United States 40,700 1,465,200
a Riverbed Technology Inc. ................................................ United States 47,700 1,611,783
---------------
6,840,834
---------------
COMPUTER PROCESSING HARDWARE 4.7%
a Apple Inc. .............................................................. United States 32,500 6,173,375
---------------
DATA PROCESSING SERVICES 0.6%
a NeuStar Inc., A ......................................................... United States 22,200 759,240
---------------
ELECTRONIC PRODUCTION EQUIPMENT 0.8%
a FormFactor Inc. ......................................................... United States 27,500 1,075,525
---------------
ELECTRONICS/APPLIANCES 0.5%
Sony Corp., ADR ......................................................... Japan 13,400 662,764
---------------
INFORMATION TECHNOLOGY SERVICES 0.3%
a Level 3 Communications Inc. ............................................. United States 124,300 376,629
---------------
INTERNET SOFTWARE/SERVICES 10.4%
a Akamai Technologies Inc. ................................................ United States 10,500 411,495
a Baidu.com Inc., ADR ..................................................... China 4,600 1,759,454
a Equinix Inc. ............................................................ United States 25,300 2,951,498
a Google Inc., A .......................................................... United States 8,000 5,656,000
a Sohu.com Inc. ........................................................... China 14,500 868,695
a VeriSign Inc. ........................................................... United States 60,400 2,059,036
---------------
13,706,178
---------------
INVESTMENT BANKS/BROKERS 0.8%
a,b Bovespa Holding SA, 144A ................................................ Brazil 57,600 1,081,331
---------------
MAJOR TELECOMMUNICATIONS 10.6%
AT&T Inc. ............................................................... United States 21,582 901,912
Atlantic Tele-Network Inc. .............................................. United States 2,200 79,002
a Bharti Airtel Ltd. ...................................................... India 168,205 4,319,815
Cable & Wireless PLC .................................................... United Kingdom 310,200 1,256,770
Semiannual Report | 49
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GLOBAL COMMUNICATIONS FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
MAJOR TELECOMMUNICATIONS (CONTINUED)
PT Telekomunikasi Indonesia, B .......................................... Indonesia 707,100 $ 835,540
Reliance Communication Ltd. ............................................. India 111,500 2,196,005
a Telenor ASA ............................................................. Norway 92,700 2,175,996
Telus Corp. ............................................................. Canada 36,700 2,151,721
---------------
13,916,761
---------------
MEDIA CONGLOMERATES 1.7%
News Corp., A ........................................................... United States 58,700 1,272,029
The Walt Disney Co. ..................................................... United States 28,030 970,679
---------------
2,242,708
---------------
MISCELLANEOUS COMMERCIAL SERVICES 0.1%
a,b,c Alibaba.com Ltd., 144A .................................................. China 102,300 178,192
---------------
MOVIES/ENTERTAINMENT 0.4%
a Outdoor Channel Holdings Inc. ........................................... United States 60,600 544,794
---------------
RECREATIONAL PRODUCTS 7.7%
a Activision Inc. ......................................................... United States 117,800 2,785,970
Nintendo Co. Ltd. ....................................................... Japan 8,600 5,360,787
a Perfect World Co. Ltd., ADR ............................................. China 18,700 648,703
a Scientific Games Corp., A ............................................... United States 38,300 1,384,545
---------------
10,180,005
---------------
SEMICONDUCTORS 1.2%
a Marvell Technology Group Ltd. ........................................... Bermuda 37,400 674,322
a Microsemi Corp. ......................................................... United States 33,600 894,096
---------------
1,568,418
---------------
SPECIALTY TELECOMMUNICATIONS 6.8%
a American Tower Corp., A ................................................. United States 98,635 4,357,694
a Crown Castle International Corp. ........................................ United States 62,638 2,572,543
a Maxcom Telecomunicaciones SA, ADR ....................................... Mexico 28,800 499,968
a Time Warner Telecom Inc., A ............................................. United States 65,000 1,510,600
---------------
8,940,805
---------------
TELECOMMUNICATIONS EQUIPMENT 9.9%
a Comverse Technology Inc. ................................................ United States 82,900 1,593,338
Harris Corp. ............................................................ United States 40,500 2,452,680
Nokia Corp., ADR ........................................................ Finland 104,200 4,138,824
QUALCOMM Inc. ........................................................... United States 50,000 2,136,500
a Research In Motion Ltd. ................................................. Canada 17,400 2,166,474
a ViaSat Inc. ............................................................. United States 15,900 484,950
---------------
12,972,766
---------------
WIRELESS COMMUNICATIONS 28.5%
America Movil SAB de CV, L, ADR ......................................... Mexico 99,800 6,525,922
Cellcom Israel Ltd. ..................................................... Israel 22,000 583,660
China Mobile (Hong Kong) Ltd., ADR ...................................... China 63,200 6,552,576
50 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GLOBAL COMMUNICATIONS FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
WIRELESS COMMUNICATIONS (CONTINUED)
a Clearwire Corp., A ...................................................... United States 19,200 $ 394,176
a Leap Wireless International Inc. ........................................ United States 56,800 4,050,408
a MetroPCS Communications Inc. ............................................ United States 219,700 4,943,250
a NII Holdings Inc. ....................................................... United States 74,400 4,315,200
Rogers Communications Inc., B ........................................... Canada 137,900 7,031,572
a SBA Communications Corp. ................................................ United States 87,600 3,118,560
---------------
37,515,324
---------------
TOTAL COMMON STOCKS (COST $73,919,532) .................................. 125,295,999
---------------
PREFERRED STOCK (COST $289,500) 0.3%
TELECOMMUNICATIONS EQUIPMENT 0.3%
a,d,e Dilithium Networks Inc., depository receipt, D, pfd., 144A, PIPES ....... United States 124,248 428,655
---------------
TOTAL LONG TERM INVESTMENTS (COST $74,209,032) .......................... 125,724,654
---------------
SHORT TERM INVESTMENT (COST $4,940,266) 3.8%
MONEY MARKET FUND 3.8%
f Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.69% .... United States 4,940,266 4,940,266
---------------
TOTAL INVESTMENTS (COST $79,149,298) 99.4% .............................. 130,664,920
OTHER ASSETS, LESS LIABILITIES 0.6% ..................................... 757,994
---------------
NET ASSETS 100.0% ....................................................... $ 131,422,914
===============
See Selected Portfolio Abbreviations on page 72.
a Non-income producing for the twelve months ended October 31, 2007.
b Security was purchased pursuant to Rule 144A under the Securities Act of 1933
and may be sold in transactions exempt from registration only to qualified
institutional buyers or in a public offering registered under the Securities Act
of 1933. These securities have been deemed liquid under guidelines approved by
the Trust's Board of Trustees. At October 31, 2007, the aggregate value of these
securities was $1,259,523, representing 0.96% of net assets.
c A portion or all of the securities purchased on when-issued or delayed
delivery basis. See Note 1(c).
d See Note 8 regarding restricted securities.
e Security has been deemed illiquid because it may not be able to be sold within
seven days. At October 31, 2007, the value of this security was $428,655,
representing 0.33% of net assets.
f See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 51
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN GLOBAL HEALTH CARE FUND
-----------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2007 2006 2005 2004 2003
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 25.92 $ 23.31 $ 20.36 $ 19.86 $ 15.53 $ 20.80
-----------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................. (0.05) -- e 0.12 (0.08) (0.10) (0.09)
Net realized and unrealized gains (losses) ..... 2.03 2.74 2.83 0.58 4.43 (4.62)
-----------------------------------------------------------------------------
Total from investment operations .................. 1.98 2.74 2.95 0.50 4.33 (4.71)
-----------------------------------------------------------------------------
Less distributions from:
Net investment income .......................... -- (0.13) -- -- -- --
Net realized gains ............................. -- -- -- -- -- (0.56)
-----------------------------------------------------------------------------
Total distributions ............................... -- (0.13) -- -- -- (0.56)
-----------------------------------------------------------------------------
Redemption fees ................................... -- e -- e -- e -- e -- --
-----------------------------------------------------------------------------
Net asset value, end of period .................... $ 27.90 $ 25.92 $ 23.31 $ 20.36 $ 19.86 $ 15.53
=============================================================================
Total return c .................................... 7.72% 11.80% 14.44% 2.52% 27.88% (22.56)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .......................................... 1.21% f 1.27% f 1.26% f 1.32% f 1.36% 1.44%
Net investment income (loss) ...................... (0.35)% --% g 0.55% (0.42)% (0.52)% (0.54)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $ 114,904 $108,756 $106,293 $86,934 $91,314 $73,991
Portfolio turnover rate ........................... 10.43% 29.33% 39.75% 77.50% 82.63% 137.37%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
g Rounds to less than 0.01%.
52 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GLOBAL HEALTH CARE FUND
-----------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2007 2006 2005 2004 2003
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 24.50 $ 22.08 $ 19.44 $ 19.10 $ 15.04 $ 20.33
-----------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................. (0.14) (0.17) (0.04) (0.22) (0.23) (0.20)
Net realized and unrealized gains (losses) ..... 1.92 2.59 2.68 0.56 4.29 (4.53)
-----------------------------------------------------------------------------
Total from investment operations .................. 1.78 2.42 2.64 0.34 4.06 (4.73)
-----------------------------------------------------------------------------
Less distributions from net realized gains ........ -- -- -- -- -- (0.56)
-----------------------------------------------------------------------------
Redemption fees ................................... -- e -- e -- e -- e -- --
-----------------------------------------------------------------------------
Net asset value, end of period .................... $ 26.28 $ 24.50 $ 22.08 $ 19.44 $ 19.10 $ 15.04
=============================================================================
Total return c .................................... 7.27% 10.96% 13.58% 1.78% 26.91% (23.10)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .......................................... 1.96% f 2.01% f 2.00% f 2.06% f 2.11% 2.18%
Net investment income (loss) ...................... (1.10)% (0.74)% (0.19)% (1.16)% (1.27)% (1.28)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $ 10,909 $ 11,367 $ 14,233 $12,060 $13,054 $ 8,892
Portfolio turnover rate ........................... 10.43% 29.33% 39.75% 77.50% 82.63% 137.37%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 53
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GLOBAL HEALTH CARE FUND
-----------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2007 2006 2005 2004 2003
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 24.26 $ 21.87 $ 19.24 $ 18.92 $ 14.90 $ 20.15
-----------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................. (0.14) (0.17) (0.04) (0.22) (0.22) (0.20)
Net realized and unrealized gains (losses) ..... 1.90 2.56 2.67 0.54 4.24 (4.49)
-----------------------------------------------------------------------------
Total from investment operations .................. 1.76 2.39 2.63 0.32 4.02 (4.69)
-----------------------------------------------------------------------------
Less distributions from net realized gains ........ -- -- -- -- -- (0.56)
-----------------------------------------------------------------------------
Redemption fees ................................... -- e -- e -- e -- e -- --
-----------------------------------------------------------------------------
Net asset value, end of period .................... $ 26.02 $ 24.26 $ 21.87 $ 19.24 $ 18.92 $ 14.90
=============================================================================
Total return c .................................... 7.30% 10.93% 13.67% 1.69% 26.98% (23.16)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .......................................... 1.96% f 2.01% f 2.01% f 2.07% f 2.11% 2.19%
Net investment income (loss) ...................... (1.10)% (0.74)% (0.20)% (1.17)% (1.27)% (1.29)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $ 29,565 $ 27,560 $ 29,083 $22,021 $23,850 $18,700
Portfolio turnover rate ........................... 10.43% 29.33% 39.75% 77.50% 82.63% 137.37%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
54 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GLOBAL HEALTH CARE FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 95.0%
BIOTECHNOLOGY 14.3%
a Acadia Pharmaceuticals Inc. ............................................. United States 45,700 $ 702,866
a Amgen Inc. .............................................................. United States 40,200 2,336,022
a Angiotech Pharmaceuticals Inc. .......................................... United States 50,900 240,757
a Cadence Pharmaceuticals Inc. ............................................ United States 47,200 674,016
a Celgene Corp. ........................................................... United States 37,600 2,481,600
a Cephalon Inc. ........................................................... United States 18,400 1,356,816
a Genzyme Corp. ........................................................... United States 23,900 1,815,683
a Gilead Sciences Inc. .................................................... United States 56,100 2,591,259
a Indevus Pharmaceuticals Inc. ............................................ United States 236,100 1,817,970
a Invitrogen Corp. ........................................................ United States 17,700 1,608,399
a Myriad Genetics Inc. .................................................... United States 55,700 3,083,552
a Orexigen Therapeutics Inc. .............................................. United States 63,700 932,568
a PDL BioPharma Inc. ...................................................... United States 77,100 1,634,520
a Sequenom Inc. ........................................................... United States 38,500 373,835
a ViroPharma Inc. ......................................................... United States 71,500 615,615
---------------
22,265,478
---------------
DRUG STORE CHAINS 0.2%
Drogasil SA ............................................................. Brazil 35,000 323,071
---------------
ELECTRICAL PRODUCTS 0.6%
a Greatbatch Inc. ......................................................... United States 36,900 917,334
---------------
GENERIC PHARMACEUTICALS 0.0% b
a Impax Laboratories Inc. ................................................. United States 4,100 44,075
---------------
HOSPITAL/NURSING MANAGEMENT 3.3%
Brookdale Senior Living Inc. ............................................ United States 50,200 1,851,878
Diagnosticos DA America SA .............................................. Brazil 64,200 1,508,581
a LifePoint Hospitals Inc. ................................................ United States 56,900 1,736,588
---------------
5,097,047
---------------
INDUSTRIAL SPECIALTIES 0.4%
a Polypore International Inc. ............................................. United States 32,800 562,848
---------------
INSURANCE BROKERS/SERVICES 0.5%
a,c Sul America SA, 144A .................................................... Brazil 40,000 722,505
---------------
LIFE/HEALTH INSURANCE 1.2%
a,c Amil Participacoes SA, 144A ............................................. Brazil 190,000 1,854,783
---------------
MAJOR PHARMACEUTICALS 31.4%
Abbott Laboratories ..................................................... United States 39,000 2,130,180
Johnson & Johnson ....................................................... United States 105,300 6,862,401
Merck & Co. Inc. ........................................................ United States 28,800 1,677,888
Merck KGaA .............................................................. Germany 46,100 5,767,969
Novartis AG ............................................................. Switzerland 112,900 6,004,178
Pfizer Inc. ............................................................. United States 219,860 5,410,755
Roche Holding AG ........................................................ Switzerland 50,900 8,683,277
Schering-Plough Corp. ................................................... United States 279,100 8,518,132
Wyeth ................................................................... United States 76,700 3,729,921
---------------
48,784,701
---------------
Semiannual Report | 55
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GLOBAL HEALTH CARE FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
MANAGED HEALTH CARE 6.7%
a,c Medial Saude SA, ADR, 144A .............................................. Brazil 95,000 $ 1,245,668
a Skilled Healthcare Group Inc. ........................................... United States 51,700 846,846
UnitedHealth Group Inc. ................................................. United States 36,030 1,770,874
a WellPoint Inc. .......................................................... United States 82,300 6,520,629
---------------
10,384,017
---------------
MEDICAL DISTRIBUTORS 2.7%
a Henry Schein Inc. ....................................................... United States 28,300 1,695,170
a MWI Veterinary Supply Inc. .............................................. United States 26,900 1,123,075
a PSS World Medical Inc. .................................................. United States 68,700 1,387,740
---------------
4,205,985
---------------
MEDICAL SPECIALTIES 16.3%
a Accuray Inc. ............................................................ United States 12,800 257,280
a Adams Respiratory Therapeutics Inc. ..................................... United States 39,000 1,713,660
Baxter International Inc. ............................................... United States 40,900 2,454,409
a Boston Scientific Corp. ................................................. United States 45,100 625,537
DENTSPLY International Inc. ............................................. United States 35,800 1,484,984
Hillenbrand Industries Inc. ............................................. United States 21,400 1,181,708
a Hologic Inc. ............................................................ United States 18,044 1,225,729
a,d,e MacroChem Corp. ......................................................... United States 250,000 176,000
a,d,e Masimo Corp. ............................................................ United States 184,092 5,459,686
Medtronic Inc. .......................................................... United States 26,800 1,271,392
Mentor Corp. ............................................................ United States 16,900 719,433
Mindray Medical International Ltd., ADR ................................. China 18,200 723,632
a Northstar Neuroscience Inc. ............................................. United States 53,300 706,225
a Thermo Fisher Scientific Inc. ........................................... United States 64,168 3,773,720
a Tomotherapy Inc. ........................................................ United States 23,600 516,132
a Trans1 Inc. ............................................................. United States 8,000 200,000
a Waters Corp. ............................................................ United States 27,300 2,101,554
a Zimmer Holdings Inc. .................................................... United States 10,800 750,492
---------------
25,341,573
---------------
MEDICAL/NURSING SERVICES 3.2%
a Amedisys Inc. ........................................................... United States 23,734 1,007,508
a DaVita Inc. ............................................................. United States 30,800 2,007,852
a,f Genoptix Inc. ........................................................... United States 8,500 209,950
a Healthways Inc. ......................................................... United States 16,100 977,270
a Nighthawk Radiology Holdings Inc. ....................................... United States 35,100 826,254
---------------
5,028,834
---------------
OTHER PHARMACEUTICALS 5.1%
Allergan Inc. ........................................................... United States 22,780 1,539,473
a,c CytRx Corp., 144A ....................................................... United States 82,000 309,960
a Endo Pharmaceuticals Holdings Inc. ...................................... United States 23,800 697,340
a Helicos Biosciences Corp. ............................................... United States 41,500 586,810
Shire PLC, ADR .......................................................... United Kingdom 28,800 2,164,320
Teva Pharmaceutical Industries Ltd., ADR ................................ Israel 40,200 1,769,202
a Wuxi Pharmatech Cayman Inc., ADR ........................................ China 20,700 796,743
---------------
7,863,848
---------------
56 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GLOBAL HEALTH CARE FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
SERVICES TO THE HEALTH INDUSTRY 9.1%
a Allscripts Healthcare Solutions Inc. .................................... United States 62,400 $ 1,728,480
a Covance Inc. ............................................................ United States 23,100 1,905,750
a Emageon Inc. ............................................................ United States 44,900 363,690
a Express Scripts Inc. .................................................... United States 36,600 2,309,460
a Medco Health Solutions Inc. ............................................. United States 10,100 953,238
Omnicare Inc. ........................................................... United States 56,000 1,652,000
Pharmaceutical Product Development Inc. ................................. United States 111,200 4,697,088
a WebMD Health Corp., A ................................................... United States 11,200 514,864
---------------
14,124,570
---------------
TOTAL COMMON STOCKS (COST $102,653,001) ................................. 147,520,669
---------------
SHORT TERM INVESTMENT (COST $9,687,788) 6.2%
MONEY MARKET FUND 6.2%
g Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.69% .... United States 9,687,788 9,687,788
---------------
TOTAL INVESTMENTS (COST $112,340,789) 101.2% ............................ 157,208,457
OTHER ASSETS, LESS LIABILITIES (1.2)% ................................... (1,830,780)
---------------
NET ASSETS 100.0% ....................................................... $ 155,377,677
===============
See Selected Portfolio Abbreviations on page 72.
a Non-income producing for the twelve months ended October 31, 2007.
b Rounds to less than 0.1% of net assets.
c Security was purchased pursuant to Rule 144A under the Securities Act of 1933
and may be sold in transactions exempt from registration only to qualified
institutional buyers or in a public offering registered under the Securities Act
of 1933. These securities have been deemed liquid under guidelines approved by
the Trust's Board of Trustees. At October 31, 2007, the aggregate value of these
securities was $4,132,916, representing 2.66% of net assets.
d Security has been deemed illiquid because it may not be able to be sold within
seven days. At October 31, 2007, the aggregate value of these securities was
$5,635,686, representing 3.63% of net assets.
e See Note 8 regarding restricted securities.
f A portion or all of the securities purchased on a when-issued or delayed
delivery basis. See Note 1(c).
