UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06243
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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: 4/30/08
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ITEM 1. REPORTS TO STOCKHOLDERS.
(GRAPHIC)
APRIL 30, 2008
Franklin Flex Cap
Growth Fund
Franklin Growth
Opportunities Fund
(formerly, Franklin Aggressive Growth Fund)
Franklin Small Cap
Growth Fund
(formerly, Franklin Small Cap Growth Fund II)
Franklin Small-Mid Cap
Growth Fund
ANNUAL REPORT AND SHAREHOLDER LETTER
GROWTH
FRANKLIN STRATEGIC SERIES
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FRANKLIN TEMPLETON INVESTMENTS
FRANKLIN - Templeton - Mutual Series
Annual Report
Economic and Market Overview
During the 12 months ended April 30, 2008, the U.S. economy slowed. The housing
downturn negatively affected the overall economy by fourth quarter 2007 as
credit conditions worsened and the pace of consumer spending declined.
Gross domestic product (GDP) growth decelerated sharply from 4.9% in the third
quarter of 2007 and registered annualized rates of 0.6% in the fourth quarter of
2007 and an estimated 0.9% in the first quarter of 2008. A weaker U.S. dollar
compared with many foreign currencies over the past year contributed to
increased exports, which along with inventory buildup, helped the fragile
economy in the first quarter.
The unemployment rate increased from 4.5% at the beginning of the period to 5.0%
in April 2008.(1) Continued deterioration in consumer confidence, home prices
and the job market, as well as rising mortgage and fuel costs, plagued the
economy. Volatile oil prices reached a historical high in April, topping $119
per barrel, before retreating to $113 by period-end. For the 12 months ended
April 30, 2008, the core Consumer Price Index (CPI), which excludes food and
energy costs, rose 2.3%, which was higher than its 10-year average rate.(1)
Faced with a deepening housing contraction and stressed financial markets, the
Federal Reserve Board made several cuts to the federal funds target rate during
the period, including 225 basis points so far in 2008. For the 12-month
period, the federal funds target rate fell 325 basis points from 5.25% to 2.00%.
As investors fled riskier, poorer-performing assets, U.S. Treasuries rallied,
and the 10-year Treasury note yield fell from 4.63% at the beginning of the
period to 3.77% on April 30, 2008.
Stock markets were volatile during the period partly due to investor concerns
about slowing economic growth. Overall, the blue chip stocks of the Dow Jones
Industrial Average had a 12-month total return of +0.47%, while the broader
Standard & Poor's 500 Index (S&P 500) had a -4.68% return, and
(1.) Source: Bureau of Labor Statistics.
Annual Report | 3
the technology-heavy NASDAQ Composite Index had a -3.74% return.(2) The energy,
materials and consumer staples sectors performed relatively well.
Large-capitalization stocks generally outperformed small caps, and growth stocks
fared better than their value counterparts.
(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 APRIL 30,
2008. 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 | Annual 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.
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 annual report for
the fiscal year ended April 30, 2008.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Flex Cap Growth Fund - Class A had a
+2.98% cumulative total return. The Fund outperformed its narrow benchmark, the
Russell 3000(R) Growth Index, which had a -0.79% return, and its broad
benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -4.68% return
for the same period.(1) The Fund also outperformed its peers in the Lipper
Multi-Cap Growth Funds Classification Average, which returned +0.03%.(2) You can
find the Fund's long-term performance data in the Performance Summary beginning
on page 8.
(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 12-month period ended 4/30/08, there were 513 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.