g See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 57
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN NATURAL RESOURCES FUND
------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2007 2006 2005 2004 2003
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 37.84 $ 35.92 $ 24.32 $ 18.80 $ 13.60 $ 16.96
------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................. 0.04 0.09 0.13 0.04 (0.04) 0.01
Net realized and unrealized gains (losses) ..... 9.21 4.29 12.64 5.48 5.26 (3.33)
------------------------------------------------------------------------------
Total from investment operations. ................. 9.25 4.38 12.77 5.52 5.22 (3.32)
------------------------------------------------------------------------------
Less distributions from:
Net investment income .......................... -- (0.25) (0.09) -- (0.02) (0.04)
Net realized gains ............................. -- (2.21) (1.08) -- -- --
------------------------------------------------------------------------------
Total distributions ............................... -- (2.46) (1.17) -- (0.02) (0.04)
------------------------------------------------------------------------------
Redemption fees ................................... -- e -- e -- e -- e -- --
------------------------------------------------------------------------------
Net asset value, end of period .................... $ 47.09 $ 37.84 $ 35.92 $ 24.32 $ 18.80 $ 13.60
==============================================================================
Total return c .................................... 24.42% 12.86% 53.11% 29.36% 38.36% (19.62)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .......................................... 0.98% f 1.03% f 1.02% f 1.08% f 1.27% 1.34%
Net investment income (loss) ...................... 0.19% 0.26% 0.44% 0.17% (0.24)% 0.04%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $ 660,408 $ 475,912 $440,475 $211,327 $102,725 $ 39,515
Portfolio turnover rate ........................... 17.16% 51.51% 56.08% 29.89% 59.53% 44.97%
a The amount shown for a share outstanding throughout the period may n ot
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
58 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND
-----------------------------------------
SIX MONTHS ENDED YEAR ENDED
OCTOBER 31, 2007 APRIL 30,
CLASS C (UNAUDITED) 2007 2006 g
-----------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................................. $37.58 $ 35.79 $ 31.56
-----------------------------------------
Income from investment operations a:
Net investment income (loss) b ..................................... (0.11) (0.17) (0.01)
Net realized and unrealized gains (losses) ......................... 9.15 4.25 5.39
-----------------------------------------
Total from investment operations ...................................... 9.04 4.08 5.38
-----------------------------------------
Less distributions from:
Net investment income .............................................. -- (0.08) (0.07)
Net realized gains ................................................. -- (2.21) (1.08)
-----------------------------------------
Total distributions ................................................... -- (2.29) (1.15)
-----------------------------------------
Redemption fees ....................................................... -- e -- e -- e
-----------------------------------------
Net asset value, end of period ........................................ $46.62 $ 37.58 $35.79
=========================================
Total return c. ....................................................... 24.02% 12.01% 17.47%
RATIOS TO AVERAGE NET ASSETS d
Expenses .............................................................. 1.67% f 1.76% f 1.67% f
Net investment income (loss) .......................................... (0.50)% (0.47)% (0.21)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................................... $59,368 $ 33,723 $18,485
Portfolio turnover rate ............................................... 17.16% 51.51% 56.08%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period September 1, 2005 (effective date) to April 30, 2006.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 59
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND
------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
ADVISOR CLASS (UNAUDITED) 2007 2006 2005 2004 2003
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 39.71 $ 37.57 $ 25.35 $ 19.53 $ 14.11 $ 17.57
------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................ 0.11 0.18 0.25 0.13 0.02 0.05
Net realized and unrealized gains (losses) ..... 9.68 4.52 13.18 5.69 5.45 (3.41)
------------------------------------------------------------------------------
Total from investment operations .................. 9.79 4.70 13.43 5.82 5.47 (3.36)
------------------------------------------------------------------------------
Less distributions from:
Net investment income .......................... -- (0.35) (0.13) -- (0.05) (0.10)
Net realized gains. ............................ -- (2.21) (1.08) -- -- --
------------------------------------------------------------------------------
Total distributions. .............................. -- (2.56) (1.21) -- (0.05) (0.10)
------------------------------------------------------------------------------
Redemption fees ................................... -- e -- e -- e -- e -- --
------------------------------------------------------------------------------
Net asset value, end of period .................... $ 49.50 $ 39.71 $ 37.57 $ 25.35 $ 19.53 $ 14.11
==============================================================================
Total return c .................................... 24.60% 13.20% 53.55% 29.80% 38.83% (19.18)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .......................................... 0.67% f 0.76% f 0.69% f 0.73% f 0.92% 1.03%
Net investment income ............................. 0.50% 0.53% 0.77% 0.52% 0.11% 0.35%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $ 60,510 $ 52,103 $ 43,874 $ 33,048 $ 11,185 $ 460
Portfolio turnover rate ........................... 17.16% 51.51% 56.08% 29.89% 59.53% 44.97%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
60 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 96.9%
COMMON STOCKS AND WARRANTS 94.8%
ENERGY MINERALS 44.7%
Addax Petroleum Corp. ........................................... Canada 155,000 $ 6,792,024
a Addax Petroleum Corp., 144A ..................................... Canada 150,000 6,572,927
b Bill Barrett Corp. .............................................. United States 430,000 20,124,000
BP PLC, ADR ..................................................... United Kingdom 100,000 7,799,000
Chesapeake Energy Corp. ......................................... United States 500,000 19,740,000
Chevron Corp. ................................................... United States 250,003 22,877,775
ConocoPhillips .................................................. United States 310,070 26,343,547
Devon Energy Corp. .............................................. United States 240,000 22,416,000
b,c,d Energy Coal Resources, 144A ..................................... United States 199,375 1,724,594
EOG Resources Inc. .............................................. United States 140,000 12,404,000
Exxon Mobil Corp. ............................................... United States 310,000 28,516,900
Foundation Coal Holdings Inc. ................................... United States 130,000 5,553,600
b Geomet Inc. ..................................................... United States 680,000 3,570,000
Marathon Oil Corp. .............................................. United States 260,000 15,373,800
b Mariner Energy Inc. ............................................. United States 440,000 11,000,000
Murphy Oil Corp. ................................................ United States 132,000 9,719,160
b Newfield Exploration Co. ........................................ United States 60,000 3,230,400
Nexen Inc. ...................................................... Canada 235,000 7,962,769
Noble Energy Inc. ............................................... United States 205,000 15,690,700
Occidental Petroleum Corp. ...................................... United States 440,000 30,382,000
Peabody Energy Corp. ............................................ United States 210,000 11,707,500
Petroleo Brasileiro SA, ADR ..................................... Brazil 86,000 8,224,180
b Southwestern Energy Co. ......................................... United States 400,000 20,692,000
Talisman Energy Inc. ............................................ Canada 480,000 10,435,200
Total SA, B, ADR ................................................ France 121,000 9,753,810
XTO Energy Inc. ................................................. United States 150,000 9,957,000
--------------
348,562,886
--------------
INDUSTRIAL SERVICES 28.9%
Aegean Marine Petroleum Network Inc. ............................ United States 100,000 4,097,000
Baker Hughes Inc. ............................................... United States 67,000 5,810,240
b Boart Longyear Group ............................................ Australia 3,800,000 9,026,719
b Dril-Quip Inc. .................................................. United States 220,000 11,732,600
ENSCO International Inc. ........................................ United States 44,000 2,441,560
b Flotek Industries Inc. .......................................... United States 205,400 10,434,320
b FMC Technologies Inc............................................. United States 360,000 21,826,800
b Global Industries Ltd............................................ United States 100,000 2,462,000
GlobalSantaFe Corp. ............................................. Cayman Islands 65,000 5,266,950
b Grant Prideco Inc. .............................................. United States 90,000 4,424,400
Halliburton Co. ................................................. United States 650,000 25,623,000
b Helix Energy Solutions Group Inc. ............................... United States 485,000 22,431,250
b Hornbeck Offshore Services Inc. ................................. United States 60,000 2,346,000
b Nabors Industries Ltd. .......................................... Bermuda 210,000 5,896,800
b National-Oilwell Varco Inc. ..................................... United States 260,000 19,042,400
Noble Corp. ..................................................... United States 110,000 5,824,500
b North American Energy Partners .................................. Canada 190,000 3,526,400
b Oil States International Inc. ................................... United States 150,000 6,478,500
Semiannual Report | 61
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND WARRANTS (CONTINUED)
INDUSTRIAL SERVICES (CONTINUED)
b PHI Inc., non-voting ............................................ United States 80,000 $ 2,768,000
Rowan Cos. Inc. ................................................. United States 80,000 3,118,400
Schlumberger Ltd. ............................................... United States 95,000 9,174,150
Smith International Inc. ........................................ United States 150,000 9,907,500
b Superior Energy Services Inc. ................................... United States 175,000 6,489,000
b T-3 Energy Services Inc. ........................................ United States 100,000 4,752,000
b Tesco Corp. ..................................................... Canada 70,000 2,064,300
b Transocean Inc. ................................................. United States 80,000 9,549,600
bWeatherford International Ltd. ................................... Bermuda 135,000 8,762,850
--------------
225,277,239
--------------
NON-ENERGY MINERALS 14.0%
b African Copper PLC .............................................. United Kingdom 1,900,000 3,622,498
Alcoa Inc. ...................................................... United States 210,000 8,313,900
Anglo American PLC .............................................. United Kingdom 25,000 1,722,244
Anglo American PLC, ADR ......................................... United Kingdom 68,250 2,385,338
AngloGold Ashanti Ltd., ADR ..................................... South Africa 111,400 5,174,530
Barrick Gold Corp. .............................................. Canada 500,006 22,065,265
b Centerra Gold Inc. .............................................. Canada 127,800 1,631,173
a,b Centerra Gold Inc., 144A ........................................ Canada 133,200 1,700,095
b First Uranium Corp. ............................................. South Africa 147,400 1,689,300
a,b First Uranium Corp., 144A ....................................... Canada 205,200 2,351,725
b Gammon Gold Inc. ................................................ Canada 510,000 5,293,931
a Hochschild Mining PLC, 144A ..................................... United Kingdom 480,000 4,669,704
b Jinshan Gold Mines Inc. ......................................... Canada 197,300 564,252
a,b Jinshan Gold Mines Inc., 144A ................................... Canada 1,305,000 3,732,126
b Mirabela Nickel Ltd. ............................................ Australia 350,000 2,131,660
a,b Mirabela Nickel Ltd., 144A .................................... Brazil 131,250 799,372
b Nautilus Minerals Inc. .......................................... Canada 176,000 796,017
b Nautilus Minerals Inc., Reg D ................................... Canada 474,000 2,143,819
b Nautilus Minerals Inc., wts., 2/15/09 ........................... Canada 237,000 --
b New Gold Inc. ................................................... Canada 8,300 54,155
Newcrest Mining Ltd. ............................................ Australia 202,500 6,111,899
b Niger Uranium Ltd. .............................................. Cayman Islands 29,561 61,450
b Regent Pacific Group Ltd. ....................................... Hong Kong 25,707,985 4,942,344
Southern Copper Corp. ........................................... United States 45,000 6,286,500
b Uranium One Inc. ................................................ Canada 302,500 3,361,111
a ,b Uranium One Inc., 144A .......................................... Canada 427,500 4,750,000
Xstrata PLC ..................................................... Switzerland 110,000 7,881,997
Zinifex Ltd. .................................................... Australia 325,000 5,040,850
--------------
109,277,255
--------------
PROCESS INDUSTRIES 5.9%
Bunge Ltd. ...................................................... United States 30,000 3,455,700
b Cosan Ltd. CLA A ................................................ Brazil 430,000 5,461,000
b CVR Energy Inc. ................................................. United States 150,000 3,420,000
The Dow Chemical Co. ............................................ United States 60,000 2,702,400
b Headwaters Inc. ................................................. United States 170,000 2,439,500
62 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND WARRANTS (CONTINUED)
PROCESS INDUSTRIES (CONTINUED)
Minerals Technologies Inc. ...................................... United States 40,000 $ 2,808,800
b Petroplus Holdings AG ........................................... Switzerland 15,000 1,302,771
a,b Petroplus Holdings AG, 144A ..................................... Switzerland 40,000 3,474,057
b,e Solutia Inc. .................................................... United States 137,000 102,750
Sunoco Inc. ..................................................... United States 143,000 10,524,800
Valero Energy Corp. ............................................. United States 151,000 10,634,930
--------------
46,326,708
--------------
PRODUCER MANUFACTURING 0.6%
b JA Solar Holdings Co. Ltd., ADR ................................. China 16,900 973,440
b Terex Corp. ..................................................... United States 47,000 3,488,340
--------------
4,461,780
--------------
TRANSPORTATION 0.7%
Aries Maritime Transport Ltd. ................................... Bermuda 320,000 3,030,400
Arlington Tankers Ltd. .......................................... Bermuda 101,000 2,484,600
--------------
5,515,000
--------------
TOTAL COMMON STOCKS AND WARRANTS
(COST $451,615,900) .......................................... 739,420,868
--------------
PREFERRED STOCKS 2.1%
ENERGY MINERALS 0.7%
Petroleo Brasileiro SA, ADR, pfd. ............................... Brazil 70,000 5,823,300
--------------
NON-ENERGY MINERALS 1.4%
Companhia Vale do Rio Doce, ADR, pfd., A ........................ Brazil 340,000 10,733,800
--------------
TOTAL PREFERRED STOCKS (COST $4,683,046) ........................ 16,557,100
--------------
TOTAL LONG TERM INVESTMENTS (COST $456,298,946) ................. 755,977,968
--------------
SHORT TERM INVESTMENT (COST $17,053,296) 2.2%
MONEY MARKET FUND 2.2%
f Franklin Institutional Fiduciary Trust Money Market Portfolio,
4.69% ........................................................ United States 17,053,296 17,053,296
--------------
TOTAL INVESTMENTS (COST $473,352,242) 99.1% ..................... 773,031,264
OTHER ASSETS, LESS LIABILITIES 0.9% ............................. 7,254,863
--------------
NET ASSETS 100.0% ............................................... $ 780,286,127
==============
See Selected Portfolio Abbreviations on page 72.
a 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 October 31, 2007, the aggregate value of these
securities was $28,050,006, representing 3.59% of net assets
b Non-income producing for the twelve months ended October 31, 2007.
c Security has been deemed illiquid because it may not be able to be sold within
seven days. At October 31, 2007, the value of this security was $1,724,594,
representing 0.22% of net assets.
d See Note 8 regarding restricted securities.
e See Note 9 regarding other considerations.
f See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 63
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN TECHNOLOGY FUND
------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2007 2006 2005 2004 2003
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 5.83 $ 5.69 $ 4.34 $ 4.25 $ 3.19 $ 4.37
------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................. (0.03) (0.05) (0.06) (0.05) (0.05) (0.05)
Net realized and unrealized gains (losses) ..... 1.06 0.19 1.41 0.14 1.11 (1.13)
------------------------------------------------------------------------------
Total from investment operations .................. 1.03 0.14 1.35 0.09 1.06 (1.18)
------------------------------------------------------------------------------
Redemption fees ................................... -- e -- e -- e -- e -- --
------------------------------------------------------------------------------
Net asset value, end of period .................... $ 6.86 $ 5.83 $ 5.69 $ 4.34 $ 4.25 $ 3.19
==============================================================================
Total return c .................................... 17.67% 2.46% 31.11% 2.12% 33.23% (27.00)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .......................................... 1.61% f 1.83% f 1.74% f 1.73% f 1.72% 2.01%
Net investment income (loss) ...................... (1.01)% (1.03)% (1.27)% (1.02)% (1.48)% (1.81)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $ 37,189 $ 30,089 $ 33,681 $ 27,626 $ 28,636 $ 20,018
Portfolio turnover rate ........................... 46.06% 138.70% 96.23% 68.39% 141.34% 182.71%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable , and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
64 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN TECHNOLOGY FUND
------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2007 2006 2005 2004 2003
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 5.58 $ 5.49 $ 4.21 $ 4.15 $ 3.14 $ 4.32
------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................. (0.05) (0.08) (0.09) (0.08) (0.17) (0.15)
Net realized and unrealized gains (losses) ..... 1.02 0.17 1.37 0.14 1.18 (1.03)
------------------------------------------------------------------------------
Total from investment operations .................. 0.97 0.09 1.28 0.06 1.01 (1.18)
------------------------------------------------------------------------------
Redemption fees ................................... -- e -- e -- e -- e -- --
------------------------------------------------------------------------------
Net asset value, end of period .................... $ 6.55 $ 5.58 $ 5.49 $ 4.21 $ 4.15 $ 3.14
==============================================================================
Total return c .................................... 17.17% 1.64% 30.40% 1.45% 32.17% (27.31)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .......................................... 2.29% f 2.48% f 2.37% f 2.40% f 2.35% 2.66%
Net investment income (loss) ...................... (1.69)% (1.68)% (1.90)% (1.69)% (2.11)% (2.46)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $ 4,015 $ 3,574 $ 4,385 $ 4,221 $ 4,788 $ 2,922
Portfolio turnover rate ........................... 46.06% 138.70% 96.23% 68.39% 141.34% 182.71%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable , and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 65
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN TECHNOLOGY FUND
------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2007 2006 2005 2004 2003
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 5.56 $ 5.47 $ 4.20 $ 4.14 $ 3.13 $ 4.30
------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................. (0.05) (0.09) (0.09) (0.08) (0.14) (0.12)
Net realized and unrealized gains (losses) ..... 1.02 0.18 1.36 0.14 1.15 (1.05)
------------------------------------------------------------------------------
Total from investment operations .................. 0.97 0.09 1.27 0.06 1.01 (1.17)
------------------------------------------------------------------------------
Redemption fees ................................... -- e -- e -- e -- e -- --
------------------------------------------------------------------------------
Net asset value, end of period .................... $ 6.53 $ 5.56 $ 5.47 $ 4.20 $ 4.14 $ 3.13
==============================================================================
Total return c .................................... 17.24% 1.65% 30.24% 1.45% 32.27% (27.21)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .......................................... 2.29% f 2.48% f 2.38% f 2.42% f 2.37% 2.66%
Net investment income (loss) ...................... (1.69)% (1.68)% (1.91)% (1.71)% (2.13)% (2.46)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $ 11,611 $ 8,819 $ 9,621 $ 8,502 $ 10,949 $ 8,545
Portfolio turnover rate ........................... 46.06% 138.70% 96.23% 68.39% 141.34% 182.71%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable , and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
66 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN TECHNOLOGY FUND
------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS R (UNAUDITED) 2007 2006 2005 2004 2003
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 5.79 $ 5.66 $ 4.32 $ 4.24 $ 3.19 $ 4.36
------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................. (0.04) (0.06) (0.07) (0.05) (0.06) (0.06)
Net realized and unrealized gains (losses) ..... 1.06 0.19 1.41 0.13 1.11 (1.11)
------------------------------------------------------------------------------
Total from investment operations .................. 1.02 0.13 1.34 0.08 1.05 (1.17)
------------------------------------------------------------------------------
Redemption fees ................................... -- e -- e -- e -- e -- --
------------------------------------------------------------------------------
Net asset value, end of period .................... $ 6.81 $ 5.79 $ 5.66 $ 4.32 $ 4.24 $ 3.19
==============================================================================
Total return c .................................... 17.62% 2.30% 31.02% 1.89% 33.33% (27.06)%
RATIOS TO AVERAGE NET ASSET d
Expenses .......................................... 1.79% f 1.98% f 1.89% f 1.92% f 1.87% 2.17%
Net investment income (loss) ...................... (1.19)% (1.18)% (1.42)% (1.21)% (1.63)% (1.97)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $ 8,146 $ 6,280 $ 3,797 $ 2,701 $ 1,582 $ 380
Portfolio turnover rate ........................... 46.06% 138.70% 96.23% 68.39% 141.34% 182.71%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable , and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 67
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN TECHNOLOGY FUND
------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
ADVISOR CLASS (UNAUDITED) 2007 2006 2005 2004 2003
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 5.97 $ 5.80 $ 4.41 $ 4.31 $ 3.22 $ 4.39
------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................. (0.02) (0.04) (0.05) (0.03) (0.05) (0.01)
Net realized and unrealized gains (losses) ..... 1.09 0.21 1.44 0.13 1.14 (1.16)
------------------------------------------------------------------------------
Total from investment operations .................. 1.07 0.17 1.39 0.10 1.09 (1.17)
------------------------------------------------------------------------------
Redemption fees ................................... -- e -- e -- e -- e -- --
------------------------------------------------------------------------------
Net asset value, end of period .................... $ 7.04 $ 5.97 $ 5.80 $ 4.41 $ 4.31 $ 3.22
==============================================================================
Total return c .................................... 17.92% 2.93% 31.52% 2.32% 33.85% (26.65)%
RATIOS TO AVERAGE NET ASSETS d
Expenses .......................................... 1.29% f 1.48% f 1.39% f 1.42% f 1.37% 1.67%
Net investment income (loss) ...................... (0.69)% (0.68)% (0.92)% (0.71)% (1.13)% (1.47)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $ 3,441 $ 2,719 $ 3,111 $ 2,374 $ 2,444 $ 10,438
Portfolio turnover rate ........................... 46.06% 138.70% 96.23% 68.39% 141.34% 182.71%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
68 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN TECHNOLOGY FUND COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 98.5%
AEROSPACE & DEFENSE 1.1%
a Aerovironment Inc. ..................................... United States 20,125 $ 517,816
a Force Protection Inc. .................................. United States 12,400 221,960
--------------------
739,776
--------------------
BIOTECHNOLOGY 2.7%
a Genentech Inc. ......................................... United States 13,900 1,030,407
a Gilead Sciences Inc. ................................... United States 15,700 725,183
--------------------
1,755,590
--------------------
CABLE/SATELLITE TELEVISION 0.7%
a The DIRECTV Group Inc. ................................. United States 18,200 481,936
--------------------
COMPUTER COMMUNICATIONS 8.1%
a Brocade Communications Systems Inc. .................... United States 67,200 639,072
a Cisco Systems Inc. ..................................... United States 58,900 1,947,234
a F5 Networks Inc. ....................................... United States 32,200 1,160,166
a Ixia ................................................... United States 118,900 1,243,694
a Riverbed Technology Inc. ............................... United States 6,600 223,014
--------------------
5,213,180
--------------------
COMPUTER PERIPHERALS 3.8%
a EMC Corp. .............................................. United States 25,000 634,750
a Network Appliance Inc. ................................. United States 36,000 1,133,640
a Synaptics Inc. ......................................... United States 12,800 695,680
--------------------
2,464,070
--------------------
COMPUTER PROCESSING HARDWARE 5.2%
a Apple Inc. ............................................. United States 8,100 1,538,595
a Compellent Technologies Inc. ........................... United States 11,600 186,760
Hewlett-Packard Co. .................................... United States 21,200 1,095,616
a VeriFone Holdings Inc. ................................. United States 10,100 499,243
--------------------
3,320,214
--------------------
DATA PROCESSING SERVICES 4.8%
Global Payments Inc. ................................... United States 23,100 1,098,636
a NeuStar Inc., A ........................................ United States 21,100 721,620
Paychex Inc. ........................................... United States 30,300 1,265,934
--------------------
3,086,190
--------------------
ELECTRICAL PRODUCTS 2.1%
a SunPower Corp., A ...................................... United States 10,900 1,378,414
--------------------
ELECTRONIC COMPONENTS 0.2%
a SanDisk Corp. .......................................... United States 3,600 159,840
--------------------
ELECTRONIC EQUIPMENT/INSTRUMENTS 2.6%
a Agilent Technologies Inc. .............................. United States 46,300 1,706,155
--------------------
ELECTRONIC PRODUCTION EQUIPMENT 1.6%
a FormFactor Inc. ........................................ United States 25,800 1,009,038
--------------------
Semiannual Report | 69
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN TECHNOLOGY FUND COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
INFORMATION TECHNOLOGY SERVICES 2.8%
a Citrix Systems Inc. .................................... United States 7,400 $ 318,126
a Cognizant Technology Solutions Corp., A ................ United States 35,100 1,455,246
--------------------
1,773,372
--------------------
INTERNET RETAIL 1.3%
a Amazon.com Inc. ........................................ United States 9,300 829,095
--------------------
INTERNET SOFTWARE/SERVICES 10.8%
a Akamai Technologies Inc. ............................... United States 17,500 685,825
a Equinix Inc. ........................................... United States 8,100 944,946
a Google Inc., A ......................................... United States 3,300 2,333,100
a Internap Network Services Corp. ........................ United States 59,100 984,606
a Omniture Inc. .......................................... United States 13,200 450,912
a VeriSign Inc. .......................................... United States 36,000 1,227,240
a Yahoo! Inc. ............................................ United States 10,980 341,478
--------------------
6,968,107
--------------------
MEDICAL SPECIALTIES 1.6%
a Thermo Fisher Scientific Inc. .......................... United States 18,000 1,058,580
--------------------
MISCELLANEOUS COMMERCIAL SERVICES 0.1%
a,b,c Alibaba.com Ltd., 144A ................................. China 50,300 87,616
--------------------
OTHER CONSUMER SERVICES 1.1%
a eBay Inc. .............................................. United States 19,100 689,510
--------------------
OTHER PHARMACEUTICALS 0.6%
a Helicos Biosciences Corp. .............................. United States 28,700 405,818
--------------------
PACKAGED SOFTWARE 8.9%
a Adobe Systems Inc. ..................................... United States 22,800 1,092,120
a Autodesk Inc. .......................................... United States 15,500 757,950
a Bottomline Technologies Inc. ........................... United States 42,700 685,762
Microsoft Corp. ........................................ United States 30,200 1,111,662
a Oracle Corp. ........................................... United States 48,300 1,070,811
a Salesforce.com Inc. .................................... United States 17,400 980,838
--------------------
5,699,143
--------------------
RECREATIONAL PRODUCTS 1.8%
a Activision Inc. ........................................ United States 48,066 1,136,761
--------------------
SEMICONDUCTORS 15.6%
a Hittite Microwave Corp. ................................ United States 15,100 758,775
Maxim Integrated Products Inc. ......................... United States 46,600 1,262,860
Microchip Technology Inc. .............................. United States 58,000 1,923,860
a Microsemi Corp. ........................................ United States 83,600 2,224,596
a Netlogic Microsystems Inc. ............................. United States 35,800 1,188,560
a NVIDIA Corp. ........................................... United States 7,850 277,733
a Power Integrations Inc. ................................ United States 39,800 1,294,694
a Silicon Laboratories Inc. .............................. United States 7,100 310,270
Texas Instruments Inc. ................................. United States 23,800 775,880
--------------------
10,017,228
--------------------
70 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN TECHNOLOGY FUND COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
SPECIALTY TELECOMMUNICATIONS 5.1%
a American Tower Corp., A ................................ United States 45,100 $ 1,992,518
a Crown Castle International Corp. ....................... United States 23,500 965,145
a Starent Networks Corp. ................................. United States 12,900 319,662
--------------------
3,277,325
--------------------
TELECOMMUNICATIONS EQUIPMENT 13.3%
a Comverse Technology Inc. ............................... United States 51,000 980,220
Corning Inc. ........................................... United States 53,000 1,286,310
Garmin Ltd. ............................................ Cayman Islands 5,200 558,480
Harris Corp. ........................................... United States 23,500 1,423,160
QUALCOMM Inc. .......................................... United States 35,600 1,521,188
a Research In Motion Ltd. ................................ Canada 14,700 1,830,297
a ViaSat Inc. ............................................ United States 30,800 939,400
--------------------
8,539,055
--------------------
WIRELESS COMMUNICATIONS 2.6%
a Leap Wireless International Inc. ....................... United States 8,200 584,742
a NII Holdings Inc. ...................................... United States 19,100 1,107,800
--------------------
1,692,542
--------------------
TOTAL COMMON STOCKS (COST $47,216,935) ................. 63,488,555
--------------------
SHORT TERM INVESTMENT (COST $1,643,884) 2.6%
MONEY MARKET FUND 2.6%
d Franklin Institutional Fiduciary Trust Money Market
Portfolio, 4.69% .................................... United States 1,643,884 1,643,884
--------------------
TOTAL INVESTMENTS (COST $48,860,819) 101.1% ............ 65,132,439
OTHER ASSETS, LESS LIABILITIES (1.1)% .................. (730,709)
--------------------
NET ASSETS 100.0% ...................................... $ 64,401,730
====================
See Selected Portfolio Abbreviations on page 72.
a Non-income producing for the twelve months ended October 31, 2007.
b A portion or all of the securities purchased on when-issued or delayed
delivery basis. See Note 1(c).
c Security was purchased pursuant to Rule 144A under the Securities Act of 1933
and may be sold in transactions exempt from registration only to qualified
institutional buyers or in a public offering registered under the Securities Act
of 1933. This security has been deemed liquid under guidelines approved by the
Trust's Board of Trustees. At October 31, 2007, the value of this security was
$87,616, representing 0.14% of net assets.
d See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 71
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED)
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
PIPES - Private Investment in Public Equity Security
72 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 2007 (unaudited)
---------------------------------------------------
FRANKLIN FRANKLIN GLOBAL FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH
DISCOVERY FUND FUND CARE FUND
---------------------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .................. $ 284,929,128 $ 74,209,032 $ 102,653,001
Cost - Sweep Money Fund (Note 7) ............. 14,311,262 4,940,266 9,687,788
Cost - Money Market Fund ..................... 3,136,000 -- --
---------------------------------------------------
Total cost of investments .................... $ 302,376,390 $ 79,149,298 $ 112,340,789
===================================================
Value - Unaffiliated issuers ................. $ 405,881,169 $ 125,724,654 $ 147,520,669
Value - Sweep Money Fund (Note 7) ............ 14,311,262 4,940,266 9,687,788
Value - Money Market Fund .................... 3,136,000 -- --
---------------------------------------------------
Total value of investments a ................. 423,328,431 130,664,920 157,208,457
Foreign currency, at value (cost $3,414,380) .... -- 3,583,679 --
Receivables:
Investment securities sold ................... 4,366,368 2,381,691 43,919
Capital shares sold .......................... 300,366 900,667 182,987
Dividends .................................... 23,556 18,714 146,087
---------------------------------------------------
Total assets .............................. 428,018,721 137,549,671 157,581,450
---------------------------------------------------
Liabilities:
Payables:
Investment securities purchased .............. 2,109,793 3,568,362 1,681,007
Capital shares redeemed ...................... 1,070,501 314,755 215,708
Affiliates ................................... 384,098 118,617 154,325
Unaffiliated transfer agent fees ............. 417,984 62,553 113,901
Funds advanced by custodian ..................... -- 1,916,679 --
Payable upon return of securities loaned ........ 3,136,000 -- --
Deferred tax .................................... -- 93,978 --
Accrued expenses and other liabilities .......... 149,813 51,813 38,832
---------------------------------------------------
Total liabilities ......................... 7,268,189 6,126,757 2,203,773
---------------------------------------------------
Net assets, at value ................... $ 420,750,532 $ 131,422,914 $ 155,377,677
===================================================
Net assets consist of:
Paid-in capital .............................. $ 596,135,495 $ 187,528,855 $ 119,026,004
Undistributed net investment income (loss) ... (4,341,320) (244,094) (421,922)
Net unrealized appreciation (depreciation) ... 120,953,483 51,565,727 44,845,762
Accumulated net realized gain (loss) ......... (291,997,126) (107,427,574) (8,072,167)
---------------------------------------------------
Net assets, at value ................... $ 420,750,532 $ 131,422,914 $ 155,377,677
===================================================
a The Franklin Biotechnology Discovery Fund includes $3,093,003 of securities
loaned.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 73
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2007 (unaudited)
---------------------------------------------------
FRANKLIN FRANKLIN GLOBAL FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH
DISCOVERY FUND FUND CARE FUND
---------------------------------------------------
CLASS A:
Net assets, at value ............................ $ 420,750,532 $ 102,737,029 $ 114,904,201
===================================================
Shares outstanding .............................. 6,392,194 6,156,713 4,118,184
===================================================
Net asset value per share a ..................... $ 65.82 $ 16.69 $ 27.90
===================================================
Maximum offering price per share (net asset
value per share / 94.25%) .................... $ 69.84 $ 17.71 $ 29.60
===================================================
CLASS B:
Net assets, at value ............................ -- $ 4,483,977 $ 10,908,902
===================================================
Shares outstanding .............................. -- 284,477 415,090
===================================================
Net asset value and maximum offering price
per share a .................................. -- $ 15.76 $ 26.28
===================================================
CLASS C:
Net assets, at value ............................ -- $ 24,201,908 $ 29,564,574
===================================================
Shares outstanding .............................. -- 1,534,038 1,136,109
===================================================
Net asset value and maximum offering price
per share a .................................. -- $ 15.78 $ 26.02
===================================================
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
74 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2007 (unaudited)
---------------------------------
FRANKLIN
FRANKLIN NATURAL TECHNOLOGY
RESOURCES FUND FUND
---------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ................................... $ 456,298,946 $ 47,216,935
Cost - Sweep Money Fund (Note 7) .............................. 17,053,296 1,643,884
---------------------------------
Total cost of investments ..................................... $ 473,352,242 $ 48,860,819
=================================
Value - Unaffiliated issuers .................................. $ 755,977,968 $ 63,488,555
Value - Sweep Money Fund (Note 7) ............................. 17,053,296 1,643,884
---------------------------------
Total value of investments .................................... 773,031,264 65,132,439
Foreign currency, at value (cost $8,366,630 and
$892,367, respectively) ....................................... 8,559,379 893,365
Receivables:
Investment securities sold .................................... -- 230,354
Capital shares sold ........................................... 4,029,469 267,709
Dividends ..................................................... 691,916 12,295
Other assets ..................................................... -- 50,037
---------------------------------
Total assets ............................................... 786,312,028 66,586,199
---------------------------------
Liabilities:
Payables:
Investment securities purchased ............................... 2,342,210 1,863,450
Capital shares redeemed ....................................... 2,891,628 158,855
Affiliates .................................................... 567,761 74,086
Unaffiliated transfer agent fees .............................. 189,928 46,318
Accrued expenses and other liabilities ........................... 34,374 41,760
---------------------------------
Total liabilities .......................................... 6,025,901 2,184,469
---------------------------------
Net assets, at value .................................... $ 780,286,127 $ 64,401,730
=================================
Net assets consist of:
Paid-in capital ............................................... $ 435,111,673 $ 92,328,723
Undistributed net investment income (loss) .................... (531,331) (321,112)
Net unrealized appreciation (depreciation) .................... 299,876,494 16,272,618
Accumulated net realized gain (loss) .......................... 45,829,291 (43,878,499)
---------------------------------
Net assets, at value .................................... $ 780,286,127 $ 64,401,730
=================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 75
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2007 (unaudited)
---------------------------------
FRANKLIN
FRANKLIN NATURAL TECHNOLOGY
RESOURCES FUND FUND
---------------------------------
CLASS A:
Net assets, at value ............................................. $ 660,407,963 $ 37,188,597
=================================
Shares outstanding ............................................... 14,025,074 5,417,398
=================================
Net asset value per share a ...................................... $ 47.09 $ 6.86
=================================
Maximum offering price per share (net asset value
per share / 94.25%) ........................................... $ 49.96 $ 7.28
=================================
CLASS B:
Net assets, at value ............................................. -- $ 4,015,319
=================================
Shares outstanding ............................................... -- 612,870
=================================
Net asset value and maximum offering price per share a ........... -- $ 6.55
=================================
CLASS C:
Net assets, at value ............................................. $ 59,367,891 $ 11,610,755
=================================
Shares outstanding ............................................... 1,273,423 1,779,042
=================================
Net asset value and maximum offering price per share a ........... $ 46.62 $ 6.53
=================================
CLASS R:
Net assets, at value ............................................. -- $ 8,145,699
=================================
Shares outstanding ............................................... -- 1,196,674
=================================
Net asset value and maximum offering price per share a ........... -- $ 6.81
=================================
ADVISOR CLASS:
Net assets, at value ............................................. $ 60,510,273 $ 3,441,360
=================================
Shares outstanding ............................................... 1,222,470 488,848
=================================
Net asset value and maximum offering price per share a ........... $ 49.50 $ 7.04
=================================
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
76 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the six months ended October 31, 2007 (unaudited)
---------------------------------------------------
FRANKLIN FRANKLIN GLOBAL FRANKLIN GLOBAL
BIOTECHNOLOGY COMMUNICATIONS HEALTH CARE
DISCOVERY FUND FUND FUND
---------------------------------------------------
Investment income:
Dividends: (net of foreign taxes)
Unaffiliated issuers ..................................................... $ 24,347 $ 446,476 $ 449,116
Sweep Money Fund (Note 7) ................................................ 448,802 49,879 187,771
Interest ................................................................... -- 9,350 --
Income from securities loaned - net ........................................ 29,981 -- --
---------------------------------------------------
Total investment income ................................................ 503,130 505,705 636,887
---------------------------------------------------
Expenses:
Management fees (Note 3a) .................................................. 1,043,483 323,496 418,960
Administrative fees (Note 3b) .............................................. 299,992 -- --
Distribution fees: (Note 3c)
Class A .................................................................. 528,902 107,004 136,356
Class B .................................................................. -- 19,850 54,597
Class C .................................................................. -- 83,746 139,599
Transfer agent fees (Note 3e) .............................................. 702,824 139,962 224,668
Custodian fees (Note 4) .................................................... 4,714 18,945 4,152
Reports to shareholders .................................................... 100,037 19,190 18,929
Registration and filing fees ............................................... 12,024 19,143 19,447
Professional fees .......................................................... 13,974 15,185 17,305
Trustees' fees and expenses ................................................ 23,453 601 848
Other ...................................................................... 7,006 2,677 4,265
---------------------------------------------------
Total expenses ......................................................... 2,736,409 749,799 1,039,126
Expense reductions (Note 4) ............................................ (16) -- (336)
---------------------------------------------------
Net expenses ......................................................... 2,736,393 749,799 1,038,790
---------------------------------------------------
Net investment income (loss) ....................................... (2,233,263) (244,094) (401,903)
---------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .............................................................. 43,364,970 5,913,569 5,433,987
Foreign currency transactions ............................................ (9,754) (18,118) (9,907)
---------------------------------------------------
Net realized gain (loss) ........................................... 43,355,216 5,895,451 5,424,080
---------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments .............................................................. (34,236,741) 17,975,668 5,925,788
Translation of assets and liabilities denominated in foreign currencies .. 733 56,479 (26,689)
Change in deferred taxes on unrealized appreciation ........................ -- 35,634 --
---------------------------------------------------
Net change in unrealized appreciation (depreciation) ............... (34,236,008) 18,067,781 5,899,099
---------------------------------------------------
Net realized and unrealized gain (loss) ....................................... 9,119,208 23,963,232 11,323,179
---------------------------------------------------
Net increase (decrease) in net assets resulting from operations ............... $ 6,885,945 $ 23,719,138 $ 10,921,276
===================================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 77
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the six months ended October 31, 2007 (unaudited)
--------------------------------
FRANKLIN
FRANKLIN NATURAL TECHNOLOGY
RESOURCES FUND FUND
--------------------------------
Investment income:
Dividends: (net of foreign taxes)
Unaffiliated issuers .................................................................... $ 3,218,164 $ 71,028
Sweep Money Fund (Note 7) ............................................................... 522,521 94,292
Interest .................................................................................. 92,799 --
--------------------------------
Total investment income ............................................................... 3,833,484 165,320
--------------------------------
Expenses:
Management fees (Note 3a) ................................................................. 1,559,290 143,082
Administrative fees (Note 3b) ............................................................. -- 54,426
Distribution fees: (Note 3c)
Class A ................................................................................. 855,814 50,857
Class B ................................................................................. -- 18,314
Class C ................................................................................. 220,945 46,978
Class R ................................................................................. -- 17,909
Transfer agent fees (Note 3e) ............................................................. 482,551 104,067
Custodian fees (Note 4) ................................................................... 13,878 1,441
Reports to shareholders ................................................................... 64,328 9,753
Registration and filing fees .............................................................. 52,412 25,496
Professional fees ......................................................................... 15,053 10,840
Trustees' fees and expenses ............................................................... 3,219 315
Other ..................................................................................... 9,164 3,221
--------------------------------
Total expenses ........................................................................ 3,276,654 486,699
Expense reductions (Note 4) ........................................................... (224) (267)
--------------------------------
Net expenses ........................................................................ 3,276,430 486,432
--------------------------------
Net investment income (loss) ...................................................... 557,054 (321,112)
--------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................................................. 23,052,746 3,179,745
Foreign currency transactions ........................................................... 1,063,735 15,033
--------------------------------
Net realized gain (loss) .......................................................... 24,116,481 3,194,778
--------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................................................. 119,426,605 6,236,000
Translation of assets and liabilities denominated in foreign currencies ................. 30,709 1,126
Change in deferred taxes on unrealized appreciation .......................................... -- 9,227
--------------------------------
Net change in unrealized appreciation (depreciation) .............................. 119,457,314 6,246,353
--------------------------------
Net realized and unrealized gain (loss) ...................................................... 143,573,795 9,441,131
--------------------------------
Net increase (decrease) in net assets resulting from operations .............................. $ 144,130,849 $ 9,120,019
================================
78 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------------------------------------------
FRANKLIN BIOTECHNOLOGY FRANKLIN GLOBAL
DISCOVERY FUND COMMUNICATIONS FUND
----------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED OCTOBER 31, 2007 YEAR ENDED
(UNAUDITED) APRIL 30, 2007 (UNAUDITED) APRIL 30, 2007
----------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ......................... $ (2,233,263) $ (4,592,009) $ (244,094) $ (900,635)
Net realized gain (loss) from investments and
foreign currency transactions ...................... 43,355,216 54,608,556 5,895,451 4,387,626
Net change in unrealized appreciation
(depreciation) on investments, translation of
assets and liabilities denominated in foreign
currencies, and deferred taxes ..................... (34,236,008) 7,936,152 18,067,781 9,233,362
----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ...................... 6,885,945 57,952,699 23,719,138 12,720,353
----------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .............................................. (43,526,256) (111,263,337) 9,626,856 (6,194,219)
Class B .............................................. -- -- (29,179) (367,372)
Class C .............................................. -- -- 6,861,471 1,525,299
----------------------------------------------------------------------
Total capital share transactions ....................... (43,526,256) (111,263,337) 16,459,148 (5,036,292)
----------------------------------------------------------------------
Redemption fees ........................................ 410 1,045 9,833 463
----------------------------------------------------------------------
Net increase (decrease) in net assets ............ (36,639,901) (53,309,593) 40,188,119 7,684,524
Net assets:
Beginning of period .................................... 457,390,433 510,700,026 91,234,795 83,550,271
----------------------------------------------------------------------
End of period .......................................... $ 420,750,532 $ 457,390,433 $ 131,422,914 $ 91,234,795
======================================================================
Undistributed net investment income (loss) included
in net assets:
End of period .......................................... $ (4,341,320) $ (2,108,057) $ (244,094) $ --
======================================================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 79
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
----------------------------------------------------------------------
FRANKLIN FRANKLIN
GLOBAL HEALTH CARE FUND NATURAL RESOURCES FUND
----------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED OCTOBER 31, 2007 YEAR ENDED
(UNAUDITED) APRIL 30, 2007 (UNAUDITED) APRIL 30, 2007
----------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ......................... $ (401,903) $ (288,510) $ 557,054 $ 1,203,210
Net realized gain (loss) from investments and
foreign currency transactions ...................... 5,424,080 5,185,955 24,116,481 36,347,295
Net change in unrealized appreciation
(depreciation) on investments and translation of
assets and liabilities denominated in foreign
currencies ......................................... 5,899,099 10,403,584 119,457,314 17,707,705
----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ...................... 10,921,276 15,301,029 144,130,849 55,258,210
----------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .............................................. -- (553,705) -- (2,856,076)
Class C .............................................. -- -- -- (52,187)
Advisor Class ........................................ -- -- -- (405,605)
Net realized gains:
Class A .............................................. -- -- -- (25,584,138)
Class C .............................................. -- -- -- (1,602,283)
Advisor Class ........................................ -- -- -- (2,601,097)
----------------------------------------------------------------------
Total distributions to shareholders .................... -- (553,705) -- (33,101,386)
----------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .............................................. (2,033,694) (8,520,514) 62,235,884 18,193,042
Class B .............................................. (1,210,165) (4,005,527) -- --
Class C .............................................. 16,906 (4,147,133) 15,915,554 13,197,324
Advisor Class ........................................ -- -- (3,737,583) 5,349,382
----------------------------------------------------------------------
Total capital share transactions ....................... (3,226,953) (16,673,174) 74,413,855 36,739,748
----------------------------------------------------------------------
Redemption fees ........................................ 31 1,010 3,973 6,226
----------------------------------------------------------------------
Net increase (decrease) in net assets ............ 7,694,354 (1,924,840) 218,548,677 58,902,798
Net assets:
Beginning of period .................................... 147,683,323 149,608,163 561,737,450 502,834,652
----------------------------------------------------------------------
End of period .......................................... $ 155,377,677 $ 147,683,323 $ 780,286,127 $ 561,737,450
======================================================================
Undistributed net investment income (loss) included
in net assets:
End of period .......................................... $ (421,922) $ (20,019) $ (531,331) $ (1,088,385)
======================================================================
80 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
----------------------------------
FRANKLIN TECHNOLOGY FUND
----------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED
(UNAUDITED) APRIL 30, 2007
----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ............................................................. $ (321,112) $ (584,760)
Net realized gain (loss) from investments and foreign currency transactions .............. 3,194,778 4,580,221
Net change in unrealized appreciation (depreciation) on investments, translation of assets
and liabilities denominated in foreign currencies, and deferred taxes .................. 6,246,353 (3,214,047)
----------------------------------
Net increase (decrease) in net assets resulting from operations ...................... 9,120,019 781,414
----------------------------------
Capital share transactions: (Note 2)
Class A .................................................................................. 1,805,842 (4,043,306)
Class B .................................................................................. (150,258) (805,152)
Class C .................................................................................. 1,239,262 (916,576)
Class R .................................................................................. 682,770 2,319,494
Advisor Class ............................................................................ 221,113 (449,503)
----------------------------------
Total capital share transactions ........................................................... 3,798,729 (3,895,043)
----------------------------------
Redemption fees ............................................................................ 2,090 403
----------------------------------
Net increase (decrease) in net assets ................................................ 12,920,838 (3,113,226)
Net assets:
Beginning of period ........................................................................ 51,480,892 54,594,118
----------------------------------
End of period .............................................................................. $ 64,401,730 $ 51,480,892
==================================
Undistributed net investment income (loss) included in net assets:
End of period .............................................................................. $ (321,112) $ --
==================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 81
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (Trust) is registered under the Investment Company Act
of 1940, as amended, (1940 Act) as an open-end investment company, consisting of
ten separate funds. All funds included in this report (Funds) are diversified,
except the Franklin Biotechnology Discovery Fund and the Franklin Global Health
Care Fund, which are non-diversified. The financial statements of the remaining
funds in the Trust are presented separately. 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 C CLASS A, CLASS B, CLASS C,
CLASS A CLASS A, CLASS B & CLASS C & ADVISOR CLASS CLASS R & ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------
Franklin Biotechnology Franklin Global Franklin Natural Franklin Technology Fund
Discovery Fund Communications Fund Resources Fund
Franklin Global Health Care Fund
The following summarizes the Funds' significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Trust has procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by
82 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
the fund. The investment manager monitors price movements following the close of
trading in foreign stock markets through a series of country specific market
proxies (such as baskets of American Depository Receipts, futures contracts and
exchange traded funds). These price movements are measured against established
trigger thresholds for each specific market proxy to assist in determining if an
event has occurred. If such an event occurs, the securities may be valued using
fair value procedures, which may include the use of independent pricing
services. All security valuation procedures are approved by the Trust's Board of
Trustees.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Trust's Board of Trustees.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS
The Funds may purchase securities on a when-issued or delayed delivery basis,
with payment and delivery scheduled for a future date. These transactions are
subject to market fluctuations and are subject to the risk that the value at
delivery may be more or less than the trade date purchase price. Although the
Funds will generally purchase these securities with the intention of holding the
securities, they may sell the securities before the settlement date. Sufficient
assets have been segregated for these securities.
Semiannual Report | 83
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. FOREIGN CURRENCY CONTRACTS
When the Funds purchase or sell foreign securities they may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
E. SECURITIES LENDING
The Funds may loan securities to certain brokers through a securities lending
agent for which they receive initial cash collateral against the loaned
securities in an amount equal to at least 102% of the market value of the loaned
securities. Collateral is maintained over the life of the loan in an amount not
less than 100% of the market value of loaned securities, as determined at the
close of fund business each day; any additional collateral required due to
changes in security values is delivered to the fund on the next business day.
The collateral is invested in short-term instruments as noted in the Statement
of Investments. The fund receives interest income from the investment of cash
collateral, adjusted by lender fees and broker rebates. The fund bears the risk
of loss with respect to the investment of the collateral and the securities
loaned. The securities lending agent has agreed to indemnify the fund in the
case of default of any securities borrower.
F. INCOME AND DEFERRED TAXES
No provision has been made for U.S. income taxes because it is each fund's
policy to qualify as a regulated investment company under the Internal Revenue
Code and to distribute to shareholders substantially all of its taxable income
and net realized gains.
Foreign securities held by the Funds may be subject to foreign taxation on
dividend and interest income received. Foreign taxes, if any, are recorded based
on the tax regulations and rates that exist in the foreign markets in which the
Funds invest.
The Funds may be subject to a tax imposed on net realized gains on securities of
certain foreign countries. The Funds record an estimated deferred tax liability
for net unrealized gains on these securities in an amount that would be payable
if the securities were disposed of on the valuation date.
G. 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
84 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
are accrued daily. Dividend income is recorded on the ex-dividend date except
that certain dividends from foreign securities are recognized as soon as the
Funds are notified of the ex-dividend date. Distributions to shareholders are
recorded on the ex-dividend date and are determined according to income tax
regulations (tax basis). Distributable earnings determined on a tax basis may
differ from earnings recorded in accordance with accounting principles generally
accepted in the United States of America. These differences may be permanent or
temporary. Permanent differences are reclassified among capital accounts to
reflect their tax character. These reclassifications have no impact on net
assets or the results of operations. Temporary differences are not reclassified,
as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class. Differences in per share
distributions, by class, are generally due to differences in class specific
expenses.
H. 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.
I. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the funds and accounted for as an addition to paid-in
capital.
J. 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.
Semiannual Report | 85
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At October 31, 2007, there were an unlimited number of shares authorized
(without par value). Transactions in the Funds' shares were as follows:
-----------------------------------------------------------
FRANKLIN BIOTECHNOLOGY FRANKLIN GLOBAL
DISCOVERY FUND COMMUNICATIONS FUND
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
CLASS A SHARES:
Six months ended October 31, 2007
Shares sold ........................... 281,953 $ 17,718,672 1,377,238 $ 20,697,512
Shares redeemed ....................... (978,161) (61,244,928) (763,047) (11,070,656)
-----------------------------------------------------------
Net increase (decrease) ............... (696,208) $ (43,526,256) 614,191 $ 9,626,856
===========================================================
Year ended April 30, 2007
Shares sold ........................... 684,637 $ 38,520,776 1,278,780 $ 15,066,774
Shares redeemed ....................... (2,644,531) (149,784,113) (1,823,629) (21,260,993)
-----------------------------------------------------------
Net increase (decrease) ............... (1,959,894) $(111,263,337) (544,849) $ (6,194,219)
===========================================================
CLASS B SHARES:
Six months ended October 31, 2007
Shares sold ......................................................... 45,182 $ 655,179
Shares redeemed ..................................................... (47,822) (684,358)
----------------------------
Net increase (decrease) ............................................. (2,640) $ (29,179)
============================
Year ended April 30, 2007
Shares sold ......................................................... 35,712 $ 400,915
Shares redeemed ..................................................... (69,970) (768,287)
----------------------------
Net increase (decrease) ............................................. (34,258) $ (367,372)
============================
CLASS C SHARES:
Six months ended October 31, 2007
Shares sold ......................................................... 606,237 $ 8,832,383
Shares redeemed ..................................................... (143,022) (1,970,912)
----------------------------
Net increase (decrease) ............................................. 463,215 $ 6,861,471
============================
Year ended April 30, 2007
Shares sold ......................................................... 436,500 $ 4,953,095
Shares redeemed ..................................................... (304,673) (3,427,796)
----------------------------
Net increase (decrease) ............................................. 131,827 $ 1,525,299
============================
-----------------------------------------------------------
FRANKLIN GLOBAL FRANKLIN NATURAL
HEALTH CARE FUND RESOURCES FUND
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
CLASS A SHARES:
Six months ended October 31, 2007
Shares sold ........................... 350,233 $ 9,221,621 2,962,838 $ 124,731,665
Shares issued in reinvestment
of distributions ................... -- -- 30 1,024
Shares redeemed ....................... (428,637) (11,255,315) (1,515,503) (62,496,805)
-----------------------------------------------------------
Net increase (decrease) ............... (78,404) $ (2,033,694) 1,447,365 $ 62,235,884
===========================================================
Year ended April 30, 2007
Shares sold ........................... 693,613 $ 16,493,153 4,464,059 $ 154,409,349
Shares issued in reinvestment
of distributions ................... 20,121 487,548 741,546 25,583,342
Shares redeemed ....................... (1,077,555) (25,501,215) (4,892,244) (161,799,649)
-----------------------------------------------------------
Net increase (decrease) ............... (363,821) $ (8,520,514) 313,361 $ 18,193,042
===========================================================
86 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-----------------------------------------------------------
FRANKLIN GLOBAL FRANKLIN NATURAL
HEALTH CARE FUND RESOURCES FUND
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
CLASS B SHARES:
Six months ended October 31, 2007
Shares sold ........................... 8,017 $ 201,326
Shares redeemed ....................... (56,861) (1,411,491)
----------------------------
Net increase (decrease) ............... (48,844) $ (1,210,165)
============================
Year ended April 30, 2007
Shares sold ........................... 19,662 $ 437,596
Shares redeemed ....................... (200,223) (4,443,123)
----------------------------
Net increase (decrease) ............... (180,561) $ (4,005,527)
============================
CLASS C SHARES:
Six months ended October 31, 2007
Shares sold ........................... 113,829 $ 2,806,520 522,703 $ 21,938,139
Shares redeemed ....................... (113,686) (2,789,614) (146,549) (6,022,585)
-----------------------------------------------------------
Net increase (decrease) ............... 143 $ 16,906 376,154 $ 15,915,554
===========================================================
Year ended April 30, 2007
Shares sold ........................... 204,428 $ 4,589,298 669,819 $ 22,697,002
Shares issued in reinvestment
of distributions ................... -- -- 44,060 1,513,899
Shares redeemed ....................... (398,354) (8,736,431) (333,141) (11,013,577)
-----------------------------------------------------------
Net increase (decrease) ............... (193,926) $ (4,147,133) 380,738 $ 13,197,324
===========================================================
ADVISOR CLASS SHARES:
Six months ended October 31, 2007
Shares sold ......................................................... 115,726 $ 5,072,028
Shares redeemed ..................................................... (205,230) (8,809,611)
----------------------------
Net increase (decrease) ............................................. (89,504) $ (3,737,583)
============================
Year ended April 30, 2007
Shares sold ......................................................... 136,121 $ 4,955,890
Shares issued in reinvestment
of distributions ................................................. 78,570 2,841,858
Shares redeemed ..................................................... (70,411) (2,448,366)
----------------------------
Net increase (decrease) ............................................. 144,280 $ 5,349,382
============================
----------------------------
FRANKLIN
TECHNOLOGY FUND
----------------------------
SHARES AMOUNT
----------------------------
CLASS A SHARES:
Six months ended October 31, 2007
Shares sold ......................................................... 1,175,954 $ 7,437,835
Shares redeemed ..................................................... (918,684) (5,631,993)
----------------------------
Net increase (decrease) ............................................. 257,270 $ 1,805,842
============================
Year ended April 30, 2007
Shares sold ......................................................... 1,516,369 $ 8,007,088
Shares redeemed ..................................................... (2,272,769) (12,050,394)
----------------------------
Net increase (decrease) ............................................. (756,400) $ (4,043,306)
============================
Semiannual Report | 87
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-------------------------
FRANKLIN
TECHNOLOGY FUND
-------------------------
SHARES AMOUNT
-------------------------
CLASS B SHARES:
Six months ended October 31, 2007
Shares sold .................................... 61,776 $ 361,847
Shares redeemed ................................ (88,943) (512,105)
-------------------------
Net increase (decrease) ........................ (27,167) $ (150,258)
=========================
Year ended April 30, 2007
Shares sold .................................... 55,357 $ 283,061
Shares redeemed ................................ (214,708) (1,088,213)
-------------------------
Net increase (decrease) ........................ (159,351) $ (805,152)
=========================
CLASS C SHARES:
Six months ended October 31, 2007
Shares sold .................................... 560,540 $ 3,388,176
Shares redeemed ................................ (366,553) (2,148,914)
-------------------------
Net increase (decrease) ........................ 193,987 $ 1,239,262
=========================
Year ended April 30, 2007
Shares sold .................................... 342,790 $ 1,730,845
Shares redeemed ................................ (517,517) (2,647,421)
-------------------------
Net increase (decrease) ........................ (174,727) $ (916,576)
=========================
CLASS R SHARES:
Six months ended October 31, 2007
Shares sold .................................... 323,820 $ 1,986,964
Shares redeemed ................................ (212,369) (1,304,194)
-------------------------
Net increase (decrease) ........................ 111,451 $ 682,770
=========================
Year ended April 30, 2007
Shares sold .................................... 801,466 $ 4,367,098
Shares redeemed ................................ (387,168) (2,047,604)
-------------------------
Net increase (decrease) ........................ 414,298 $ 2,319,494
=========================
ADVISOR CLASS SHARES:
Six months ended October 31, 2007
Shares sold .................................... 120,425 $ 800,228
Shares redeemed ................................ (87,044) (579,115)
-------------------------
Net increase (decrease) ........................ 33,381 $ 221,113
=========================
Year ended April 30, 2007
Shares sold .................................... 74,940 $ 414,441
Shares redeemed ................................ (155,573) (863,944)
-------------------------
Net increase (decrease) ........................ (80,633) $ (449,503)
=========================
88 | Semiannual Report
Franklin Strategic Series
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 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
All funds, except the Franklin Technology Fund, pay an investment management fee
to Advisers based on the average daily net assets of each of the funds as
follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
0.440% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% In excess of $15 billion
The Franklin Technology Fund pays an investment management fee to Advisers based
on the average daily net assets of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.550% Up to and including $500 million
0.450% Over $500 million, up to and including $1 billion
0.400% Over $1 billion, up to and including $1.5 billion
0.350% Over $1.5 billion, up to and including $6.5 billion
0.325% Over $6.5 billion, up to and including $11.5 billion
0.300% Over $11.5 billion, up to and including $16.5 billion
0.290% Over $16.5 billion, up to and including $19 billion
0.280% Over $19 billion, up to and including $21.5 billion
0.270% In excess of $21.5 billion
B. ADMINISTRATIVE FEES
The Franklin Biotechnology Discovery Fund pays an administrative fee to FT
Services based on the fund's average daily net assets as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.150% Up to and including $200 million
0.135% Over $200 million, up to and including $700 million
0.100% Over $700 million, up to and including $1.2 billion
0.075% In excess of $1.2 billion
Semiannual Report | 89
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
B. ADMINISTRATIVE FEES (CONTINUED)
The Franklin Technology Fund pays an administrative fee to FT Services of 0.20%
per year of the average daily net assets of the fund.