Annual Report | 5
PORTFOLIO BREAKDOWN
Franklin Flex Cap Growth Fund
Based on Total Net Assets as of 4/30/08
Software & Services* 18.9%
Technology Hardware & Equipment* 15.5%
Pharmaceuticals, Biotechnology & Life Sciences 12.1%
Telecommunication Services 6.3%
Capital Goods 5.7%
Semiconductors & Semiconductor Equipment* 5.0%
Health Care Equipment & Services 4.8%
Transportation 4.3%
Energy 4.0%
Diversified Financials 3.4%
Materials 3.2%
Food, Beverage & Tobacco 2.9%
Retailing 2.6%
Household & Personal Products 2.1%
Other 7.5%
Short-Term Investments & Other Net Assets 1.7%
* 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
During the 12 months under review, among the holdings that contributed most to
Fund performance relative to the Russell 3000 Growth Index were the world's
largest consumer payment system operator Visa,(3) specialized imaging systems
manufacturer FLIR Systems and medical monitoring device manufacturer Masimo.(3)
From a sector perspective, our investments in the information technology sector
made the largest contribution to relative Fund performance. In addition to Visa
and FLIR Systems, key sector performers included BlackBerry smart phones
manufacturer Research In Motion(3) and computer hardware, software and
electronics device maker Apple. Stock selection in the information technology
and health care sectors supported relative Fund performance. Biotechnology
holdings Gilead Sciences and Celgene in the health care sector fared well. In
addition, an underweighted allocation to the consumer discretionary sector
helped relative performance.
By contrast, the Fund had some disappointments during the reporting period,
including international mobile telecommunication network provider NII Holdings,
drug maker Schering-Plough, and residential and business mortgage lender
CapitalSource (sold by period-end).
Additionally, stock selection and our underweighted position in the consumer
staples sector hurt the Fund's relative performance. Detractors included
beverage company Hansen Natural and household products manufacturer Clorox. In
the financials sector, an overweighted allocation negatively impacted
performance,
(3.) Not an index component.
6 | Annual Report
and in addition to CapitalSource, credit rating agency Moody's and real estate
services company Jones Lang LaSalle lost value. The Fund sold its positions in
Moody's and CapitalSource by period-end. In the energy sector, underweighted
positions in energy equipment and services, and oil, gas and consumable fuels
companies also negatively affected relative Fund performance.
Thank you for your continued participation in Franklin Flex Cap Growth Fund. We
look forward to serving your future investment needs.
(PHOTO OF CONRAD B. HERRMANN)
/s/ Conrad B. Herrmann
Conrad B. Herrmann, CFA
Portfolio Manager
Franklin Flex Cap Growth Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
TOP 10 HOLDINGS
Franklin Flex Cap Growth Fund
4/30/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- ------------------------------------------------- ----------
Visa Inc., A 3.6%
SOFTWARE & SERVICES
Gilead Sciences Inc. 2.9%
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES
Google Inc., A 2.8%
SOFTWARE & SERVICES
Apple Inc. 2.7%
TECHNOLOGY HARDWARE & EQUIPMENT
Cisco Systems Inc. 2.4%
TECHNOLOGY HARDWARE & EQUIPMENT
American Tower Corp., A 2.2%
TELECOMMUNICATION SERVICES
FLIR Systems Inc. 2.2%