Under an agreement with Advisers, FT Services provides administrative services
to the Franklin Global Communications Fund, the Franklin Global Health Care Fund
and the Franklin Natural Resources Fund. The fee is paid by Advisers based on
average daily net assets, and is not an additional expense of the funds.
C. DISTRIBUTION FEES
The Trust's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the funds' Class A reimbursement distribution plans, the
funds reimburse Distributors for costs incurred in connection with the
servicing, sale and distribution of each fund's shares up to the maximum annual
plan rate for each class. Under the Class A reimbursement distribution plans,
costs exceeding the maximum for the current plan year cannot be reimbursed in
subsequent periods.
In addition, under the funds' compensation distribution plans, the funds pay
Distributors for costs incurred in connection with the servicing, sale and
distribution of each fund's shares up to the maximum annual plan rate for each
class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
-------------------------------------------------------------------------------
FRANKLIN FRANKLIN GLOBAL FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH NATURAL TECHNOLOGY
DISCOVERY FUND FUND CARE FUND RESOURCES FUND FUND
-------------------------------------------------------------------------------
Reimbursement Plans:
Class A ............. 0.35% 0.25% 0.25% 0.35% --
Compensation Plans:
Class A ............. -- -- -- -- 0.35%
Class B ............. -- 1.00% 1.00% -- 1.00%
Class C ............. -- 1.00% 1.00% 1.00% 1.00%
Class R ............. -- -- -- -- 0.50%
The Franklin Biotechnology Discovery Fund reimburses Distributors up to 0.35%
when the fund is open to new investors and up to 0.25% when the fund is closed
to new investors. This fund was reopened to new investors September 1, 2001, and
will remain open until net assets reach $2 billion.
90 | Semiannual Report
Franklin Strategic Series
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 GLOBAL FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH
DISCOVERY FUND FUND CARE FUND
------------------------------------------------
Sales charges retained net of commissions paid to
unaffiliated broker/dealers ......................... $30,585 $34,848 $25,152
Contingent deferred sales charges retained ............. $ 1,274 $ 8,919 $ 5,395
--------------------------------
FRANKLIN FRANKLIN
NATURAL TECHNOLOGY
RESOURCES FUND FUND
--------------------------------
Sales charges retained net of commissions paid to
unaffiliated broker/dealers ......................... $342,026 $17,295
Contingent deferred sales charges retained ............. $ 12,809 $ 1,641
E. TRANSFER AGENT FEES
For the period ended October 31, 2007, 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 GLOBAL FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH NATURAL TECHNOLOGY
DISCOVERY FUND FUND CARE FUND RESOURCES FUND FUND
------------------------------------------------------------------------------
Transfer agent fees ... $415,519 $98,608 $149,082 $320,377 $74,360
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 October 31, 2007, the
custodian fees were reduced as noted in the Statements of Operations.
Semiannual Report | 91
Franklin Strategic Series
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 April 30, 2007, the capital loss carryforwards were as
follows:
---------------------------------------------------------------
FRANKLIN FRANKLIN GLOBAL FRANKLIN FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH TECHNOLOGY
DISCOVERY FUND FUND CARE FUND FUND
---------------------------------------------------------------
Capital loss carryforwards expiring in:
2010 ............................... $ 22,121,469 $ 60,808,017 $ -- $18,243,659
2011 ............................... 238,490,545 52,123,016 -- 28,445,452
2012 ............................... 72,400,540 -- 13,046,350 --
---------------------------------------------------------------
$ 333,012,554 $ 112,931,033 $ 13,046,350 $46,689,111
===============================================================
For tax purposes, realized currency losses occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At April 30, 2007, the Franklin Global Communications Fund and the
Franklin Global Health Care Fund deferred realized currency losses of $18,768
and $5,083, respectively.
At October 31, 2007, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
--------------------------------------------------
FRANKLIN FRANKLIN GLOBAL FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH
DISCOVERY FUND FUND CARE FUND
--------------------------------------------------
Cost of investments ............................. $ 306,697,326 $ 79,463,130 $ 112,908,247
==================================================
Unrealized appreciation ......................... $ 150,990,318 $ 52,896,799 $ 47,043,623
Unrealized depreciation ......................... (34,359,213) (1,695,009) (2,743,413)
--------------------------------------------------
Net unrealized appreciation (depreciation) ...... $ 116,631,105 $ 51,201,790 $ 44,300,210
==================================================
----------------------------------
FRANKLIN FRANKLIN
NATURAL TECHNOLOGY
RESOURCES FUND FUND
----------------------------------
Cost of investments ............................. $ 480,415,941 $ 49,242,689
==================================
Unrealized appreciation ......................... $ 298,644,505 $ 16,252,980
Unrealized depreciation ......................... (6,029,182) (363,230)
----------------------------------
Net unrealized appreciation (depreciation) ...... $ 292,615,323 $ 15,889,750
==================================
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions, passive
foreign investment company shares, and foreign taxes paid on net realized gains.
92 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INCOME TAXES (CONTINUED)
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, passive foreign investment company shares, and foreign taxes paid
on net realized gains.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended October 31, 2007, were as follows:
-------------------------------------------------------------------------------
FRANKLIN FRANKLIN GLOBAL FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH NATURAL TECHNOLOGY
DISCOVERY FUND FUND CARE FUND RESOURCES FUND FUND
-------------------------------------------------------------------------------
Purchases ........ $60,518,928 $52,342,967 $14,580,063 $181,810,715 $30,966,245
Sales ............ $89,227,771 $39,481,271 $15,107,644 $106,783,520 $23,502,556
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (Sweep Money Fund), an open-end investment company managed by
Advisers. Management fees paid by the Funds are reduced on assets invested in
the Sweep Money Fund, in an amount not to exceed the management and
administrative fees paid by the Sweep Money Fund.
8. RESTRICTED SECURITIES
The Funds may invest in securities that are restricted under the Securities Act
of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed
upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Funds may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
Semiannual Report | 93
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. RESTRICTED SECURITIES (CONTINUED)
At October 31, 2007, the funds held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Trust's Board of Trustees as reflecting fair value,
as follows:
- -------------------------------------------------------------------------------------------------------
SHARES/ ACQUISITION
WARRANTS ISSUER DATES COST VALUE
- -------------------------------------------------------------------------------------------------------
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
279,590 a Critical Therapeutics Inc., wts., 10/26/11 ..... 10/26/06 $ -- $ 156,570
1,128,271 Fibrogen Inc., pfd., E ......................... 5/19/00 5,065,937 5,607,506
2,250,000 MacroChem Corp. ................................ 10/01/07 1,350,000 1,584,000
-----------
TOTAL RESTRICTED SECURITIES (1.75% of Net Assets) ...................... $7,348,076
===========
FRANKLIN GLOBAL COMMUNICATIONS FUND
124,248 Dilithium Networks Inc., depository receipt,
D, pfd., 144A, PIPES ......................... 7/13/06 $ 289,500 $ 428,655
===========
TOTAL RESTRICTED SECURITIES (0.33% of Net Assets)
FRANKLIN GLOBAL HEALTH CARE FUND
250,000 MacroChem Corp. ................................ 10/01/07 $ 150,000 $ 176,000
184,092 Masimo Corp. ................................... 8/08/07 675,004 5,459,686
-----------
TOTAL RESTRICTED SECURITIES (3.63% of Net Assets) ...................... $5,635,686
===========
FRANKLIN NATURAL RESOURCES FUND
199,375 Energy Coal Resources, 144A ............... 11/16/05 - 5/05/06 $3,118,103 $1,724,594
===========
TOTAL RESTRICTED SECURITIES (0.22% of Net Assets)
a The Franklin Biotechnology Discovery Fund also invests in unrestricted
securities of the issuer, valued at $906,360 as of October 31, 2007.
9. OTHER CONSIDERATIONS
Officers, directors or employees of the Franklin Natural Resources Fund's
Investment Manager, may serve from time to time as members of bondholders'
steering committees or official creditors' committees. Such participation may
result in the possession by the Investment Manager of material non-public
information which, pursuant to the Fund's policies and the requirements of
applicable securities laws, could prevent the Fund from trading in the
securities of such companies for limited or extended periods of time.
10. REGULATORY AND LITIGATION MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), relating to certain practices in the mutual fund industry,
including late trading, market timing and marketing support
94 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
10. REGULATORY AND LITIGATION MATTERS (CONTINUED)
payments to securities dealers who sell fund shares ("marketing support"),
Franklin Resources, Inc. and certain of its subsidiaries (collectively, the
"Company"), entered into settlements with certain of those regulators and
governmental entities. Specifically, the Company entered into settlements with
the SEC, among others, concerning market timing and marketing support.
On June 6, 2007, the SEC posted for public comment the proposed plan of
distribution for the market timing settlement. Once the SEC approves the final
plan of distribution, disbursements of settlement monies will be made promptly
to individuals who were shareholders of the designated funds during the relevant
period, in accordance with the terms and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits relate to the industry
practices referenced above.
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Trust, it is
committed to making the Trust or their shareholders whole, as appropriate.
11. NEW ACCOUNTING PRONOUNCEMENTS
The Funds adopted Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" (FIN 48), on October 31, 2007. FIN 48
clarifies the accounting for uncertainty in tax positions taken or expected to
be taken in a tax return. FIN 48 provides guidance on the measurement,
recognition, classification and disclosure of tax positions, along with
accounting for the related interest and penalties. The Funds have reviewed the
tax positions for open tax years (tax years ended April 30, 2005 - 2007) and
have determined that the implementation of FIN 48 did not have a material impact
on the Funds' financial statements.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
(SFAS 157), which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Trust believes the adoption of SFAS 157
will have no material impact on its financial statements.
Semiannual Report | 95
Franklin Strategic Series
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Trust has established Proxy Voting Policies and Procedures (Policies) that
the Trust uses to determine how to vote proxies relating to portfolio
securities. Shareholders may view the Trust's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Trust's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Trust files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
96 | Semiannual Report
Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON FUNDS
INTERNATIONAL
Mutual European 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 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund 1
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small Cap Growth Fund II 2
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin Balance Sheet Investment Fund 1
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 1
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 8
Colorado
Connecticut
Florida 8
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 7
Michigan 7
Minnesota 7
Missouri
New Jersey
New York 8
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance
Products Trust 9
1. The fund is open only to existing shareholders and select retirement plans.
2. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
3. The fund is a continuously offered, closed-end fund. Shares may be purchased
daily; there is no daily redemption. However, each quarter, pending board
approval, the fund will authorize the repurchase of 5%-25% of the outstanding
number of shares. Investors may tender all or a portion of their shares during
the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy remained the
same.
6. For investors subject to the alternative minimum tax, a small portion of fund
dividends may be taxable. Distributions of capital gains are generally taxable.
7. The fund invests primarily in insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA) and
limited-term, intermediate-term and money market portfolios (CA and NY).
9.The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
05/07 Not part of the semiannual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at franklintempleton.com.
See inside for details.
SEMIANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN STRATEGIC SERIES
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
FSS2 S2007 12/07
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
OCTOBER 31, 2007
- --------------------------------------------------------------------------------
A series of Franklin Strategic Series
- --------------------------------------------------------------------------------
SEMIANNUAL REPORT AND SHAREHOLDER LETTER INCOME
- --------------------------------------------------------------------------------
WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
FRANKLIN
STRATEGIC INCOME FUND Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
- --------------------------------------------------------------------------------
[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
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
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Not part of the semiannual report
Contents
SHAREHOLDER LETTER ........................................................ 1
SEMIANNUAL REPORT
Franklin Strategic Income Fund ............................................ 3
Performance Summary ....................................................... 9
Your Fund's Expenses ...................................................... 12
Financial Highlights and Statement of Investments ......................... 14
Financial Statements ...................................................... 36
Notes to Financial Statements ............................................. 40
Shareholder Information ................................................... 53
Semiannual Report
Franklin Strategic Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Strategic Income Fund seeks a
high level of current income, with capital appreciation over the long term as a
secondary objective. The Fund uses an active asset allocation process and
invests at least 65% of its assets in U.S. and foreign debt securities,
including those in emerging markets, which include all varieties of fixed and
floating rate income securities, including bonds, mortgage securities and other
asset-backed securities, and convertible securities.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Strategic Income Fund's semiannual report
for the period ended October 31, 2007.
PERFORMANCE OVERVIEW
Franklin Strategic Income Fund - Class A posted a cumulative total return of
+2.95% for the six months under review. The Fund outperformed its benchmark, the
Lehman Brothers (LB) U.S. Aggregate Index, which had a +2.68% total return for
the same period. 1 During the same period, the Fund outperformed its peers as
measured by the Lipper Multi-Sector Income Funds Classification Average's +1.56%
total return. 2 You can find the Fund's long-term performance data in the
Performance Summary beginning on page 9.
1. Source: Lehman Brothers Inc. The LB U.S. Aggregate Index represents
securities that are SEC-registered, taxable and dollar denominated. The index
covers the U.S. investment grade fixed-rate bond market, with index components
for government and corporate securities, mortgage pass-through securities and
asset-backed securities. All issues included must have at least one year to
final maturity and must be rated investment grade (Baa3 or better) by Moody's
Investors Service. They must also be dollar denominated and nonconvertible.
Total return includes price appreciation/depreciation and income as a percentage
of the original investment. The index is rebalanced monthly by market
capitalization. The index is unmanaged and includes reinvestment of any income
or distributions. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
2. Source: Lipper Inc. The Lipper Multi-Sector Income Funds Classification
Average is calculated by averaging the total returns of all funds within the
Lipper Multi-Sector Income Funds classification in the Lipper Open-End
underlying funds universe. Lipper Multi-Sector Income Funds are defined as funds
that seek current income by allocating assets among different fixed income
securities sectors (not primarily in one sector except for defensive purposes),
including U.S. and foreign governments, with a significant portion rated below
investment grade. For the six-month period ended 10/31/07, there were 134 funds
in this category. Lipper calculations do not include sales charges or expense
subsidization by a fund's manager. Fund performance relative to the average may
have differed if these or other factors had been considered. The Lipper average
includes reinvestment of any income or distributions. Past performance does not
guarantee future results. One cannot invest directly in a Lipper average, nor is
the average representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 19.
Semiannual Report | 3
ECONOMIC AND MARKET OVERVIEW
The U.S. economy grew at a healthy pace for the six-month period ended October
31, 2007. A surge in exports fueled second quarter 2007 growth to 3.8%
annualized. In the third quarter, GDP growth advanced at an estimated 4.9%
annualized rate, the fastest pace in over a year. Over the reporting period,
consumer spending and personal income remained positive contributors to economic
expansion, while a declining housing market, softening employment environment
and tighter credit conditions weighed on overall economic growth.
Oil prices exhibited continued volatility and reached a historical high in
October. Core inflation, which excludes food and energy costs, remained modest.
For October 2007, core Consumer Price Index (CPI) had a 12-month increase of
2.2%. 3 The Federal Reserve Board's (Fed's) preferred measure of inflation, the
core personal consumption expenditures price index, reported a 12-month increase
of 1.7%. 4 These current levels of inflation lessened near-term concerns and
provided the Fed with more flexibility to respond to ongoing economic pressures
resulting from tightening credit conditions, energy prices and a weaker dollar.
With continued investor uncertainty, the Fed remained committed to act in an
effort to restore some normalcy to the U.S. financial markets. In August, the
Fed cut the discount rate (the Fed's interest rate charged to member banks) 50
basis points from 6.25% to 5.75%. In September and October, the Fed made further
cuts, bringing the discount rate to 5.00%. After cutting the federal funds
target rate 50 basis points in September, the Fed lowered the rate an additional
25 basis points to 4.50% at its October meeting. With the latest rate reduction
the Fed still seemed concerned about inflation and gave strong indications that
further interest rate cuts were not a certainty. The committee noted that "after
this action, the upside risks to inflation roughly balance the downside risks to
growth." The Fed stated it will continue to "assess the effects of financial and
other developments on economic prospects and will act as needed to foster price
stability and sustainable economic growth."
3. Source: Bureau of Labor Statistics.
4. Source: Bureau of Economic Analysis.
4 | Semiannual Report
Over the period, investors sought relative safety in short-term U.S. Treasuries,
Treasury yields declined and the yield curve steepened. Short-term, two- and
five-year yields declined moderately, with the two-year bill yielding 3.94% at
the end of October, down from 4.60% six months earlier. The 10-year U.S.
Treasury note ended October yielding 4.48%, compared with 4.63% at the beginning
of the period.
Outside the U.S., global economic growth remained strong, demonstrating
resilience to higher commodity prices, including oil, and a deteriorating U.S.
housing sector. Notably, the period was marked by the diverging growth paths of
developing and developed economies as many emerging markets continued to
experience robust growth.
Asian economies posted stronger economic growth relative to the U.S. China led
the region, followed by India, Singapore, Malaysia and South Korea. Rising food
and commodity prices added to inflationary pressures generated by continued
strong growth. Some countries, including China and South Korea, sought a more
appropriate policy mix between interest rates and currency appreciation to curb
inflationary pressures. China hiked interest rates 90 basis points and South
Korea 50 during the period.
Interest rate tightening in Europe was relatively more aggressive. However,
financial market volatility caused greater uncertainty in the central banks'
forecasts, encouraging a wait-and-see approach. The European Central Bank and
the U.K. each hiked policy rates 100 basis points, while Norway boosted rates
100 basis points, Sweden 75 and Poland 50. These interest rate increases were
partly a response to tightened labor markets across Europe. Relatively strong
eurozone GDP growth in the second quarter of 2007 continued to provide support
to other European economies given the region's high integration through trade.
Poland, Norway and Sweden registered higher GDP growth than the eurozone.
INVESTMENT STRATEGY
The Fund uses an active asset allocation strategy, investing across the fixed
income market in sectors including high yield and investment grade corporate
bonds, international developed and emerging market bonds, U.S. government and
agency securities, mortgage- and other asset-backed securities, corporate bank
loans, convertible securities and preferred stocks. In addition to our bottom-up
fundamental analysis of market sectors, industries and issuers, we evaluate
country risk, business cycles, yield curves, and values between and within
markets as part of our portfolio construction process.
Semiannual Report | 5
DIVIDEND DISTRIBUTIONS*
5/1/07-10/31/07
- ------------------------------------------------------------------------------------
DIVIDEND PER SHARE
---------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS
- ------------------------------------------------------------------------------------
May 5.00 cents 4.64 cents 4.66 cents 4.79 cents 5.21 cents
- ------------------------------------------------------------------------------------
June 5.00 cents 4.64 cents 4.66 cents 4.80 cents 5.21 cents
- ------------------------------------------------------------------------------------
July 5.00 cents 4.64 cents 4.66 cents 4.80 cents 5.21 cents
- ------------------------------------------------------------------------------------
August 5.00 cents 4.64 cents 4.66 cents 4.80 cents 5.21 cents
- ------------------------------------------------------------------------------------
September 5.00 cents 4.66 cents 4.67 cents 4.78 cents 5.21 cents
- ------------------------------------------------------------------------------------
October 5.00 cents 4.66 cents 4.67 cents 4.78 cents 5.21 cents
====================================================================================
TOTAL 30.00 CENTS 27.88 CENTS 27.98 CENTS 28.75 CENTS 31.26 CENTS
- ------------------------------------------------------------------------------------
* All Fund distributions will vary depending upon current market conditions, and
past distributions are not indicative of future trends.
MANAGER'S DISCUSSION
For the six-month period under review, Franklin Strategic Income Fund
outperformed the L.B. U.S. Aggregate Index and the Lipper Multi-Sector Income
Funds Classification Average. Outperformance was driven largely by the Fund's
positioning in non-dollar government bond positions, which benefited from
significant U.S. dollar depreciation during the period. 1,2
Beginning in June 2007, global fixed income markets experienced significant
volatility largely due to the deteriorating U.S. housing market. Rising
delinquencies and defaults for residential subprime mortgages put pressure on
prices and ratings of various structured vehicles that held these instruments.
This led to rising risk aversion across the credit markets as many financial
institutions sought to reduce their overall credit risk.
With a lower federal funds target rate and heightened level of market risk
aversion, Treasury bond prices rallied. The five-year Treasury yield dropped
from 4.51% to 4.16%, and the 10-year declined from 4.63% to 4.48% over the
reporting period. Given the decline in U.S. interest rates, Treasury bonds
provided above-coupon returns during the period. Agency mortgage-backed
securities lagged Treasury performance given widening mortgage spreads as well
as increased prepayment sensitivity. Asset-backed securities (ABS) significantly
underperformed Treasuries, driven largely by weakness in securities tied to
subprime home equity loans. Consequently, the Fund's heavier exposure to agency
mortgages than to Treasuries was a drag on performance. The Fund did add to its
exposure in commercial mortgage-backed securities as well as credit-card ABS as
valuations decreased in these sectors while our assessment of fundamentals
remained supportive.