TECHNOLOGY HARDWARE & EQUIPMENT
Hewlett-Packard Co. 2.1%
TECHNOLOGY HARDWARE & EQUIPMENT
Praxair Inc. 2.0%
MATERIALS
CVS Caremark Corp. 2.0%
FOOD & STAPLES RETAILING
Annual Report | 7
Performance Summary as of 4/30/08
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 and graphs do 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 4/30/08 4/30/07
- ------------------------------ ------ ------- -------
Net Asset Value (NAV) +$0.62 $45.77 $45.15
DISTRIBUTIONS (5/1/07-4/30/08)
Dividend Income $0.0245
Long-Term Capital Gain $0.7438
TOTAL $0.7683
CLASS B (SYMBOL: FKCBX) CHANGE 4/30/08 4/30/07
- ------------------------------ ------ ------- -------
Net Asset Value (NAV) +$0.23 $42.66 $42.43
DISTRIBUTIONS (5/1/07-4/30/08)
Long-Term Capital Gain $0.7438
CLASS C (SYMBOL: FCIIX) CHANGE 4/30/08 4/30/07
- ------------------------------ ------ ------- -------
Net Asset Value (NAV) +$0.24 $42.76 $42.52
DISTRIBUTIONS (5/1/07-4/30/08)
Long-Term Capital Gain $0.7438
CLASS R (SYMBOL: FRCGX) CHANGE 4/30/08 4/30/07
- ------------------------------ ------ ------- -------
Net Asset Value (NAV) +$0.49 $45.10 $44.61
DISTRIBUTIONS (5/1/07-4/30/08)
Dividend Income $0.0245
Long-Term Capital Gain $0.7438
TOTAL $0.7683
ADVISOR CLASS (SYMBOL: FKCAX) CHANGE 4/30/08 4/30/07
- ------------------------------ ------ ------- -------
Net Asset Value (NAV) +$0.74 $46.15 $45.41
DISTRIBUTIONS (5/1/07-4/30/08)
Dividend Income $0.0245
Long-Term Capital Gain $0.7438
TOTAL $0.7683
8 | Annual 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.UNTIL AUGUST
31, 2008, THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF
PURCHASE.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- ------ ------- -------
Cumulative Total Return(1) +2.98% +82.15% +104.61%
Average Annual Total Return(2) -2.93% +11.41% +6.79%
Value of $10,000 Investment(3) $9,707 $17,167 $19,287
Avg. Ann. Total Return (3/31/08)(4) -6.14% +11.21% +6.19%
Total Annual Operating Expenses(5) 0.98%
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------------------------------------- ------ ------- ------------------
Cumulative Total Return(1) +2.19% +75.40% +92.18%
Average Annual Total Return(2) -1.81% +11.64% +7.25%
Value of $10,000 Investment(3) $9,819 $17,340 $19,218
Avg. Ann. Total Return (3/31/08)(4) -5.04% +11.43% +6.47%
Total Annual Operating Expenses(5) 1.73%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- ------- ------- -------
Cumulative Total Return(1) +2.21% +75.45% +89.92%
Average Annual Total Return(2) +1.21% +11.90% +6.62%
Value of $10,000 Investment(3) $10,121 $17,545 $18,992
Avg. Ann. Total Return (3/31/08)(4) -2.12% +11.69% +6.03%
Total Annual Operating Expenses(5) 1.71%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------------------------------------- ------- ------- ------------------
Cumulative Total Return(1) +2.73% +79.85% +43.98%
Average Annual Total Return(2) +2.73% +12.46% +5.93%
Value of $10,000 Investment(3) $10,273 $17,985 $14,398
Avg. Ann. Total Return (3/31/08)(4) -0.64% +12.25% +4.78%
Total Annual Operating Expenses(5) 1.23%
ADVISOR CLASS(6) 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- ------- ------- -------
Cumulative Total Return(1) +3.23% +83.79% +106.45%
Average Annual Total Return(2) +3.23% +12.94% +7.52%
Value of $10,000 Investment(3) $10,323 $18,379 $20,645
Avg. Ann. Total Return (3/31/08)(4) -0.15% +12.73% +6.92%
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.