6 | Semiannual Report
PORTFOLIO BREAKDOWN
Based on Total Net Assets
- --------------------------------------------------------------------------------
10/31/07 4/30/07
- --------------------------------------------------------------------------------
High Yield Corporate Bonds & Preferred Stocks 26.5% 28.8%
- --------------------------------------------------------------------------------
Mortgages & Other Asset-Backed Bonds 15.4% 13.5%
- --------------------------------------------------------------------------------
Floating Rate Bank Loans 15.1% 13.3%
- --------------------------------------------------------------------------------
Other International Bonds (non-$US) 13.3% 14.6%
- --------------------------------------------------------------------------------
International Developed Country Bonds (non-$US) 10.0% 9.8%
- --------------------------------------------------------------------------------
U.S. Government & Agency Bonds 7.3% 9.3%
- --------------------------------------------------------------------------------
Investment Grade Corporate Bonds 5.0% 2.7%
- --------------------------------------------------------------------------------
Convertible Securities 3.2% 3.0%
- --------------------------------------------------------------------------------
Emerging Market Bonds ($US) 1.9% 2.7%
- --------------------------------------------------------------------------------
Common Stocks and Warrants 0.0%* 0.0%*
- --------------------------------------------------------------------------------
Short-Term Investments & Other Net Assets 2.3% 2.3%
- --------------------------------------------------------------------------------
* Rounds to less than 0.1% of net assets.
In terms of more credit-sensitive fixed income sectors, the high yield corporate
bond and leveraged corporate bank loan sectors experienced declining prices and
widening yield spreads during the period. Although fundamentals for
noninvestment-grade issuers remained supportive (with default rates near
historical lows), a significant forward supply of lower-rated loans and
corporate bond issues, primarily to fund announced leveraged-buyout
transactions, weighed on these markets. In addition, funding for structured
vehicles, which had been the largest buyer of leveraged bank loans, dried up as
their liability costs rose. Overall, spreads for high yield corporate bonds rose
from 3.02% to 4.38% by period-end while secondary prices for leveraged bank
loans fell below par. 5 The Fund reduced its exposure to high yield corporate
bonds in favor of bank loans over the past several quarters. Overall, these
sectors generated similar total returns over the past six months. However,
following the sell-off, we believed valuations for senior secured bank loans
became increasingly attractive. As a result, the Fund raised its exposure to
loans during the period.
Spreads for U.S. dollar-denominated emerging market bonds also rose, though to a
lesser extent than high yield corporate bonds, during the period. The Fund's low
exposure to this sector, at 1.9% of total net assets, was therefore beneficial
to performance, particularly relative to the peer group. Lastly, the Fund sought
to take advantage of dislocations in the investment-grade financial corporate
sector to add exposure to select bank and brokerage bonds at
5. Source: Credit Suisse.
Semiannual Report | 7
historically cheap valuations. We believed that the earnings pressure and
write-offs for these issuers would not ultimately threaten these institutions'
viability.
The non-U.S. dollar sovereign fixed income sector was the standout performer
during the period as the U.S. dollar experienced significant, broad-based
depreciation. The structural imbalances caused by the U.S.'s current account
deficit as well as the reduction in short-term U.S. interest rates relative to
certain other countries caused pressure on the U.S. dollar. Throughout the
period, we held a significant weighting in non-U.S. dollar bonds based on our
belief that these trends could cause further longer-term weakness in the dollar.
Over the period, gains in the Fund's non-dollar bond positions included Canada,
Brazil, Norway and Poland.
The Fund added exposure to the convertible securities sector during the period,
leveraging the expertise of Franklin Templeton Investments' equity and
convertible research groups. However, overall exposure to this asset class
compared with other asset classes remained relatively low at period-end.
Thank you for your continued participation in Franklin Strategic Income Fund. We
look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Christopher J. Molumphy
Christopher J. Molumphy, CFA
[PHOTO OMITTED] /s/ Eric G. Takaha
Eric G. Takaha, CFA
Portfolio Management Team
Franklin Strategic Income Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2007, 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.
8 | Semiannual Report
Performance Summary as of 10/31/07
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: FRSTX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.01 $10.49 $10.48
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (5/1/07-10/31/07)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.3000
- --------------------------------------------------------------------------------------------------
CLASS B (SYMBOL: FKSBX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.01 $10.53 $10.52
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (5/1/07-10/31/07)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.2788
- --------------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FSGCX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.01 $10.49 $10.48
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (5/1/07-10/31/07)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.2798
- --------------------------------------------------------------------------------------------------
CLASS R (SYMBOL: FKSRX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.01 $10.47 $10.46
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (5/1/07-10/31/07)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.2875
- --------------------------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FKSAX) CHANGE 10/31/07 4/30/07
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.01 $10.50 $10.49
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (5/1/07-10/31/07)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.3126
- --------------------------------------------------------------------------------------------------
Semiannual Report | 9
Performance Summary (CONTINUED)
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER
SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS
R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS
MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.95% +8.28% +66.56% +94.24%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -1.47% +3.64% +9.79% +6.41%
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +3.83% +9.67% +6.11%
- ---------------------------------------------------------------------------------------------------------------
Distribution Rate 5 5.47%
- ---------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 5.24%
- ---------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.94%
- ---------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.72% +7.91% +63.34% +76.30%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -1.28% +3.91% +10.04% +6.63%
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +3.94% +9.89% +6.56%
- ---------------------------------------------------------------------------------------------------------------
Distribution Rate 5 5.31%
- ---------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 5.08%
- ---------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.34%
- ---------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/98)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.74% +7.86% +63.31% +76.13%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +1.74% +6.86% +10.31% +6.14%
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +6.99% +10.18% +6.07%
- ---------------------------------------------------------------------------------------------------------------
Distribution Rate 5 5.34%
- ---------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 5.08%
- ---------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.34%
- ---------------------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.93% +8.03% +64.71% +61.22%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +2.93% +8.03% +10.50% +8.54%
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +8.17% +10.34% +8.46%
- ---------------------------------------------------------------------------------------------------------------
Distribution Rate 5 5.48%
- ---------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 5.22%
- ---------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.19%
- ---------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 8 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +3.17% +8.65% +68.76% +98.37%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +3.17% +8.65% +11.03% +7.09%
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/07) 4 +8.68% +10.88% +6.80%
- ---------------------------------------------------------------------------------------------------------------
Distribution Rate 5 5.95%
- ---------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 5.73%
- ---------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.69%
- ---------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
10 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. HIGH YIELDS REFLECT THE HIGHER CREDIT RISKS ASSOCIATED WITH
CERTAIN LOWER-RATED SECURITIES HELD IN THE PORTFOLIO. FLOATING-RATE LOANS AND
HIGH-YIELD CORPORATE BONDS ARE RATED BELOW INVESTMENT GRADE AND ARE SUBJECT TO
GREATER RISK OF DEFAULT, WHICH COULD RESULT IN LOSS OF PRINCIPAL -- A RISK THAT
MAY BE HEIGHTENED IN A SLOWING ECONOMY. THE RISKS OF FOREIGN SECURITIES INCLUDE
CURRENCY FLUCTUATIONS AND POLITICAL UNCERTAINTY. THE FUND'S PROSPECTUS ALSO
INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Past expense reductions by the Fund's manager increased the Fund's total
returns. Without these reductions, the Fund's total returns would have been
lower.
2. Cumulative total return represents the change in value of an investment over
the periods indicated.
3. Average annual total return represents the average annual change in value of
an investment over the periods indicated. Six-month return has not been
annualized.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Distribution rate is based on an annualization of the respective class's
October dividend and the maximum offering price (NAV for Classes B, C, R and
Advisor) per share on 10/31/07.
6. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/07.
7. Figures are as stated in the Fund's prospectus current as of the date of this
report.
8. Effective 9/1/99, the Fund began offering Advisor Class shares, which do not
have sales charges or a Rule 12b-1 plan. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 8/12/99,
a restated figure is used based upon the Fund's Class A performance, excluding
the effect of Class A's maximum initial sales charge, but reflecting the effect
of the Class A Rule 12b-1 fees; and (b) for periods after 8/11/99, actual
Advisor Class performance is used reflecting all charges and fees applicable to
that class. Since 9/1/99 (commencement of sales), the cumulative and average
annual total returns of Advisor Class shares were +87.62% and +7.96%.
Semiannual Report | 11
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table 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.
12 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/07 VALUE 10/31/07 PERIOD* 5/1/07-10/31/07
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,029.50 $4.49
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.71 $4.47
- ----------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.20 $6.52
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.70 $6.50
- ----------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.40 $6.52
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.70 $6.50
- ----------------------------------------------------------------------------------------------------------------
CLASS R
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,029.30 $5.76
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.46 $5.74
- ----------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,031.70 $3.22
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.97 $3.20
- ----------------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.88%; B: 1.28%; C: 1.28%; R: 1.13%; and Advisor:
0.63%), multiplied by the average account value over the period, multiplied by
184/366 to reflect the one-half year period.
Semiannual Report | 13
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN STRATEGIC INCOME FUND
--------------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning of
period ......................... $ 10.48 $ 10.20 $ 10.24 $ 10.09 $ 9.65 $ 9.36
--------------------------------------------------------------------------------------
Income from investment
operations a:
Net investment income b ......... 0.28 0.53 0.51 0.53 0.56 0.65
Net realized and unrealized
gains (losses) ................. 0.03 0.35 0.05 0.27 0.54 0.35
--------------------------------------------------------------------------------------
Total from investment operations .. 0.31 0.88 0.56 0.80 1.10 1.00
--------------------------------------------------------------------------------------
Less distributions from net
investment income .............. (0.30) (0.60) (0.60) (0.65) (0.66) (0.71)
--------------------------------------------------------------------------------------
Redemption fees ................... -- f -- f -- f -- f -- --
--------------------------------------------------------------------------------------
Net asset value, end of period .... $ 10.49 $ 10.48 $ 10.20 $ 10.24 $ 10.09 $ 9.65
======================================================================================
Total return c .................... 2.95% 9.09% 5.69% 8.10% 11.69% 11.60%
RATIOS TO AVERAGE NET ASSETS d
Expenses before waiver and
payments by affiliates ......... 0.88% 0.92% 0.91% 0.92% 0.92% 0.96%
Expenses net of waiver and
payments by affiliates ......... 0.88% g 0.92% g 0.91% g 0.91% g 0.92% g 0.88%
Net investment income ............. 5.39% 5.22% 5.05% 5.18% 5.53% 7.30%
SUPPLEMENTAL DATA
Net assets, end of period
(000's) ........................ $1,851,775 $1,521,459 $998,182 $696,198 $446,282 $336,607
Portfolio turnover rate ........... 18.59% 42.24% 34.10% 48.57% 66.57% 67.65%
Portfolio turnover rate
excluding mortgage dollar
rolls e ........................ 18.59% 41.50% 33.59% 39.91% 52.35% 53.25%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e See Note 1(e) regarding mortgage dollar rolls.
f Amount rounds to less than $0.01 per share.
g Benefit of expense reduction rounds to less than 0.01%.
14 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
--------------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning of
period ......................... $ 10.52 $ 10.24 $ 10.27 $ 10.12 $ 9.67 $ 9.38
--------------------------------------------------------------------------------------
Income from investment
operations a:
Net investment income b ......... 0.26 0.49 0.47 0.49 0.52 0.61
Net realized and unrealized
gains (losses) ................. 0.03 0.35 0.06 0.27 0.55 0.35
--------------------------------------------------------------------------------------
Total from investment operations .. 0.29 0.84 0.53 0.76 1.07 0.96
--------------------------------------------------------------------------------------
Less distributions from net
investment income .............. (0.28) (0.56) (0.56) (0.61) (0.62) (0.67)
--------------------------------------------------------------------------------------
Redemption fees ................... -- f -- f -- f -- f -- --
--------------------------------------------------------------------------------------
Net asset value, end of period .... $ 10.53 $ 10.52 $ 10.24 $ 10.27 $ 10.12 $ 9.67
======================================================================================
Total return c .................... 2.72% 8.62% 5.34% 7.65% 11.33% 11.14%
RATIOS TO AVERAGE NET ASSETS d
Expenses before waiver and
payments by affiliates ......... 1.28% 1.32% 1.31% 1.32% 1.32% 1.36%
Expenses net of waiver and
payments by affiliates ......... 1.28% g 1.32% g 1.31% g 1.31% g 1.32% g 1.28%
Net investment income ............. 4.99% 4.82% 4.65% 4.78% 5.13% 6.90%
SUPPLEMENTAL DATA
Net assets, end of period
(000's) ........................ $ 103,431 $ 104,523 $104,477 $110,502 $ 91,974 $ 61,254
Portfolio turnover rate ........... 18.59% 42.24% 34.10% 48.57% 66.57% 67.65%
Portfolio turnover rate
excluding mortgage dollar
rolls e ........................ 18.59% 41.50% 33.59% 39.91% 52.35% 53.25%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e See Note 1(e) regarding mortgage dollar rolls.
f Amount rounds to less than $0.01 per share.
g Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 15
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
--------------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning of
period ......................... $ 10.48 $ 10.20 $ 10.24 $ 10.09 $ 9.64 $ 9.36
--------------------------------------------------------------------------------------
Income from investment
operations a:
Net investment income b ......... 0.26 0.49 0.47 0.49 0.52 0.61
Net realized and unrealized
gains (losses) ................. 0.03 0.35 0.05 0.27 0.55 0.34
--------------------------------------------------------------------------------------
Total from investment
operations ..................... 0.29 0.84 0.52 0.76 1.07 0.95
--------------------------------------------------------------------------------------
Less distributions from net
investment income .............. (0.28) (0.56) (0.56) (0.61) (0.62) (0.67)
--------------------------------------------------------------------------------------
Redemption fees ................... -- f -- f -- f -- f -- --
--------------------------------------------------------------------------------------
Net asset value, end of period .... $ 10.49 $ 10.48 $ 10.20 $ 10.24 $ 10.09 $ 9.64
======================================================================================
Total return c .................... 2.74% 8.67% 5.27% 7.67% 11.36% 11.18%
RATIOS TO AVERAGE NET ASSETS d
Expenses before waiver and
payments by affiliates ......... 1.28% 1.32% 1.31% 1.32% 1.32% 1.36%
Expenses net of waiver and
payments by affiliates ......... 1.28% g 1.32% g 1.31% g 1.31% g 1.32% g 1.28%
Net investment income ............. 4.99% 4.82% 4.65% 4.78% 5.13% 6.90%
SUPPLEMENTAL DATA
Net assets, end of period
(000's) ........................ $ 564,303 $ 437,026 $294,412 $213,741 $151,823 $ 86,153
Portfolio turnover rate ........... 18.59% 42.24% 34.10% 48.57% 66.57% 67.65%
Portfolio turnover rate
excluding mortgage dollar
rolls e ........................ 18.59% 41.50% 33.59% 39.91% 52.35% 53.25%
a The amount shown for a share outstanding throughout the period may not correla
te with the Statement of Operations for the period due to the timing of sales
and repurchase of the Fund shares in relation to income earned and/ or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e See Note 1(e) regarding mortgage dollar rolls.
f Amount rounds to less than $0.01 per share.
g Benefit of expense reduction rounds to less than 0.01%.
16 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
--------------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
CLASS R (UNAUDITED) 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning of
period ......................... $ 10.46 $ 10.18 $ 10.22 $ 10.07 $ 9.63 $ 9.34
--------------------------------------------------------------------------------------
Income from investment
operations a:
Net investment income b ......... 0.27 0.51 0.49 0.51 0.53 0.63
Net realized and unrealized
gains (losses) ................. 0.03 0.35 0.05 0.26 0.55 0.35
--------------------------------------------------------------------------------------
Total from investment
operations ..................... 0.30 0.86 0.54 0.77 1.08 0.98
--------------------------------------------------------------------------------------
Less distributions from net
investment income .............. (0.29) (0.58) (0.58) (0.62) (0.64) (0.69)
--------------------------------------------------------------------------------------
Redemption fees ................... -- f -- f -- f -- f -- --
--------------------------------------------------------------------------------------
Net asset value, end of period .... $ 10.47 $ 10.46 $ 10.18 $ 10.22 $ 10.07 $ 9.63
======================================================================================
Total return c .................... 2.93% 8.74% 5.44% 7.86% 11.45% 11.35%
RATIOS TO AVERAGE NET ASSETS d
Expenses before waiver and
payments by affiliates ......... 1.13% 1.17% 1.16% 1.17% 1.17% 1.21%
Expenses net of waiver and
payments by affiliates ......... 1.13% g 1.17% g 1.16% g 1.16% g 1.17% g 1.13%
Net investment income ............. 5.14% 4.97% 4.80% 4.93% 5.28% 7.05%
SUPPLEMENTAL DATA
Net assets, end of period
(000's) ........................ $ 88,711 $ 65,527 $ 32,971 $ 17,859 $ 7,324 $ 1,558
Portfolio turnover rate ........... 18.59% 42.24% 34.10% 48.57% 66.57% 67.65%
Portfolio turnover rate
excluding mortgage dollar
rolls e ........................ 18.59% 41.50% 33.59% 39.91% 52.35% 53.25%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e See Note 1(e) regarding mortgage dollar rolls.
f Amount rounds to less than $0.01 per share.
g Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 17
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
--------------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED APRIL 30,
ADVISOR CLASS (UNAUDITED) 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning of
period ......................... $ 10.49 $ 10.21 $ 10.24 $ 10.09 $ 9.65 $ 9.36
--------------------------------------------------------------------------------------
Income from investment
operations a:
Net investment income b ......... 0.29 0.56 0.54 0.56 0.58 0.69
Net realized and unrealized
gains (losses) ................. 0.03 0.35 0.06 0.26 0.54 0.33
--------------------------------------------------------------------------------------
Total from investment
operations ..................... 0.32 0.91 0.60 0.82 1.12 1.02
--------------------------------------------------------------------------------------
Less distributions from net
investment income .............. (0.31) (0.63) (0.63) (0.67) (0.68) (0.73)
--------------------------------------------------------------------------------------
Redemption fees ................... -- f -- f -- f -- f -- --
--------------------------------------------------------------------------------------
Net asset value, end of period .... $ 10.50 $ 10.49 $ 10.21 $ 10.24 $ 10.09 $ 9.65
======================================================================================
Total return c .................... 3.17% 9.25% 6.05% 8.37% 11.97% 11.87%
RATIOS TO AVERAGE NET ASSETS d
Expenses before waiver and
payments by affiliates ......... 0.63% 0.67% 0.66% 0.67% 0.67% 0.71%
Expenses net of waiver and
payments by affiliates ......... 0.63% g 0.67% g 0.66% g 0.66% g 0.67% g 0.63%
Net investment income ............. 5.64% 5.47% 5.30% 5.43% 5.78% 7.55%
SUPPLEMENTAL DATA
Net assets, end of period
(000's) ........................ $ 102,068 $ 66,745 $ 57,367 $ 60,489 $ 39,784 $ 34,224
Portfolio turnover rate ........... 18.59% 42.24% 34.10% 48.57% 66.57% 67.65%
Portfolio turnover rate
excluding mortgage dollar
rolls e ........................ 18.59% 41.50% 33.59% 39.91% 52.35% 53.25%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing of
sales and repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e See Note 1(e) regarding mortgage dollar rolls.
f Amount rounds to less than $0.01 per share.
g Benefit of expense reduction rounds to less than 0.01%.
18 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 93.6%
COMMON STOCKS 0.0% a
PRODUCER MANUFACTURING 0.0% a
b,c,d Cambridge Industries Liquidating Trust Interest ........ United States 516,372 $ 568
b,c,d VS Holdings Inc. ....................................... United States 64,666 --
-------------------
TOTAL COMMON STOCKS (COST $64,666) ..................... 568
-------------------
CONVERTIBLE PREFERRED STOCKS 1.6%
CONSUMER DURABLES 0.3%
c General Motors Corp., 1.50%, cvt. pfd., D .............. United States 240,000 7,110,000
-------------------
ENERGY MINERALS 0.2%
Chesapeake Energy Corp., 6.25%, cvt. pfd. .............. United States 20,000 6,353,480
-------------------
FINANCE 0.8%
Affiliated Managers Group Inc., 5.10%, cvt. pfd. ....... United States 135,000 7,711,875
c CIT Group Inc., 7.75%, cvt. pfd. ....................... United States 261,600 6,582,406
E*TRADE Financial Corp., 6.125%, cvt. pfd. ............. United States 400,000 6,504,000
-------------------
20,798,281
-------------------
NON-ENERGY MINERALS 0.3%
Freeport-McMoRan Copper & Gold Inc., 6.75%, cvt.