Annual Report | 9
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/08
- ------- -------
1-Year -2.93%
5-Year +11.41%
10-Year +6.79%
CLASS A (5/1/98-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN FLEX CAP S&P 500 RUSSELL 3000
DATE GROWTH FUND - CLASS A INDEX GROWTH INDEX
- ---------- --------------------- ------- ------------
5/1/1998 $ 9,426 $10,000 $10,000
5/31/1998 $ 8,928 $ 9,828 $ 9,675
6/30/1998 $ 9,138 $10,227 $10,223
7/31/1998 $ 8,703 $10,118 $10,086
8/31/1998 $ 7,263 $ 8,656 $ 8,505
9/30/1998 $ 7,743 $ 9,210 $ 9,175
10/31/1998 $ 8,174 $ 9,959 $ 9,892
11/30/1998 $ 8,771 $10,563 $10,645
12/31/1998 $ 9,446 $11,171 $11,605
1/31/1999 $10,053 $11,639 $12,275
2/28/1999 $ 9,260 $11,277 $11,673
3/31/1999 $ 9,808 $11,728 $12,274
4/30/1999 $10,029 $12,182 $12,363
5/31/1999 $ 9,998 $11,895 $12,013
6/30/1999 $11,011 $12,555 $12,838
7/31/1999 $11,116 $12,163 $12,431
8/31/1999 $11,561 $12,102 $12,585
9/30/1999 $11,791 $11,771 $12,355
10/31/1999 $13,248 $12,516 $13,245
11/30/1999 $15,150 $12,770 $14,005
12/31/1999 $18,436 $13,522 $15,531
1/31/2000 $18,452 $12,843 $14,844
2/29/2000 $23,234 $12,600 $15,772
3/31/2000 $21,952 $13,832 $16,664
4/30/2000 $19,547 $13,416 $15,807
5/31/2000 $18,265 $13,141 $14,971
6/30/2000 $20,993 $13,465 $16,158
7/31/2000 $20,436 $13,254 $15,435
8/31/2000 $23,425 $14,078 $16,847
9/30/2000 $22,697 $13,334 $15,304
10/31/2000 $20,720 $13,278 $14,544
11/30/2000 $16,300 $12,231 $12,367
12/31/2000 $17,138 $12,291 $12,049
1/31/2001 $17,441 $12,727 $12,892
2/28/2001 $14,213 $11,567 $10,733
3/31/2001 $12,685 $10,834 $ 9,579
4/30/2001 $14,106 $11,676 $10,788
5/31/2001 $14,110 $11,754 $10,659
6/30/2001 $14,023 $11,468 $10,453
7/31/2001 $13,497 $11,355 $10,148
8/31/2001 $12,813 $10,644 $ 9,331
9/30/2001 $11,040 $ 9,785 $ 8,361
10/31/2001 $11,802 $ 9,971 $ 8,823
11/30/2001 $12,909 $10,736 $ 9,663
12/31/2001 $13,157 $10,830 $ 9,685
1/31/2002 $12,875 $10,672 $ 9,502
2/28/2002 $12,382 $10,466 $ 9,093
3/31/2002 $13,335 $10,860 $ 9,438
4/30/2002 $12,718 $10,201 $ 8,707
5/31/2002 $12,436 $10,126 $ 8,474
6/30/2002 $11,434 $ 9,405 $ 7,695
7/31/2002 $10,249 $ 8,672 $ 7,220
8/31/2002 $10,195 $ 8,729 $ 7,240
9/30/2002 $ 9,429 $ 7,780 $ 6,503
10/31/2002 $ 9,942 $ 8,465 $ 7,082
11/30/2002 $10,556 $ 8,963 $ 7,487
12/31/2002 $ 9,876 $ 8,437 $ 6,970
1/31/2003 $ 9,893 $ 8,216 $ 6,799
2/28/2003 $ 9,843 $ 8,092 $ 6,758
3/31/2003 $ 9,930 $ 8,171 $ 6,883
4/30/2003 $10,589 $ 8,844 $ 7,400
5/31/2003 $11,384 $ 9,310 $ 7,799
6/30/2003 $11,454 $ 9,429 $ 7,910
7/31/2003 $11,923 $ 9,595 $ 8,134
8/31/2003 $12,503 $ 9,782 $ 8,353
9/30/2003 $12,134 $ 9,678 $ 8,255
10/31/2003 $13,190 $10,226 $ 8,737
11/30/2003 $13,609 $10,316 $ 8,843