pfd. ................................................ United States 50,000 8,528,000
-------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $41,240,594) 42,789,761
-------------------
-----------------------
PRINCIPAL AMOUNT e
-----------------------
f,g SENIOR FLOATING RATE INTERESTS 15.1%
COMMERCIAL SERVICES 1.9%
Affiliated Computer Services Inc.,
Additional Term Loan, 6.753% - 7.122%, 3/20/13 ...... United States 6,472,314 6,390,375
Term Loan B, 6.819%, 3/20/13 ........................ United States 601,290 593,678
ARAMARK Corp.,
Synthetic L/C, 5.198%, 1/26/14 ...................... United States 633,057 620,775
Term Loan B, 7.198%, 1/26/14 ........................ United States 8,722,277 8,553,065
Dealer Computer Services Inc. (Reynolds & Reynolds),
First Lien Term Loan, 7.198%, 10/26/12 .............. United States 6,979,457 6,856,549
First Data Corp., Term Loan B-2, 7.96%, 9/24/14 ........ United States 10,000,000 9,622,300
Idearc Inc.,
Term Loan A, 6.86%, 11/17/13 ........................ United States 2,100,000 2,064,342
Term Loan B, 7.36%, 11/17/14 ........................ United States 6,149,560 6,100,548
Laureate Education Inc., Closing Date Term Loan,
8.729%, 9/25/14 ...................................... United States 5,107,507 4,995,142
R.H. Donnelley Inc., Term Loan D-2, 6.46% - 7.22%,
6/30/11 .............................................. United States 5,396,735 5,371,209
-------------------
51,167,983
-------------------
COMMUNICATIONS 0.6%
Alaska Communications Systems Holdings Inc.,
2005 Incremental Loan, 6.948%, 2/01/12 .............. United States 146,800 144,006
2006 Incremental Loan, 6.948%, 2/01/12 .............. United States 265,000 259,931
Term Loan, 6.948%, 2/01/12 .......................... United States 5,568,200 5,462,237
Windstream Corp., Tranche B-1, 6.714%, 7/17/13 ......... United States 10,780,917 10,747,065
-------------------
16,613,239
-------------------
Semiannual Report | 19
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT e VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
f,g SENIOR FLOATING RATE INTERESTS (CONTINUED)
CONSUMER DURABLES 0.4%
Jarden Corp.,
Term Loan B1, 6.948%, 1/24/12 ....................... United States 2,898,006 $ 2,836,597
Term Loan B2, 6.948%, 1/24/12 ....................... United States 5,321,917 5,204,994
Stile Acquisition Corp. (Masonite), Canadian Term
Loan, 7.084% - 7.231%, 4/05/13 ....................... Canada 2,255,834 2,105,641
Stile U.S. Acquisition Corp. (Masonite), U.S. Term
Loan, 7.084% - 7.231%, 4/05/13 ....................... United States 2,259,677 2,109,228
-------------------
12,256,460
-------------------
CONSUMER NON-DURABLES 1.0%
CBRL Group (Cracker Barrel),
Term Loan B1, 6.86%, 4/27/13 ........................ United States 6,046,241 5,874,890
Term Loan B2 (Delayed Draw), 6.86% - 8.00%,
4/27/13 ........................................... United States 262,120 254,692
Constellation Brands Inc., Term Loan B, 6.875%,
6/05/13 .............................................. United States 6,978,333 6,908,690
Dean Foods Co., Term Loan B, 6.70%, 4/02/14 ............ United States 8,563,484 8,293,306
The William Carter Co., Term Loan B, 6.253% -
6.46%, 7/14/12 ....................................... United States 6,349,664 6,275,500
-------------------
27,607,078
-------------------
CONSUMER SERVICES 3.8%
Citadel Broadcasting Corp., Term Loan B, 6.385% -
6.825%, 6/12/14 ...................................... United States 9,791,032 9,388,425
CSC Holdings Inc. (Cablevision), Incremental Term
Loan, 6.875%, 3/29/13 ................................ United States 7,316,988 7,146,063
Green Valley Ranch Gaming LLC, Term Loan B, 7.198%
- 7.541%, 2/16/14 .................................... United States 618,320 603,048
Insight Midwest Holdings, Term Loan B, 7.00%,
4/02/14 .............................................. United States 6,740,000 6,612,277
MCC Iowa,
Term Loan D-1, 6.61%, 1/31/15 ....................... United States 3,566,088 3,464,668
Term Loan D-2 (Delayed Draw), 6.61%, 1/31/15 ........ United States 1,740,101 1,690,612
Mediacom LLC, Term Loan C, 6.61%, 1/31/15 .............. United States 3,068,080 2,980,824
National CineMedia LLC, Term Loan, 7.46%, 2/13/15 ...... United States 7,485,000 7,184,852
OSI Restaurant Partners LLC (Outback),
Pre-Funded Revolving Credit, 5.523%, 6/14/13 ........ United States 714,727 685,895
Term Loan B, 7.063%, 6/14/14 ........................ United States 9,339,513 8,965,466
Penn National Gaming Inc., Term Loan B, 6.76% -
7.11%, 10/03/12 ...................................... United States 7,171,190 7,115,254
Readers Digest Association Inc., Term Loan B,
7.385% - 7.58%, 3/02/14 .............................. United States 582,079 551,764
h Regal Cinemas Corp., Term Loan, 6.698%, 10/27/13 ....... United States 8,674,629 8,504,866
Sabre Inc., Term Loan B, 6.96%, 9/30/14 ................ United States 4,373,134 4,124,872
Tribune Co., Term Loan B, 8.244%, 5/16/14 .............. United States 8,628,375 8,024,475
h Univision Communications Inc.,
i Delayed Draw Term Loan, 7.003%, 9/29/14 ............. United States 316,778 231,326
Term Loan B, 7.21%, 9/29/14 ......................... United States 8,550,336 8,129,146
UPC Financing Partnership, Term Loan N, 7.13%,
12/31/14 ............................................. Netherlands 6,430,000 6,172,028
20 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT e VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
f,g SENIOR FLOATING RATE INTERESTS (CONTINUED)
CONSUMER SERVICES (CONTINUED)
VML U.S. Finance LLC (Venetian Macau),
Delayed Draw, 7.45%, 5/25/12 ........................ Macau 2,924,815 $ 2,877,433
New Project Term Loans, 7.45%, 5/25/13 .............. Macau 1,847,222 1,810,222
h Term Loan B, 7.45%, 5/24/13 ......................... Macau 5,372,963 5,267,545
-------------------
101,531,061
-------------------
ELECTRONIC TECHNOLOGY 0.4%
h Flextronics International USA Inc.,
Term Loan A, 8.75%, 10/01/14 ........................ United States 5,991,769 5,931,971
Term Loan A-1, 8.75%, 10/01/14 ...................... United States 1,721,773 1,704,589
h Hawker Beechcraft Inc.,
Synthetic L/C, 5.198%, 3/26/14 ...................... United States 353,555 345,575
Term Loan B, 6.819% - 7.198%, 3/26/14 ............... United States 4,157,484 4,063,650
-------------------
12,045,785
-------------------
ENERGY MINERALS 0.3%
Citgo Petroleum Corp., Term Loan B, 6.221%,
11/15/12 ............................................. United States 6,670,126 6,644,713
Western Refining Inc., Term Loan B, 6.569%, 5/30/14 .... United States 1,620,938 1,602,248
-------------------
8,246,961
-------------------
FINANCE 0.6%
Avis Budget Car Rental LLC, Term Loan, 6.21%,
4/19/12 .............................................. United States 6,221,735 6,064,077
Hertz Corp.,
Credit Link, 5.238%, 12/21/12 ....................... United States 484,444 476,950
Term Loan B, 6.86% - 7.00%, 12/21/12 ................ United States 2,692,593 2,650,938
TD Ameritrade Holding Corp., Term Loan B, 6.25%,
12/31/12 ............................................. United States 6,566,733 6,448,729
-------------------
15,640,694
-------------------
HEALTH SERVICES 1.2%
Community Health Systems Inc., Term Loan, 7.755% -
7.76%, 7/25/14 ....................................... United States 7,181,611 7,069,650
Fresenius Medical Care Holdings Inc., Term Loan
B, 6.573% - 6.973%, 3/31/13 .......................... United States 6,978,232 6,877,326
HCA Inc., Term Loan B-1, 7.448%, 11/18/13 .............. United States 8,480,514 8,323,369
Health Management Associates Inc., Term Loan B,
6.503% - 6.948%, 2/28/14 ............................. United States 6,612,493 6,353,283
LifePoint Hospitals Inc., Term Loan B, 7.165%,
4/15/12 .............................................. United States 2,812,042 2,754,620
-------------------
31,378,248
-------------------
HEALTH TECHNOLOGY 0.2%
h Bausch and Lomb Inc.,
Delayed Draw Term Loan, 9.75%, 4/26/15 .............. United States 460,000 460,662
Term Loan B, 9.75%, 4/26/15 ......................... United States 1,840,000 1,842,650
Carestream Health Inc., Term Loan, 6.753% -
7.327%, 4/30/13 ...................................... United States 2,450,000 2,360,477
-------------------
4,663,789
-------------------
Semiannual Report | 21
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT e VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
f,g SENIOR FLOATING RATE INTERESTS (CONTINUED)
INDUSTRIAL SERVICES 0.3%
Allied Waste North America Inc.,
Credit Link, 5.43%, 3/28/14 ......................... United States 1,702,475 $ 1,681,756
Term Loan B, 6.279% - 6.89%, 1/15/12 ................ United States 3,165,119 3,126,599
Knight Inc. (Kinder Morgan), Term Loan B, 6.26%,
5/30/14 .............................................. United States 4,642,545 4,546,259
-------------------
9,354,614
-------------------
PROCESS INDUSTRIES 1.5%
Celanese U.S. Holdings LLC, Dollar Term Loan,
6.979%, 4/02/14 ...................................... United States 7,338,125 7,254,177
h Domtar Corp., Term Loan, 6.475%, 3/07/14 ............... United States 7,050,216 6,901,527
Georgia-Pacific Corp.,
Additional Term Loan, 6.948% - 7.474%, 12/20/12 ..... United States 2,046,766 2,000,857
Term Loan B, 6.948% - 7.474%, 12/20/12 .............. United States 4,728,576 4,597,547
Hexion Specialty Chemicals Inc.,
Term Loan C-1, 7.50%, 5/03/13 ....................... United States 5,568,059 5,467,556
Term Loan C-2, 7.50%, 5/03/13 ....................... Netherlands 1,209,541 1,187,709
Ineos U.S. Finance LLC,
Term Loan B2, 7.357% - 7.451%, 12/16/13 ............. United States 1,959,408 1,919,769
Term Loan C2, 7.857% - 7.951%, 12/23/14 ............. United States 1,959,408 1,915,733
Lyondell Chemical Co., Term Loan, 6.25% - 6.856%,
8/16/13 .............................................. United States 6,072,843 6,039,260
Nalco Co., Term Loan B, 6.872% - 7.12%, 11/04/10 ....... United States 4,318,089 4,305,005
-------------------
41,589,140
-------------------
PRODUCER MANUFACTURING 1.1%
Allison Transmission, Term Loan B, 8.00% - 8.48%,
8/07/14 .............................................. United States 6,500,000 6,353,165
Baldor Electric Co., Term Loan B, 6.563% - 7.125%,
1/31/14 .............................................. United States 5,876,733 5,803,861
Bucyrus International Inc., Tranche B Dollar Term
Loan, 6.628% - 7.114%, 5/04/14 ....................... United States 583,538 572,952
Dresser Inc., Term Loan B, 7.319% - 8.01%, 5/04/14 ..... United States 7,958,054 7,839,240
Key Safety Systems Inc., Term Loan B, 7.27% - 7.45%,
3/10/14 ............................................. United States 582,075 563,967
Oshkosh Truck Corp., Term Loan B, 7.45%, 12/06/13 ...... United States 9,940,481 9,820,897
-------------------
30,954,082
-------------------
REAL ESTATE INVESTMENT TRUSTS 0.4%
Capital Automotive REIT, Term Loan B, 6.88%,
12/15/10 ............................................. United States 6,715,918 6,569,847
Macerich Co., Term Loan B, 6.688%, 4/25/10 ............. United States 3,363,000 3,308,721
-------------------
9,878,568
-------------------
TECHNOLOGY SERVICES 0.3%
SunGard Data Systems Inc., New U.S. Term Loan,
7.356%, 2/28/14 ...................................... United States 7,504,535 7,407,426
-------------------
UTILITIES 1.1%
Dynegy Holdings Inc.,
Term L/C Facility, 6.629%, 4/02/13 .................. United States 5,816,489 5,603,199
Term Loan B, 6.626%, 4/02/13 ........................ United States 208,511 200,864
22 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT e VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
f,g SENIOR FLOATING RATE INTERESTS (CONTINUED)
UTILITIES (CONTINUED)
Niska Gas Storage Canada ULC (C/R Gas),
Asset Sale Term Loan, 7.28%, 5/13/11 ................ Canada 514,470 $ 506,671
Canadian Term Loan, 7.323%, 5/12/13 ................. Canada 2,819,043 2,780,197
Niska Gas Storage U.S. LLC (C/R Gas),
Delayed Draw, 7.325%, 5/12/13 ....................... United States 310,087 302,350
U.S. Term Loan, 7.323%, 5/12/13 ..................... United States 457,767 445,530
NRG Energy Inc.,
Credit Link, 6.848%, 2/01/13 ........................ United States 1,995,289 1,960,850
Term Loan, 6.948%, 2/01/13 .......................... United States 4,794,148 4,711,401
h Texas Competitive Electric Holdings Co. LLC, Term
Loan B-2,10.00%, 10/10/14 ........................... United States 10,000,000 9,986,800
TPF Generation Holdings LLC,
Synthetic L/C, 5.26%, 12/15/13 ...................... United States 322,914 315,096
Synthetic Revolver, 5.098%, 12/15/11 ................ United States 101,227 97,089
Term Loan, 7.198%, 12/15/13 ......................... United States 1,651,533 1,611,549
-------------------
28,521,596
-------------------
TOTAL SENIOR FLOATING RATE INTERESTS
(COST $415,506,928) .................................. 408,856,724
-------------------
CORPORATE BONDS 31.2%
COMMERCIAL SERVICES 2.0%
ARAMARK Corp., senior note, 8.50%, 2/01/15 ............. United States 7,000,000 7,122,500
j Ceva Group PLC, senior note, 144A, 10.00%, 9/01/14 ..... United Kingdom 6,500,000 6,800,625
Dex Media East LLC, senior sub. note, B, 12.125%,
11/15/12 ............................................. United States 1,321,000 1,408,516
Dex Media West LLC, senior sub. note, 9.875%,
8/15/13 .............................................. United States 4,000,000 4,285,000
Iron Mountain Inc., senior sub. note, 8.75%,
7/15/18 .............................................. United States 7,000,000 7,385,000
JohnsonDiversey Holdings Inc., senior disc. note,
10.67%, 5/15/13 ...................................... United States 2,000,000 2,080,000
JohnsonDiversey Inc., senior sub. note, B, 9.625%,
5/15/12 .............................................. United States 4,000,000 4,170,000
Lamar Media Corp., senior sub. note,
7.25%, 1/01/13 ...................................... United States 5,500,000 5,541,250
6.625%, 8/15/15 ..................................... United States 1,500,000 1,447,500
R.H. Donnelley Corp., senior note,
8.875%, 1/15/16 ..................................... United States 6,500,000 6,532,500
j 144A, 8.875%, 10/15/17 .............................. United States 500,000 502,500
RSC Equipment Rental Inc., 9.50%, 12/01/14 ............. United States 7,000,000 6,763,750
-------------------
54,039,141
-------------------
COMMUNICATIONS 3.3%
j American Tower Corp., senior note, 144A, 7.00%,
10/15/17 ............................................. United States 7,000,000 7,192,500
j Digicel Group Ltd., senior note, 144A, 8.875%,
1/15/15 .............................................. Jamaica 6,500,000 6,085,950
Dobson Cellular Systems Inc., senior secured note,
9.875%, 11/01/12 ..................................... United States 4,200,000 4,567,500
Embarq Corp., senior note, 7.082%, 6/01/16 ............. United States 7,000,000 7,327,677
Inmarsat Finance II PLC, senior note, zero cpn. to
11/15/08,10.375% thereafter, 11/15/12 ................ United Kingdom 6,500,000 6,305,000
Intelsat Intermediate, senior note, zero cpn. to
2/01/10,9.25% thereafter, 2/01/15 .................... Bermuda 2,000,000 1,655,000
Semiannual Report | 23
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT e VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
COMMUNICATIONS (CONTINUED)
Intelsat Subsidiary Holding Co. Ltd., senior note,
8.25%, 1/15/13 ....................................... Bermuda 7,000,000 $ 7,087,500
j MetroPCS Wireless Inc., senior note, 144A, 9.25%,
11/01/14 ............................................. United States 6,500,000 6,483,750
Millicom International Cellular SA, senior note,
10.00%, 12/01/13 ..................................... Luxembourg 6,500,000 7,028,125
Qwest Communications International Inc., senior note,
7.50%, 2/15/14 ....................................... United States 7,500,000 7,631,250
Telecom Italia Capital, senior note, 4.95%,
9/30/14 .............................................. Italy 7,000,000 6,709,612
Verizon New York Inc., senior deb.,
A, 6.875%, 4/01/12 .................................. United States 5,000,000 5,304,075
B, 7.375%, 4/01/32 .................................. United States 1,500,000 1,614,474
j Wind Acquisition Finance SA, senior note, 144A,
10.75%, 12/01/15 ..................................... Italy 6,000,000 6,705,000
Windstream Corp., senior note, 8.625%, 8/01/16 ......... United States 6,000,000 6,450,000
-------------------
88,147,413
-------------------
CONSUMER DURABLES 1.7%
Beazer Homes USA Inc., senior note, 8.125%,
6/15/16 .............................................. United States 2,400,000 1,920,000
D.R. Horton Inc., senior note, 6.50%, 4/15/16 .......... United States 7,000,000 6,365,807
Ford Motor Credit Co. LLC, senior note,
5.80%, 1/12/09 ...................................... United States 6,000,000 5,790,138
9.875%, 8/10/11 ..................................... United States 9,000,000 8,993,313
General Motors Corp., senior deb., 8.25%, 7/15/23 ...... United States 7,000,000 6,352,500
Jarden Corp., senior sub. note, 7.50%, 5/01/17 ......... United States 7,000,000 6,685,000
Jostens IH Corp., senior sub. note, 7.625%,
10/01/12 ............................................. United States 4,000,000 4,130,000
KB Home, senior note,
6.25%, 6/15/15 ...................................... United States 3,900,000 3,529,500
7.25%, 6/15/18 ...................................... United States 3,600,000 3,357,000
-------------------
47,123,258
-------------------
CONSUMER NON-DURABLES 0.6%
Dole Foods Co., senior note, 7.25%, 6/15/10 ............ United States 200,000 191,000
Reynolds American Inc., senior secured note,
7.625%, 6/01/16 ...................................... United States 8,000,000 8,695,336
Smithfield Foods Inc., senior note, 7.75%,
5/15/13 ............................................. United States 4,200,000 4,326,000
7/01/17 ............................................. United States 3,300,000 3,415,500
-------------------
16,627,836
-------------------
CONSUMER SERVICES 4.9%
Cablevision Systems Corp., senior note, B, 8.00%,
4/15/12 .............................................. United States 700,000 687,750
CanWest Media Inc., senior sub. note, 8.00%,
9/15/12 .............................................. Canada 7,000,000 6,860,000
CCH I LLC, senior secured note, 11.00%, 10/01/15 ....... United States 4,000,000 3,900,000
CCH II LLC, senior note, 10.25%, 9/15/10 ............... United States 8,000,000 8,200,000
Comcast Corp., senior note, 6.30%, 11/15/17 ............ United States 7,000,000 7,234,122
CSC Holdings Inc.,
senior deb., 7.625%, 7/15/18 ........................ United States 5,500,000 5,307,500
senior note, 6.75%, 4/15/12 ......................... United States 400,000 389,000
DIRECTV Holdings LLC, senior note, 8.375%,
3/15/13 .............................................. United States 2,000,000 2,100,000
24 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT e VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
CONSUMER SERVICES (CONTINUED)
EchoStar DBS Corp., senior note,
6.375%, 10/01/11 .................................... United States 5,500,000 $ 5,582,500
7.125%, 2/01/16 ..................................... United States 500,000 525,000
j Fontainebleau Las Vegas, 144A, 10.25%, 6/15/15 ......... United States 5,000,000 4,700,000
Harrah's Operating Co. Inc., senior note, 6.50%,
6/01/16 .............................................. United States 3,300,000 2,619,256
Liberty Media Corp., senior note, 5.70%, 5/15/13 ....... United States 7,000,000 6,596,765
LIN Television Corp., senior sub. note, 6.50%,
5/15/13 .............................................. United States 6,000,000 5,850,000
MGM MIRAGE, senior note,
6.625%, 7/15/15 ..................................... United States 9,000,000 8,550,000
7.50%, 6/01/16 ...................................... United States 1,000,000 998,750
j Outback Steakhouse Inc., senior note, 144A,
10.00%, 6/15/15 ...................................... United States 5,000,000 4,325,000
Pinnacle Entertainment Inc., senior sub. note,
8.25%, 3/15/12 ...................................... United States 600,000 621,000
8.75%, 10/01/13 ..................................... United States 4,200,000 4,389,000
Quebecor Media Inc.,
j 144A, 7.75%, 3/15/16 ................................ Canada 500,000 485,000
senior note, 7.75%, 3/15/16 ......................... Canada 6,500,000 6,321,250
Radio One Inc., senior sub. note, 6.375%, 2/15/13 ...... United States 6,500,000 5,752,500
j Rainbow National Services LLC, senior sub. deb.,
144A, 10.375%, 9/01/14 .............................. United States 3,000,000 3,315,000
Royal Caribbean Cruises Ltd., senior deb., 7.25%,
3/15/18 .............................................. United States 7,000,000 6,875,666
Station Casinos Inc.,
senior note, 6.00%, 4/01/12 ......................... United States 1,200,000 1,119,000
senior sub. note, 6.50%, 2/01/14 .................... United States 1,000,000 840,000
senior sub. note, 6.875%, 3/01/16 ................... United States 6,800,000 5,661,000
Time Warner Inc., 5.875%, 11/15/16 ..................... United States 8,000,000 7,961,680
j Univision Communications Inc., senior note, 144A,
PIK, 9.75%, 3/15/15 .................................. United States 8,500,000 8,372,500
Viacom Inc., senior note, 6.875%, 4/30/36 .............. United States 7,500,000 7,634,078
-------------------
133,773,317
-------------------
ELECTRONIC TECHNOLOGY 1.5%
DRS Technologies Inc., senior sub. note,
6.875%, 11/01/13 .................................... United States 2,000,000 2,010,000
7.625%, 2/01/18 ..................................... United States 5,000,000 5,137,500
Freescale Semiconductor Inc., senior note, 8.875%,
12/15/14 ............................................. United States 7,000,000 6,658,750
L-3 Communications Corp., senior sub. note,
5.875%, 1/15/15 ..................................... United States 4,500,000 4,410,000
6.375%, 10/15/15 .................................... United States 2,000,000 2,010,000
NXP BV/NXP Funding LLC, senior secured note,
7.875%, 10/15/14 ..................................... Netherlands 6,500,000 6,378,125
Sanmina-SCI Corp.,
f,j senior note, 144A, FRN, 8.444%, 6/15/14 ............. United States 2,000,000 1,950,000
senior sub. note, 6.75%, 3/01/13 .................... United States 4,300,000 3,773,250
senior sub. note, 8.125%, 3/01/16 ................... United States 1,700,000 1,500,250
TransDigm Inc., senior sub. note, 7.75%, 7/15/14 ....... United States 6,500,000 6,646,250
-------------------
40,474,125
-------------------
Semiannual Report | 25
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT e VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
ENERGY MINERALS 1.8%
Chesapeake Energy Corp., senior note,
7.625%, 7/15/13 ..................................... United States 1,500,000 $ 1,575,000
6.625%, 1/15/16 ..................................... United States 3,500,000 3,447,500
6.25%, 1/15/18 ...................................... United States 6,000,000 5,820,000
Mariner Energy Inc., senior note, 7.50%, 4/15/13 ....... United States 6,500,000 6,353,750
Peabody Energy Corp., senior note,
7.375%, 11/01/16 .................................... United States 3,500,000 3,657,500
B, 6.875%, 3/15/13 .................................. United States 3,500,000 3,535,000
j Petroplus Finance Ltd., senior note, 144A, 6.75%,
5/01/14 .............................................. Switzerland 5,600,000 5,404,000
Pogo Producing Co., senior sub. note, 6.875%,
10/01/17 ............................................. United States 5,300,000 5,392,750
j Tesoro Corp., senior note, 144A, 6.50%, 6/01/17 ........ United States 6,500,000 6,451,250
XTO Energy Inc., senior note, 6.25%, 8/01/17 ........... United States 7,000,000 7,270,494
-------------------
48,907,244
-------------------
FINANCE 3.1%
j Capmark Financial Group Inc., 144A, 6.30%, 5/10/17 ..... United States 1,900,000 1,556,431
CIT Group Funding Co. of Canada, senior note,
4.65%, 7/01/10 ....................................... United States 3,400,000 3,284,553
E*TRADE Financial Corp., senior note, 8.00%,
6/15/11 .............................................. United States 5,100,000 4,870,500
GMAC LLC,
7.25%, 3/02/11 ...................................... United States 4,500,000 4,258,211
6.875%, 9/15/11 ..................................... United States 6,000,000 5,534,214
6.875%, 8/28/12 ..................................... United States 4,000,000 3,609,540
The Goldman Sachs Group Inc., sub. note, 6.75%,
10/01/37 ............................................. United States 5,350,000 5,387,418
j ICICI Bank Ltd., 144A, 6.625%, 10/03/12 ................ India 2,325,000 2,346,034
iStar Financial Inc., senior note, 5.65%, 9/15/11 ...... United States 6,500,000 6,013,585
JPMorgan Chase Capital XXII, sub. bond, 6.45%,
2/02/37 .............................................. United States 12,000,000 11,135,892
Lehman Brothers Holdings Inc., sub. note, 6.50%,
7/19/17 .............................................. United States 12,000,000 12,107,004
Merrill Lynch & Co. Inc., senior note, 6.40%,
8/28/17 .............................................. United States 12,000,000 12,126,336
Residential Capital LLC, senior note, 6.50%,
6/01/12 .............................................. United States 6,500,000 4,749,205
United Rentals North America Inc., senior sub.
note, 7.75%, 11/15/13 ................................ United States 6,000,000 6,390,000
-------------------
83,368,923
-------------------
HEALTH SERVICES 2.4%
Coventry Health Care Inc., senior note,
6.30%, 8/15/14 ...................................... United States 3,700,000 3,764,073
5.95%, 3/15/17 ...................................... United States 2,800,000 2,730,260
DaVita Inc., senior sub. note, 7.25%, 3/15/15 .......... United States 7,500,000 7,621,875
j FMC Finance III SA, senior note, 144A, 6.875%,
7/15/17 .............................................. Germany 4,000,000 4,030,000
Fresenius Medical Care Capital Trust II, 7.875%,
2/01/08 .............................................. Germany 3,000,000 3,015,000
HCA Inc.,
senior note, 6.50%, 2/15/16 ......................... United States 3,000,000 2,576,250
j senior secured note, 144A, 9.125%, 11/15/14 ......... United States 7,900,000 8,196,250
Quest Diagnostics Inc., 6.40%, 7/01/17 ................. United States 4,200,000 4,347,744
26 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT e VALUE
- ------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
HEALTH SERVICES (CONTINUED)
Tenet Healthcare Corp., senior note,
6.375%, 12/01/11 .................................... United States 6,000,000 $ 5,280,000
9.875%, 7/01/14 ..................................... United States 2,500,000 2,287,500
United Surgical Partners International Inc., senior
sub. note, PIK, 9.25%, 5/01/17 ....................... United States 3,300,000 3,316,500
j United Health Group Inc., 144A, 6.50%, 6/15/37 ......... United States 4,100,000 4,217,481
f,j U.S. Oncology Holdings Inc., senior note, 144A,
FRN, 10.759%, 3/15/12 ................................ United States 6,500,000 5,752,500
Vanguard Health Holding Co. II LLC, senior sub. note,
9.00%, 10/01/14 ...................................... United States 6,500,000 6,370,000
---------------
63,505,433
---------------
HEALTH TECHNOLOGY 0.5%
j Amgen Inc., senior note, 144A, 5.85%, 6/01/17 .......... United States 6,500,000 6,502,015
Schering-Plough Corp., senior note, 6.00%, 9/15/17 ..... United States 6,000,000 6,113,916
---------------
12,615,931
---------------
INDUSTRIAL SERVICES 1.6%
Allied Waste North America Inc., senior secured note,
6.875%, 6/01/17 ...................................... United States 6,000,000 6,030,000
j Bristow Group Inc., senior note, 144A, 7.50%,
9/15/17 .............................................. United States 2,100,000 2,173,500
Compagnie Generale de Geophysique-Veritas, senior note,
7.50%, 5/15/15 ...................................... France 5,200,000 5,330,000
7.75%, 5/15/17 ...................................... France 1,800,000 1,863,000
Copano Energy LLC, senior note, 8.125%, 3/01/16 ........ United States 7,000,000 7,227,500
El Paso Corp., senior note, 6.875%, 6/15/14 ............ United States 7,000,000 7,047,523
Markwest Energy Partners LP, senior note, 6.875%,
11/01/14 ............................................. United States 6,500,000 6,110,000
The Williams Cos. Inc.,
8.75%, 3/15/32 ...................................... United States 1,300,000 1,521,000
senior note, 7.625%, 7/15/19 ........................ United States 3,000,000 3,270,000
senior note, 7.875%, 9/01/21 ........................ United States 3,400,000 3,757,000
---------------
44,329,523
---------------
NON-ENERGY MINERALS 0.5%
Freeport-McMoRan Copper & Gold Inc., senior note,
8.375%, 4/01/17 ...................................... United States 6,500,000 7,133,750
Novelis Inc., senior note, 7.25%, 2/15/15 .............. Canada 7,500,000 7,237,500
---------------
14,371,250
---------------
PROCESS INDUSTRIES 2.3%
Buckeye Technologies Inc., senior sub. note, 8.00%,
10/15/10 ............................................. United States 4,346,000 4,346,000
Crown Americas Inc., senior note, 7.75%, 11/15/15 ...... United States 7,000,000 7,245,000
Huntsman International LLC, senior sub. note, 7.875%,
11/15/14 ............................................. United States 6,000,000 6,480,000
j Ineos Group Holdings PLC, 144A, 8.50%, 2/15/16 ......... United Kingdom 7,500,000 7,162,500
JSG Funding PLC, senior sub. note, 7.75%, 4/01/15 ...... Ireland 6,800,000 6,732,000
Semiannual Report | 27
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT e VALUE
- ------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
PROCESS INDUSTRIES (CONTINUED)
Lyondell Chemical Co., senior note,
8.00%, 9/15/14 ...................................... United States 7,500,000 $ 8,343,750
6.875%, 6/15/17 ..................................... United States 800,000 884,000
j MacDermid Inc., senior sub. note, 144A, 9.50%,
4/15/17 .............................................. United States 6,500,000 6,240,000
Nalco Co., senior sub. note, 8.875%, 11/15/13 .......... United States 7,000,000 7,402,500
Owens-Brockway Glass Container Inc., senior note,
6.75%, 12/01/14 ...................................... United States 7,000,000 7,052,500
---------------
61,888,250
---------------
PRODUCER MANUFACTURING 1.3%
Case New Holland Inc., senior note, 7.125%, 3/01/14 .... United States 3,250,000 3,380,000
Commercial Vehicle Group Inc., senior note, 8.00%,
7/01/13 .............................................. United States 5,300,000 5,114,500
Greenbrier Cos. Inc., senior note, 8.375%, 5/15/15 ..... United States 6,000,000 5,962,500
Nortek Inc., senior sub. note, 8.50%, 9/01/14 .......... United States 7,000,000 6,230,000
RBS Global & Rexnord Corp., senior note, 9.50%,
8/01/14 .............................................. United States 7,000,000 7,262,500
j TRW Automotive Inc., senior note, 144A,
7.25%, 3/15/17 ....................................... United States 7,500,000 7,340,625
---------------
35,290,125
---------------
REAL ESTATE DEVELOPMENT 0.2%
Forest City Enterprises Inc., senior note,
7.625%, 6/01/15 ...................................... United States 5,000,000 4,912,500
---------------
REAL ESTATE INVESTMENT TRUSTS 0.3%
Host Hotels & Resorts LP, senior note, 6.875%,
11/01/14 ............................................. United States 1,000,000 1,012,500
Host Marriott LP, senior note,
K, 7.125%, 11/01/13 ................................. United States 6,000,000 6,120,000
M, 7.00%, 8/15/12 ................................... United States 2,000,000 2,030,000
---------------
9,162,500
---------------
RETAIL TRADE 0.5%
j Dollar General Corp., senior note, 144A,
10.625%, 7/15/15 ..................................... United States 6,500,000 6,272,500
Michaels Stores Inc., senior note, 10.00%, 11/01/14 .... United States 8,000,000 8,100,000
---------------
14,372,500
---------------
TECHNOLOGY SERVICES 0.4%
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13 ........................ United States 5,000,000 5,125,000
senior sub. note, 10.25%, 8/15/15 ................... United States 6,000,000 6,285,00
---------------
11,410,000
---------------
UTILITIES 2.3%
j AES Corp., senior note, 144A, 8.00%, 10/15/17 .......... United States 6,700,000 6,792,124
Aquila Inc., senior note, 9.95%, 2/01/11 ............... United States 7,000,000 7,605,584
CenterPoint Energy Inc., senior note, 6.125%,
11/01/17 ............................................. United States 1,950,000 1,958,796
Dynegy Holdings Inc., senior note, 8.375%, 5/01/16 ..... United States 7,000,000 7,052,500
j Edison Mission Energy, senior note, 144A,
7.00%, 5/15/17 ....................................... United States 7,000,000 6,877,500
j Intergen NV, senior secured note, 144A, 9.00%,
6/30/17 .............................................. Netherlands 6,500,000 6,906,250
Mirant North America LLC, senior note, 7.375%,
12/31/13 ............................................. United States 7,000,000 7,131,250
28 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT e VALUE
- ------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
UTILITIES (CONTINUED)
NRG Energy Inc., senior note,
7.25%, 2/01/14 ...................................... United States 1,500,000 $ 1,503,750
7.375%, 2/01/16 ..................................... United States 6,000,000 6,000,000
7.375%, 1/15/17 ..................................... United States 2,500,000 2,493,750
j Texas Competitive Electric Holdings Co. LLC, senior
note, 144A, 10.25%, 11/01/15 ......................... United States 7,100,000 7,171,000
TXU Corp., senior note, P, 5.55%, 11/15/14 ............. United States 1,900,000 1,491,510
---------------
62,984,014
---------------
TOTAL CORPORATE BONDS (COST $848,036,735) .............. 847,303,283
---------------
CONVERTIBLE BONDS 1.6%
ELECTRONIC TECHNOLOGY 0.2%
Intel Corp., cvt., sub. deb., 2.95%, 12/15/35 .......... United States 6,000,000 6,405,360
---------------
FINANCE 0.8%
CapitalSource Inc., cvt., senior sub. note, 4.00%,
7/15/34 .............................................. United States 8,000,000 7,880,000
f iStar Financial Inc., senior note, cvt., FRN,
5.743%, 10/01/12 ..................................... United States 6,500,000 6,254,456
Merrill Lynch & Co. Inc., cvt., senior note, zero cpn.,
3/13/32 .............................................. United States 7,000,000 7,799,960
---------------
21,934,416
---------------
HEALTH TECHNOLOGY 0.3%
Amgen Inc., cvt., senior note, 0.375%, 2/01/13 ......... United States 8,500,000 8,000,625
---------------
RETAIL TRADE 0.3%
Best Buy Co. Inc., cvt., sub. deb., 2.25%, 1/15/22 ..... United States 7,000,000 7,876,890
---------------
TOTAL CONVERTIBLE BONDS (COST $44,114,583) ............. 44,217,291
---------------
ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED
SECURITIES 3.5%
FINANCE 3.2%
f Banc of America Commercial Mortgage Inc., 2005-6,
A4, FRN, 5.182%, 9/10/47 ............................. United States 8,000,000 7,859,919
f Chase Credit Card Master Trust, 2003-6, A, FRN,
5.201%, 2/15/11 ...................................... United States 10,000,000 9,996,695
f Chase Issuance Trust, 2007-A9, A, FRN, 5.121%,
6/16/14 .............................................. United States 12,000,000 11,892,487
f Citigroup/Deutsche Bank Commercial Mortgage Trust,
2006-CD3, A5, FRN, 5.617%, 10/15/48 .................. United States 22,000,000 22,014,978
Countrywide Asset-Backed Certificates,
2004-7, AF4, 4.774%, 8/25/32 ........................ United States 225,276 222,289
2005-11, AF4, 5.21%, 3/25/34 . ...................... United States 2,800,000 2,697,589
GE Capital Commercial Mortgage Corp., 2003-C1, A4,
4.819%, 1/10/38 ...................................... United States 1,827,831 1,785,049
f Greenwich Capital Commercial Funding Corp.,
2006-GG7, A4, FRN, 5.913%, 7/10/38 ................... United States 12,000,000 12,317,344
JPMorgan Chase Commercial Mortgage Securities Corp.,
f 2004-CB9, A4, FRN, 5.377%, 6/12/41 .................. United States 8,871,306 8,901,281
2004-LN2, A2, 5.115%, 7/15/41 ....................... United States 807,292 789,375
Semiannual Report | 29
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT e VALUE
- ------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED
SECURITIES (CONTINUED)
FINANCE (CONTINUED)
j Keystone Owner Trust, 1997-P3, M2, 144A, 7.98%,
12/25/24 ............................................. United States 41,183 $ 40,932
f Morgan Stanley Capital I, 2004-IQ7, A4, FRN,
5.431%, 6/15/38 ...................................... United States 7,000,000 6,997,514
Residential Asset Securities Corp., 2004-KS1, AI4,
4.213%, 4/25/32 ...................................... United States 417,209 411,941
---------------
85,927,393
---------------
REAL ESTATE DEVELOPMENT 0.3%
f GS Mortgage Securities Corp. II, 2006-GG6, A4, FRN,
5.553%, 4/10/38 ...................................... United States 10,000,000 9,993,272
---------------
TOTAL ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES (COST $97,710,531) ........ 95,920,665
---------------
MORTGAGE-BACKED SECURITIES 11.9%
f FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE
RATE 0.0% a
FHLMC, 4.683%, 1/01/33 ................................. United States 512,035 515,399
---------------
FEDERAL HOME LOAN MORTGAGE CORP(FHLMC) FIXED RATE 4.5%
FHLMC Gold 15 Year, 4.50%, 10/01/18 - 9/01/19 .......... United States 6,587,987 6,383,691
FHLMC Gold 15 Year, 5.00%, 12/01/17 - 7/01/22 .......... United States 14,851,639 14,650,394
FHLMC Gold 15 Year, 5.50%, 7/01/17 - 2/01/19 ........... United States 1,284,822 1,291,024
FHLMC Gold 15 Year, 6.50%, 4/01/11 ..................... United States 763 782
FHLMC Gold 15 Year, 7.00%, 1/01/09 - 9/01/11 ........... United States 1,174 1,207
FHLMC Gold 30 Year, 5.00%, 3/01/34 - 6/01/37 ........... United States 20,873,796 20,056,862
FHLMC Gold 30 Year, 5.50%, 6/01/33 - 6/01/37 ........... United States 39,739,022 39,143,057
FHLMC Gold 30 Year, 6.00%, 6/01/33 - 6/01/37 ........... United States 34,908,802 35,155,496
FHLMC Gold 30 Year, 6.50%, 10/01/21 - 6/01/36 .......... United States 3,566,275 3,657,140
FHLMC Gold 30 Year, 7.00%, 9/01/21 - 8/01/32 ........... United States 264,117 276,309
FHLMC Gold 30 Year, 7.50%, 4/01/24 - 1/01/31 ........... United States 46,741 49,367
FHLMC Gold 30 Year, 8.00%, 11/01/25 - 1/01/26 .......... United States 838 890
FHLMC Gold 30 Year, 9.00%, 12/01/24 .................... United States 468 508
---------------
120,666,727
---------------
f FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)
ADJUSTABLE RATE 0.1%
FNMA, 4.542%, 4/01/20 .................................. United States 458,988 453,944
FNMA, 4.601%, 12/01/34 ................................. United States 1,968,794 1,960,318
---------------
2,414,262
---------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED
RATE 6.8%
FNMA 15 Year, 4.50%, 3/01/20 ........................... United States 1,513,204 1,464,716
FNMA 15 Year, 5.00%, 1/01/18 - 6/01/18 ................. United States 1,964,907 1,942,205
FNMA 15 Year, 5.50%, 3/01/14 - 4/01/21 ................. United States 7,466,747 7,483,594
FNMA 15 Year, 6.00%, 4/01/13 - 10/01/16 ................ United States 276,339 281,700
FNMA 15 Year, 6.50%, 2/01/09 - 6/01/13 ................. United States 27,259 28,043
FNMA 15 Year, 7.50%, 10/01/14 .......................... United States 17,845 18,582
FNMA 30 Year, 5.00%, 4/01/34 - 6/01/37 ................. United States 35,964,518 34,531,510
FNMA 30 Year, 5.50%, 9/01/33 - 7/01/37 ................. United States 64,155,660 63,284,216
30 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT e VALUE
- ------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MORTGAGE-BACKED SECURITIES (CONTINUED)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED
RATE (CONTINUED)
FNMA 30 Year, 6.00%, 6/01/34 - 7/01/37 ................. United States 62,085,455 $ 62,599,892
FNMA 30 Year, 6.50%, 1/01/24 - 7/01/37 ................. United States 13,194,071 13,519,314
FNMA 30 Year, 7.50%, 12/01/28 - 10/01/29 ............... United States 43,500 46,133
FNMA 30 Year, 8.00%, 1/01/25 - 1/01/27 ................. United States 22,416 23,750
FNMA 30 Year, 8.50%, 7/01/25 . ......................... United States 754 811
---------------
185,224,466
---------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED
RATE 0.5%
GNMA I SF 15 Year, 7.00%, 7/15/08 ...................... United States 15,218 15,357
GNMA I SF 30 Year, 5.00%, 6/15/34 - 7/15/34 ............ United States 1,555,624 1,511,610
GNMA I SF 30 Year, 5.50%, 2/15/33 - 6/15/36 ............ United States 4,797,719 4,773,507
GNMA I SF 30 Year, 6.00%, 8/15/36 ...................... United States 927,486 939,398
GNMA I SF 30 Year, 6.50%, 3/15/24 - 3/15/32 ............ United States 449,076 463,354
GNMA I SF 30 Year, 7.00%, 11/15/27 - 5/15/28 ........... United States 56,253 59,330
GNMA I SF 30 Year, 7.50%, 9/15/23 - 5/15/27 ............ United States 23,352 24,732
GNMA I SF 30 Year, 8.00%, 2/15/25 - 9/15/27 ............ United States 18,577 19,766
GNMA I SF 30 Year, 8.50%, 8/15/24 ...................... United States 141 153
GNMA I SF 30 Year, 9.00%, 1/15/25 ...................... United States 876 952
GNMA I SF 30 Year, 9.50%, 6/15/25 ...................... United States 731 807
GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33 .......... United States 2,136,397 2,057,451
GNMA II SF 30 Year, 5.50%, 6/20/34 ..................... United States 1,148,885 1,137,000
GNMA II SF 30 Year, 6.00%, 11/20/34 .................... United States 1,049,389 1,061,412
GNMA II SF 30 Year, 6.50%, 7/20/28 - 12/20/31 .......... United States 459,718 474,085
GNMA II SF 30 Year, 7.50%, 8/20/16 - 4/20/32 ........... United States 256,279 269,139
---------------
12,808,053
---------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $321,895,316) ... 321,628,907
---------------
U.S. GOVERNMENT AND AGENCY SECURITIES 7.3%
FHLMC,
4.375%, 7/17/15 ..................................... United States 4,300,000 4,176,788
4.875%, 11/15/13 .................................... United States 500,000 503,813
5.125%, 10/18/16 .................................... United States 10,000,000 10,166,540
6.00%, 6/15/11 ...................................... United States 4,900,000 5,151,306
6.625%, 9/15/09 ..................................... United States 11,700,000 12,180,905
FNMA,
1.75%, 3/26/08 ...................................... United States 700,000,000 JPY 6,089,445
3.25%, 1/15/08 ...................................... United States 2,100,000 2,092,898
4.25%, 5/15/09 ...................................... United States 400,000 399,466
4.375%, 3/15/13 ..................................... United States 2,600,000 2,563,228
4.375%, 10/15/15 .................................... United States 1,900,000 1,850,412
5.00%, 4/15/15 ...................................... United States 600,000 607,517
5.00%, 3/15/16 ...................................... United States 5,000,000 5,047,430
5.00%, 2/13/17 ...................................... United States 5,000,000 5,031,980
5.25%, 1/15/09 ...................................... United States 7,100,000 7,168,188
5.375%, 11/15/11 .................................... United States 1,700,000 1,754,347
5.50%, 3/15/11 ...................................... United States 300,000 309,892
6.625%, 11/15/10 .................................... United States 1,850,000 1,966,482
7.125%, 1/15/30 ..................................... United States 1,300,000 1,628,181
Semiannual Report | 31
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT e VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
U.S. GOVERNMENT AND AGENCY SECURITIES (CONTINUED)
U.S. Treasury Bond,
6.25%, 8/15/23 ...................................... United States 6,800,000 $ 7,894,378
6.88%, 8/15/25 ...................................... United States 9,450,000 11,777,809
7.125%, 2/15/23 ..................................... United States 10,200,000 12,785,863
U.S. Treasury Note,
3.00%, 2/15/08 ...................................... United States 3,500,000 3,490,431
3.375%, 10/15/09 .................................... United States 500,000 494,961
3.50%, 12/15/09 ..................................... United States 4,500,000 4,462,735
4.00%, 4/15/10 ...................................... United States 1,100,000 1,102,064
4.00%, 11/15/12 ..................................... United States 1,850,000 1,840,606
4.125%, 8/15/10 ..................................... United States 2,900,000 2,914,955
4.25%, 8/15/13 ...................................... United States 1,000,000 1,003,126
4.25%, 11/15/14 ..................................... United States 700,000 697,758
4.375%, 8/15/12 ..................................... United States 2,600,000 2,633,922
4.50%, 9/30/11 ...................................... United States 2,500,000 2,539,455
4.50%, 3/31/12 ...................................... United States 14,000,000 14,218,764
4.625%, 12/31/11 .................................... United States 8,000,000 8,164,376
4.625%, 11/15/16 .................................... United States 25,000,000 25,343,775
5.00%, 8/15/11 ...................................... United States 2,100,000 2,174,649
5.625%, 5/15/08 ..................................... United States 3,000,000 3,024,141
k Index Linked, 1.625%, 1/15/15 ....................... United States 3,266,844 3,171,903
k Index Linked, 2.00%, 1/15/14 ........................ United States 14,629,106 14,622,259
k Index Linked, 2.50%, 7/15/16 ........................ United States 4,118,399 4,254,825
---------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $194,653,903) ................................... 197,301,573
---------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 21.4%
f European Investment Bank, senior note, FRN, 0.781%,
9/21/11 ............................................... Supranational l 2,170,000,000 JPY 18,819,033
f,m Government of Argentina, FRN, 5.475%, 8/03/12 .......... Argentina 70,878,000 40,035,576
Government of Canada,
4.25%, 12/01/08 ..................................... Canada 37,500,000 CAD 39,700,841
5.25%, 6/01/12 ...................................... Canada 250,000 CAD 276,080
6.00%, 6/01/11 ...................................... Canada 593,000 CAD 665,343
Government of Indonesia,
10.00%, 7/15/17 ..................................... Indonesia 10,200,000,000 IDR 1,170,038
10.25%, 7/15/27 ..................................... Indonesia 86,000,000,000 IDR 9,535,405
11.00%, 10/15/14 .................................... Indonesia 4,500,000,000 IDR 544,640
11.75%, 8/15/23 ..................................... Indonesia 29,150,000,000 IDR 3,644,622
12.80%, 6/15/21 ..................................... Indonesia 40,130,000,000 IDR 5,393,548
13.15%, 3/15/10 ..................................... Indonesia 7,125,000,000 IDR 865,938
13.15%, 1/15/12 ..................................... Indonesia 17,300,000,000 IDR 2,197,007
14.25%, 6/15/13 ..................................... Indonesia 63,035,000,000 IDR 8,563,147
14.275%, 12/15/13 ................................... Indonesia 28,415,000,000 IDR 3,895,017
n Government of Iraq, Reg S, 5.80%, 1/15/28 .............. Iraq 20,000,000 12,118,800
32 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT e VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED)
Government of Malaysia,
3.135%, 12/17/07 .................................... Malaysia 1,925,000 MYR $ 576,927
4.305%, 2/27/09 ..................................... Malaysia 53,510,000 MYR 16,213,642
6.45%, 7/01/08 ...................................... Malaysia 16,188,000 MYR 4,947,060
7.00%, 3/15/09 ...................................... Malaysia 4,760,000 MYR 1,494,297
8.60%, 12/01/07 ..................................... Malaysia 34,810,000 MYR 10,480,289
Government of Mexico,
8.00%, 12/17/15 ..................................... Mexico 725,000 o MXN 6,855,257
h 10.00%, 12/05/24 .................................... Mexico 2,980,000 o MXN 33,464,680
Government of New Zealand, 6.50%, 4/15/13 .............. New Zealand 7,590,000 NZD 5,766,199
Government of Norway, 5.50%, 5/15/09 ................... Norway 49,900,000 NOK 9,362,329
Government of Peru,
7.84%, 8/12/20 ...................................... Peru 4,340,000 PEN 1,648,309
7, 8.60%, 8/12/17 ................................... Peru 28,805,000 PEN 11,293,532
Government of Poland,
5.75%, 9/23/22 ...................................... Poland 38,800,000 PLN 15,902,440
6.00%, 5/24/09 ...................................... Poland 64,850,000 PLN 26,127,071
6.25%, 10/24/15 ..................................... Poland 17,100,000 PLN 7,134,996
Government of Singapore,
1.50%, 4/01/08 ...................................... Singapore 1,500,000 SGD 1,034,259
4.375%, 1/15/09 ..................................... Singapore 8,600,000 SGD 6,109,034
5.625%, 7/01/08 ..................................... Singapore 12,660,000 SGD 8,954,882
Government of Sweden,
5.00%, 1/28/09 ...................................... Sweden 230,450,000 SEK 36,671,073
5.50%, 10/08/12 ..................................... Sweden 24,960,000 SEK 4,143,501
6.50%, 5/05/08 ...................................... Sweden 236,350,000 SEK 37,643,406
p Strip, 9/17/08 ...................................... Sweden 21,000,000 SEK 3,192,155
f KfW Bankengruppe, FRN, 0.60%, 8/08/11 Germany 7,175,000,000 JPY 62,239,090
Korea Treasury Note,
4.25%, 9/10/08 ...................................... South Korea 22,550,000,000 KRW 24,823,678
4.50%, 9/09/08 ...................................... South Korea 2,675,000,000 KRW 2,950,840
4.75%, 3/12/08 ...................................... South Korea 15,130,000,000 KRW 16,770,236
4.75%, 6/10/09 ...................................... South Korea 13,200,000,000 KRW 14,511,250
New South Wales Treasury Corp., 8.00%, 3/01/08 ......... Australia 5,510,000 AUD 5,149,497
Nota Do Tesouro Nacional,
9.762%, 1/01/14 ..................................... Brazil 5,200 q BRL 2,776,990
h 9.762%, 1/01/17 ..................................... Brazil 60,650 q BRL 31,527,305
r Index Linked, 6.00%, 5/15/15 ........................ Brazil 4,000 q BRL 3,623,829
r Index Linked, 6.00%, 5/15/45 ........................ Brazil 3,570 q BRL 3,298,414
Queensland Treasury Corp., 6.00%, 7/14/09 .............. Australia 14,250,000 AUD 13,070,544
p Sweden Treasury Bill, 12/19/07 ......................... Sweden 11,555,000 SEK 1,809,362
---------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $532,952,799) ................................... 578,991,408
---------------
TOTAL LONG TERM INVESTMENTS
(COST $2,496,176,055) ................................. 2,537,010,180
---------------
Semiannual Report | 33
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT e VALUE
- -------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 5.9%
FOREIGN GOVERNMENT AND AGENCY SECURITIES 4.1%
p Egypt Treasury Bills, 11/13/07 - 9/30/08 ............... Egypt 148,925,000 EGP $ 26,127,554
Government of Malaysia,
3.17%, 5/15/08 ...................................... Malaysia 20,560,000 MYR 6,154,440
3.546%, 1/11/08 ..................................... Malaysia 13,020,000 MYR 3,904,829
3.562%, 7/15/08 ..................................... Malaysia 30,900,000 MYR 9,276,764
3.569%, 2/14/08 ..................................... Malaysia 8,340,000 MYR 2,501,750
7.60%, 3/15/08 ...................................... Malaysia 3,245,000 MYR 987,317
p Government of Sweden, Strip, 6/18/08 ................... Sweden 21,000,000 SEK 3,224,478
p Malaysia Treasury Bills, 11/1/07 - 3/13/08 ............. Malaysia 100,385,000 MYR 29,861,564
p Norway Treasury Bills, 12/19/07 - 9/17/08 .............. Norway 160,250,000 NOK 29,596,227
---------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $104,369,668) ................................... 111,634,923
---------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUND
(COST $2,600,545,723) ................................. 2,648,645,103
---------------
------------------
SHARES
------------------
MONEY MARKET FUND (COST $49,010,167) 1.8%
s Franklin Institutional Fiduciary Trust Money
Market Portfolio, 4.69% .............................. United States 49,010,167 49,010,167
---------------
TOTAL INVESTMENTS (COST $2,649,555,890) 99.5% .......... 2,697,655,270
NET UNREALIZED GAIN ON FORWARD EXCHANGE
CONTRACTS 0.1% ......................................... 1,713,317
OTHER ASSETS, LESS LIABILITIES 0.4% .................... 10,919,113
---------------
NET ASSETS 100.0% ...................................... $ 2,710,287,700
===============
CURRENCY ABBREVIATIONS
AUD - Australian Dollar
BRL - Brazilian Real
CAD - Canadian Dollar
EGP - Egyptian Pound
IDR - Indonesian Rupiah
JPY - Japanese Yen
KRW - South Korean Won
MXN - Mexican Peso
MYR - Malaysian Ringgit
NOK - Norwegian Krone
NZD - New Zealand Dollar
PEN - Peruvian Nuevo Sol
PLN - Polish Zloty
SEK - Swedish Krona
SGD - Singapore Dollar
34 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2007 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
SELECTED PORTFOLIO ABBREVIATIONS
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Association
FRN - Floating Rate Note
GNMA - Government National Mortgage Association
L/C - Letter of Credit
PIK - Payment-In-Kind
REIT - Real Estate Investment Trust
SF - Single Family
a Rounds to less than 0.1% of net assets.
b See Note 10 regarding restricted securities.
c Non-income producing for the twelve months ended October 31, 2007.
d Security has been deemed illiquid because it may not be able to be sold within
seven days. At October 31, 2007, the aggregate value of these securities was
$568, representing less than 0.01% of net assets.
e The principal amount is stated in U.S. dollars unless otherwise indicated.
f The coupon rate shown represents the rate at period end.
g See Note 1 (f) regarding senior floating rate interests.
h A portion or all of the securities purchased on a when-issued or delayed
delivery basis. See Note 1(c).
i See Note 11 regarding unfunded loan commitments.
j Security was purchased pursuant to Rule 144A under the Securities Act of 1933
and may be sold in transactions exempt from registration only to qualified
institutional buyers or in a public offering registered under the Securities Act
of 1933. These securities have been deemed liquid under guidelines approved by
the Trust's Board of Trustees. At October 31, 2007, the aggregate value of these
securities was $158,350,718, representing 5.84% of net assets.
k Principal amount of security is adjusted for inflation. See Note 1(h).
l A supranational organization is an entity formed by two or more central
governments through international treaties.
m The principal amount is stated in original face, and scheduled paydowns are
reflected in the market price on ex-date.
n Security was purchased pursuant to Regulation S under the Securities Act of
1933, which exempts from registration securities offered and sold outside of the
United States. Such a security cannot be sold in the United States without
either an effective registration statement filed pursuant to the Securities Act
of 1933, or pursuant to an exemption from registration. This security has been
deemed liquid under guidelines approved by the Trust's Board of Trustees. At
October 31, 2007, the value of this security was $12,118,800, representing 0.45%
of net assets.
o Principal amount is stated in 100 Mexican Peso Units.
p The security is traded on a discount basis with no stated coupon rate.
q Principal amount is stated in 1,000 Brazilian Real Units.
r Redemption price at maturity is adjusted for inflation. See Note 1(h).
s See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 35
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2007 (unaudited)
-----------------
FRANKLIN
STRATEGIC
INCOME FUND
-----------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ................................................. $ 2,600,545,723
Cost - Sweep Money Fund (Note 7) ............................................ 49,010,167
-----------------
Total cost of investments ................................................... $ 2,649,555,890
=================
Value - Unaffiliated issuers ................................................ $ 2,648,645,103
Value - Sweep Money Fund (Note 7) ........................................... 49,010,167
-----------------
Total value of investments .................................................. 2,697,655,270
Cash .......................................................................... 729,593
Foreign currency, at value (cost $950,175) .................................... 1,094,069
Receivables:
Investment securities sold .................................................. 379,433
Capital shares sold ......................................................... 17,144,472
Dividends and interest ...................................................... 36,588,453
Unrealized gain on forward exchange contracts (Note 8) ........................ 2,195,693
-----------------
Total assets .............................................................. 2,755,786,983
-----------------
Liabilities:
Payables:
Investment securities purchased ............................................. 36,374,028
Capital shares redeemed ..................................................... 5,910,594
Affiliates .................................................................. 1,992,421
Unrealized loss on forward exchange contracts (Note 8) ........................ 482,376
Unrealized loss on unfunded loan commitments (Note 11) ........................ 25,610
Accrued expenses and other liabilities ........................................ 714,254
-----------------
Total liabilities ......................................................... 45,499,283
-----------------
Net assets, at value .................................................... $ 2,710,287,700
=================
Net assets consist of:
Paid-in capital ............................................................... $ 2,653,673,952
Distributions in excess of net investment income .............................. (3,974,153)
Net unrealized appreciation (depreciation) .................................... 50,325,362
Accumulated net realized gain (loss) .......................................... 10,262,539
-----------------
Net assets, at value .................................................... $ 2,710,287,700
=================
36 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2007 (unaudited)
-----------------
FRANKLIN
STRATEGIC
INCOME FUND
-----------------
CLASS A:
Net assets, at value .......................................................... $ 1,851,775,029
=================
Shares outstanding ............................................................ 176,475,778
=================
Net asset value per share a ................................................... $ 10.49
=================
Maximum offering price per share (net asset value per share / 95.75%) ......... $ 10.96
=================
CLASS B:
Net assets, at value .......................................................... $ 103,430,578
=================
Shares outstanding ............................................................ 9,818,491
=================
Net asset value and maximum offering price per share a ........................ $ 10.53
=================
CLASS C:
Net assets, at value .......................................................... $ 564,302,789
=================
Shares outstanding ............................................................ 53,790,821
=================
Net asset value and maximum offering price per share a ........................ $ 10.49
=================
CLASS R:
Net assets, at value .......................................................... $ 88,711,355
=================
Shares outstanding ............................................................ 8,473,402
=================
Net asset value and maximum offering price per share a ........................ $ 10.47
=================
ADVISOR CLASS:
Net assets, at value .......................................................... $ 102,067,949
=================
Shares outstanding ............................................................ 9,720,319
=================
Net asset value and maximum offering price per share a ........................ $ 10.50
=================
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 37
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the six months ended October 31, 2007 (unaudited)
-----------------
FRANKLIN
STRATEGIC
INCOME FUND
-----------------
Investment income:
Dividends:
Unaffiliated issuers ........................................................ $ 1,160,698
Sweep Money Fund (Note 7) ................................................... 1,658,092
Interest ...................................................................... 74,117,486
-----------------
Total investment income ................................................... 76,936,276
-----------------
Expenses:
Management fees (Note 3a) ..................................................... 5,525,355
Distribution fees: (Note 3c) ..................................................
Class A ..................................................................... 2,117,373
Class B ..................................................................... 334,344
Class C ..................................................................... 1,634,072
Class R ..................................................................... 192,365
Transfer agent fees (Note 3e) ................................................. 1,557,139
Custodian fees (Note 4) ....................................................... 324,834
Reports to shareholders ....................................................... 101,218
Registration and filing fees .................................................. 109,031
Professional fees ............................................................. 32,871
Trustees' fees and expenses ................................................... 9,626
Other ......................................................................... 31,757
-----------------
Total expenses ............................................................ 11,969,985
Expense reductions (Note 4) ............................................... (26,991)
-----------------
Net expenses ............................................................ 11,942,994
-----------------
Net investment income ................................................. 64,993,282
-----------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................................................. 3,856,621
Foreign currency transactions ............................................... 19,832,460
-----------------
Net realized gain (loss) .............................................. 23,689,081
-----------------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................................. (11,564,682)
Translation of assets and liabilities denominated in foreign currencies ..... 107,235
-----------------
Net change in unrealized appreciation (depreciation) .................. (11,457,447)
-----------------
Net realized and unrealized gain (loss) ......................................... 12,231,634
-----------------
Net increase (decrease) in net assets resulting from operations ................. $ 77,224,916
=================
38 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
FRANKLIN STRATEGIC INCOME FUND
-----------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2007 YEAR ENDED
(UNAUDITED) APRIL 30, 2007
-----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .......................................................... $ 64,993,282 $ 89,407,218
Net realized gain (loss) from investments and foreign currency transactions .... 23,689,081 23,971,751
Net change in unrealized appreciation (depreciation) on investments and
translation of assets and liabilities denominated in foreign currencies ....... (11,457,447) 41,340,324
-----------------------------------
Net increase (decrease) in net assets resulting from operations ............. 77,224,916 154,719,293
-----------------------------------
Distributions to shareholders from net investment income:
Class A ........................................................................ (48,073,232) (69,450,108)
Class B ........................................................................ (2,746,641) (5,676,985)
Class C ........................................................................ (13,255,452) (18,536,653)
Class R ........................................................................ (2,065,210) (2,534,963)
Advisor Class .................................................................. (2,330,229) (3,568,807)
-----------------------------------
Total distributions to shareholders .............................................. (68,470,764) (99,767,516)
-----------------------------------
Capital share transactions: (Note 2) .............................................
Class A ........................................................................ 324,589,399 485,094,064
Class B ........................................................................ (1,191,934) (2,806,860)
Class C ........................................................................ 125,292,043 131,890,312
Class R ........................................................................ 22,804,530 30,979,468
Advisor Class .................................................................. 34,745,966 7,746,480
-----------------------------------
Total capital share transactions ................................................. 506,240,004 652,903,464
-----------------------------------
Redemption fees .................................................................. 13,281 15,988
-----------------------------------
Net increase (decrease) in net assets ....................................... 515,007,437 707,871,229
Net assets:
Beginning of period .............................................................. 2,195,280,263 1,487,409,034
-----------------------------------
End of period .................................................................... $ 2,710,287,700 $ 2,195,280,263
-----------------------------------
Distributions in excess of net investment income included in net assets:
End of period .................................................................... $ (3,974,153) $ (496,671)
===================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 39
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (Trust) is registered under the Investment Company Act
of 1940, as amended, (1940 Act) as an open-end investment company, consisting of
ten separate funds. The Franklin Strategic Income Fund (Fund) included in this
report is diversified. The financial statements of the remaining funds in the
Trust are presented separately. The Fund offers five classes of shares: Class A,
Class B, Class C, Class R, and Advisor Class. Each class of shares differs by
its initial sales load, contingent deferred sales charges, distribution fees,
voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Corporate debt securities, government securities, mortgage pass-through
securities, other mortgage-backed securities, collateralized mortgage
obligations and asset-backed securities generally trade in the over-the-counter
market rather than on a securities exchange. The Trust may utilize independent
pricing services, quotations from bond dealers, and information with respect to
bond and note transactions, to assist in determining a current market value for
each security. The Trust's pricing services may use valuation models or matrix
pricing which considers information with respect to comparable bond and note
transactions, quotations from bond dealers, or by reference to other securities
that are considered comparable in such characteristics as rating, interest rate
and maturity date, option adjusted spread models, prepayment projections,
interest rate spreads and yield curves, to determine current value.
Senior secured corporate loans with floating or variable interest rates
generally trade in the over-the-counter market rather than on a securities
exchange. The Trust may utilize independent pricing services, quotations from
loan dealers and other financial institutions, and information with respect to
bond and note transactions, to assist in determining a current market value for
each security. The Trust's pricing services use independent market quotations
from loan dealers or financial institutions and may incorporate valuation
methodologies that consider multiple bond characteristics such as dealer quotes,
issuer type, coupon, maturity, weighted average maturity, interest rate spreads
and yield curves, cash flow and credit risk/quality analysis, to determine
current value.
40 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Trust has procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. All security valuation
procedures are approved by the Trust's Board of Trustees.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Trust's Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Semiannual Report | 41
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION (CONTINUED)
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. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, OR TBA BASIS
The Fund may purchase securities on a when-issued, delayed delivery, or
to-be-announced (TBA) basis, with payment and delivery scheduled for a future
date. These transactions are subject to market fluctuations and are subject to
the risk that the value at delivery may be more or less than the trade date
purchase price. Although the Fund will generally purchase these securities with
the intention of holding the securities, it may sell the securities before the
settlement date. Sufficient assets have been segregated for these securities.
D. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The Fund may also enter into forward exchange contracts to hedge against
fluctuations in foreign exchange rates. These contracts are valued daily by the
Fund and the unrealized gains or losses on the contracts, as measured by the
difference between the contractual forward foreign exchange rates and the
forward rates at the reporting date, are included in the Statement of Assets and
Liabilities. Realized and unrealized gains and losses on these contracts are
included in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
42 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. MORTGAGE DOLLAR ROLLS
The Fund enters into mortgage dollar rolls, typically on a TBA basis. Dollar
rolls are agreements between the fund and a financial institution to
simultaneously sell and repurchase mortgage-backed securities at a future date.
Gains or losses are realized at the time of the sale and the difference between
the repurchase price and sale price is recorded as an unrealized gain to the
Fund. The risks of mortgage dollar roll transactions include the potential
inability of the counter-party to fulfill its obligations.
F. SENIOR FLOATING RATE INTERESTS
Senior secured corporate loans pay interest at rates which are periodically
reset by reference to a base lending rate plus a spread. These base lending
rates are generally the prime rate offered by a designated U.S. bank or the
London InterBank Offered Rate (LIBOR). Senior secured corporate loans often
require prepayment of principal from excess cash flows or at the discretion of
the borrower. As a result, actual maturity may be substantially less than the
stated maturity.
Senior secured corporate loans in which the Fund invests are generally readily
marketable, but may be subject to some restrictions on resale.
G. INCOME TAXES
No provision has been made for U.S. income taxes because it is the Fund's policy
to qualify as a regulated investment company under the Internal Revenue Code and
to distribute to shareholders substantially all of its taxable income and net
realized gains.
H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Facility fees are recognized as income over the expected term of the
loan. Dividend income is recorded on the ex-dividend date. Distributions to
shareholders are recorded on the ex-dividend date and are determined according
to income tax regulations (tax basis). Distributable earnings determined on a
tax basis may differ from earnings recorded in accordance with accounting
principles generally accepted in the United States of America. These differences
may be permanent or temporary. Permanent differences are reclassified among
capital accounts to reflect their tax character. These reclassifications have no
impact on net assets or the results of operations. Temporary differences are not
reclassified, as they may reverse in subsequent periods.
Semiannual Report | 43
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
Common expenses incurred by the Trust are allocated among the funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class. Differences in per share
distributions, by class, are generally due to differences in class specific
expenses.
Inflation-indexed bonds provide an inflation hedge through periodic increases in
the security's interest accruals and principal redemption value, by amounts
corresponding to the current rate of inflation. Any such adjustments, including
adjustments to principal redemption value, are recorded as interest income.
I. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
J. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Fund and accounted for as an addition to paid-in
capital.
K. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust, on behalf of the Fund, enters into contracts with service
providers that contain general indemnification clauses. The Trust's maximum
exposure under these arrangements is unknown as this would involve future claims
that may be made against the Trust that have not yet occurred. Currently, the
Trust expects the risk of loss to be remote.
44 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
2. SHARES OF BENEFICIAL INTEREST
At October 31, 2007, there were an unlimited number of shares authorized
(without par value). Transactions in the Fund's shares were as follows:
----------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
OCTOBER 31, 2007 APRIL 30, 2007
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
CLASS A SHARES:
Shares sold ....................... 44,967,319 $ 464,912,521 64,577,523 $ 661,797,699
Shares issued in reinvestment
of distributions ............... 3,491,997 35,983,137 4,904,231 50,058,427
Shares redeemed ................... (17,098,225) (176,306,259) (22,187,101) (226,762,062)
----------------------------------------------------------------
Net increase (decrease) ........... 31,361,091 $ 324,589,399 47,294,653 $ 485,094,064
================================================================
CLASS B SHARES:
Shares sold ....................... 857,989 $ 8,891,063 1,326,154 $ 13,607,104
Shares issued in reinvestment
of distributions ............... 173,242 1,793,090 356,823 3,651,957
Shares redeemed ................... (1,144,608) (11,876,087) (1,953,852) (20,065,921)
----------------------------------------------------------------
Net increase (decrease) ........... (113,377) $ (1,191,934) (270,875) $ (2,806,860)
================================================================
CLASS C SHARES:
Shares sold ....................... 15,359,364 $ 158,898,554 18,208,945 $ 186,898,178
Shares issued in reinvestment
of distributions ............... 860,424 8,866,093 1,165,184 11,894,052
Shares redeemed ................... (4,119,339) (42,472,604) (6,539,064) (66,901,918)
----------------------------------------------------------------
Net increase (decrease) ........... 12,100,449 $ 125,292,043 12,835,065 $ 131,890,312
================================================================
CLASS R SHARES:
Shares sold ....................... 2,985,819 $ 30,787,319 3,989,540 $ 40,838,506
Shares issued in reinvestment
of distributions ............... 186,141 1,914,063 237,409 2,419,134
Shares redeemed ................... (962,273) (9,896,852) (1,200,894) (12,278,172)
----------------------------------------------------------------
Net increase (decrease) ........... 2,209,687 $ 22,804,530 3,026,055 $ 30,979,468
================================================================
ADVISOR CLASS SHARES:
Shares sold ....................... 3,677,211 $ 38,025,549 2,180,173 $ 22,375,180
Shares issued in reinvestment
of distributions ............... 191,438 1,974,008 299,259 3,050,388
Shares redeemed ................... (510,389) (5,253,591) (1,736,283) (17,679,088)
----------------------------------------------------------------
Net increase (decrease) ........... 3,358,260 $ 34,745,966 743,149 $ 7,746,480
================================================================
Semiannual Report | 45
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
trustees of the Trust are also officers and/or directors of the following
subsidiaries:
- -------------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- -------------------------------------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to Advisers based on the average
daily net assets of the Fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
0.440% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% Over $15 billion, up to and including $17.5 billion
0.380% Over $17.5 billion, up to and including $20 billion
0.360% Over $20 billion, up to and including $35 billion
0.355% Over $35 billion, up to and including $50 billion
0.350% In excess of $50 billion
B. ADMINISTRATIVE FEES
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
C. DISTRIBUTION FEES
The Trust's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund
reimburses Distributors for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate.
Under the Class A reimbursement distribution plan, costs exceeding the maximum
for the current plan year cannot be reimbursed in subsequent periods.
46 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
In addition, under the Fund's Class B, C, and R compensation distribution plans,
the Fund pays Distributors for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate
for each class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
Class A ............................................................... 0.25%
Class B ............................................................... 0.65%
Class C ............................................................... 0.65%
Class R ............................................................... 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the period:
Sales charges retained net of commissions paid to unaffiliated
broker/dealers ................................................. $1,042,651
Contingent deferred sales charges retained ........................ $ 98,766
E. TRANSFER AGENT FEES
For the period ended October 31, 2007, the Fund paid transfer agent fees of
$1,557,139, of which $1,006,374 was retained by Investor Services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the period ended October 31, 2007, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At April 30, 2007, the Fund had tax basis capital losses of
$13,380,507 expiring in 2011.
Semiannual Report | 47
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
5. INCOME TAXES (CONTINUED)
At October 31, 2007, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments ............................. $ 2,657,470,417
================
Unrealized appreciation ......................... $ 79,114,232
Unrealized depreciation ......................... (38,929,379)
----------------
Net unrealized appreciation (depreciation) ...... $ 40,184,853
================
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions, mortgage
dollar roll, paydown losses, 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, mortgage dollar roll, paydown losses, bond discounts and premiums.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended October 31, 2007, aggregated $953,185,915 and $426,576,183,
respectively.
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (Sweep Money Fund), an open-end investment company managed by
Advisers. Management fees paid by the Fund are reduced on assets invested in the
Sweep Money Fund, in an amount not to exceed the management and administrative
fees paid by the Sweep Money Fund.
48 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
8. FORWARD EXCHANGE CONTRACTS
At October 31, 2007, the Fund had the following forward exchange contracts
outstanding:
--------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT a DATE GAIN LOSS
--------------------------------------------------------
CONTRACTS TO BUY
524,000,000 Iceland Krona ........ 8,574,701 11/09/07 $ 181,676 $ --
150,750,000 Iceland Krona ........ 2,500,000 11/09/07 19,129 --
226,500,000 Indian Rupee ......... 7,582,224 NZD 11/29/07 -- (60,880)
420,000,000 Iceland Krona ........ 6,528,836 12/27/07 407,747 --
23,099,600 Swiss Franc .......... 20,000,000 10/24/08 285,993 --
CONTRACTS TO SELL
73,468,367 Mexican Peso ......... 295,195,897 INR 1/28/08 651,048 --
63,268,687 Mexican Peso ......... 250,455,423 INR 2/28/08 471,815 --
22,688,628 Mexican Peso ......... 86,103,344 INR 5/15/08 81,743 --
95,141,931 Mexican Peso ......... 4,364,636,082 CLP 6/12/08 75,783 --
85,260,441 Mexican Peso ......... 931,119,898 KZT 6/30/08 (421,496)
35,638,464 Mexican Peso ......... 1,620,480,980 CLP 9/15/08 20,759 --
------------------------
Unrealized gain (loss) on forward exchange contracts ................ 2,195,693 (482,376)
------------------------
Net unrealized gain (loss) on forward exchange contracts ......... $1,713,317 $ --
========================
a In U.S. Dollar unless otherwise indicated.
CURRENCY ABBREVIATIONS
CLP - Chilean Peso
INR - Indian Rupee
KZT - Kazakhstan Tenge
NZD - New Zealand Dollar
9. CREDIT RISK
The Fund has 48.6% of its portfolio invested in below investment grade and
comparable quality unrated high yield securities, which tend to be more
sensitive to economic conditions than higher rated securities. The risk of loss
due to default by the issuer may be significantly greater for the holders of
high yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer.
Semiannual Report | 49
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
10. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed
upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
At October 31, 2007, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Trust's Board of Trustees as reflecting fair value,
as follows:
- --------------------------------------------------------------------------------------------------
SHARES ISSUER DATE COST VALUE
- --------------------------------------------------------------------------------------------------
516,372 Cambridge Industries Liquidating Trust Interest ........... 1/09/02 $ -- $ 568
64,666 VS Holdings Inc. .......................................... 12/06/01 64,666 --
-----
TOTAL RESTRICTED SECURITIES (0.00%a of Net Assets) ........ $ 568
=====
a Rounds to less than 0.01% of net assets.
11. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrowers' discretion. Funded portions of credit agreements are presented on the
Statement of Investments.
At October 31, 2007, unfunded commitments were as follows:
- --------------------------------------------------------------------------------
UNFUNDED
BORROWER COMMITMENTS
- --------------------------------------------------------------------------------
Community Health Systems Inc., Delayed Draw ..................... $ 473,643
Laureate Education Inc., Delayed Draw ........................... 756,668
NRG Holdings Inc., Delayed Draw ................................. 1,038,380
Univision Communications Inc., Delayed Draw ..................... 232,886
------------
$ 2,501,577
============
Unfunded loan commitments and funded portions of credit agreements are marked to
market daily and any unrealized gain or loss is included in the Statement of
Assets and Liabilities and Statement of Operations.
50 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
12. REGULATORY AND LITIGATION MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), relating to certain practices in the mutual fund industry,
including late trading, market timing and marketing support payments to
securities dealers who sell fund shares ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
On June 6, 2007, the SEC posted for public comment the proposed plan of
distribution for the market timing settlement. Once the SEC approves the final
plan of distribution, disbursements of settlement monies will be made promptly
to individuals who were shareholders of the designated funds during the relevant
period, in accordance with the terms and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits relate to the industry
practices referenced above.
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Trust, it is
committed to making the Trust or their shareholders whole, as appropriate.
13. NEW ACCOUNTING PRONOUNCEMENTS
The Fund adopted Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" (FIN 48), on October 31, 2007. FIN 48
clarifies the accounting for uncertainty in tax positions taken or expected to
be taken in a tax return. FIN 48 provides guidance on the measurement,
recognition, classification and disclosure of tax positions, along with
accounting for the related interest and penalties. The Fund has reviewed the tax
positions for open tax years (tax years ended April 30, 2005 - 2007) and has
determined that the implementation of FIN 48 did not have a material impact on
the Fund's financial statements.
Semiannual Report | 51
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
13. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
(SFAS 157), which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Trust believes the adoption of SFAS 157
will have no material impact on its financial statements.
52 | Semiannual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION
FRANKLIN STRATEGIC INCOME FUND
PROXY VOTING POLICIES AND PROCEDURES
The Trust has established Proxy Voting Policies and Procedures (Policies) that
the Trust uses to determine how to vote proxies relating to portfolio
securities. Shareholders may view the Trust's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Trust's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Trust files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
Semiannual Report | 53
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON FUNDS
INTERNATIONAL
Mutual European 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 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund 1
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small Cap Growth Fund II 2
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin Balance Sheet Investment Fund 1
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 1
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio (R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 8
Colorado
Connecticut
Florida 8
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 7
Michigan 7
Minnesota 7
Missouri
New Jersey
New York 8
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is open only to existing shareholders and select retirement plans.
2. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
3. The fund is a continuously offered, closed-end fund. Shares may be purchased
daily; there is no daily redemption. However, each quarter, pending board
approval, the fund will authorize the repurchase of 5%-25% of the outstanding
number of shares. Investors may tender all or a portion of their shares during
the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy remained the
same.
6. For investors subject to the alternative minimum tax, a small portion of fund
dividends may be taxable. Distributions of capital gains are generally taxable.
7. The fund invests primarily in insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA) and
limited-term, intermediate-term and money market portfolios (CA and NY).
9.The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
05/07 Not part of the semiannual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at franklintempleton.com.
See inside for details.
SEMIANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN STRATEGIC INCOME FUND
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN (R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
194 S2007 12/07
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 Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN STRATEGIC SERIES
By /S/JIMMY D. GAMBILL
--------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date December 27, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /S/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date December 27, 2007
By /S/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date December 27, 2007