12/31/2003 $13,874 $10,857 $ 9,128
1/31/2004 $14,093 $11,056 $ 9,337
2/29/2004 $14,213 $11,210 $ 9,390
3/31/2004 $14,276 $11,040 $ 9,233
4/30/2004 $13,986 $10,867 $ 9,097
5/31/2004 $14,404 $11,016 $ 9,268
6/30/2004 $14,657 $11,230 $ 9,398
7/31/2004 $13,770 $10,859 $ 8,841
8/31/2004 $13,696 $10,903 $ 8,786
9/30/2004 $14,164 $11,021 $ 8,901
10/31/2004 $14,491 $11,189 $ 9,046
11/30/2004 $15,104 $11,642 $ 9,395
12/31/2004 $15,672 $12,038 $ 9,761
1/31/2005 $15,100 $11,745 $ 9,425
2/28/2005 $15,373 $11,992 $ 9,528
3/31/2005 $15,017 $11,779 $ 9,338
4/30/2005 $14,607 $11,556 $ 9,125
5/31/2005 $15,328 $11,924 $ 9,583
6/30/2005 $15,220 $11,941 $ 9,577
7/31/2005 $15,904 $12,385 $10,062
8/31/2005 $15,788 $12,272 $ 9,931
9/30/2005 $15,958 $12,371 $ 9,980
10/31/2005 $15,709 $12,165 $ 9,859
11/30/2005 $16,620 $12,625 $10,296
12/31/2005 $16,645 $12,629 $10,265
1/31/2006 $17,474 $12,964 $10,516
2/28/2006 $17,494 $12,999 $10,495
3/31/2006 $17,668 $13,161 $10,683
4/30/2006 $17,586 $13,337 $10,667
5/31/2006 $16,554 $12,954 $10,268
6/30/2006 $16,753 $12,971 $10,232
7/31/2006 $16,401 $13,051 $10,008
8/31/2006 $16,687 $13,362 $10,318
9/30/2006 $17,014 $13,706 $10,584
10/31/2006 $17,424 $14,153 $10,982
11/30/2006 $17,834 $14,422 $11,204
12/31/2006 $17,604 $14,624 $11,236
1/31/2007 $18,160 $14,845 $11,518
2/28/2007 $17,832 $14,555 $11,316
3/31/2007 $17,990 $14,718 $11,381
4/30/2007 $18,728 $15,370 $11,897
5/31/2007 $19,317 $15,906 $12,335
6/30/2007 $19,224 $15,642 $12,160
7/31/2007 $19,095 $15,157 $11,933
8/31/2007 $19,714 $15,384 $12,133
9/30/2007 $20,963 $15,959 $12,628
10/31/2007 $21,556 $16,213 $13,069
11/30/2007 $20,569 $15,535 $12,552
12/31/2007 $20,425 $15,427 $12,517
1/31/2008 $18,415 $14,502 $11,527
2/29/2008 $17,854 $14,031 $11,284
3/31/2008 $17,917 $13,970 $11,216
4/30/2008 $19,287 $14,651 $11,804
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/08
- ------------------------ -------
1-Year -1.81%
5-Year +11.64%
Since Inception (1/1/99) +7.25%
CLASS B (1/1/99-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN FLEX CAP S&P 500 RUSSELL 3000
DATE GROWTH FUND - CLASS B INDEX GROWTH INDEX
- ---------- --------------------- ------- ------------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $10,633 $10,418 $10,577
2/28/1999 $ 9,786 $10,094 $10,058
3/31/1999 $10,362 $10,498 $10,576
4/30/1999 $10,588 $10,905 $10,653
5/31/1999 $10,551 $10,647 $10,351
6/30/1999 $11,610 $11,238 $11,062
7/31/1999 $11,709 $10,887 $10,711
8/31/1999 $12,175 $10,833 $10,845
9/30/1999 $12,406 $10,536 $10,646
10/31/1999 $13,932 $11,203 $11,413
11/30/1999 $15,919 $11,431 $12,068
12/31/1999 $19,359 $12,104 $13,383
1/31/2000 $19,359 $11,496 $12,791
2/29/2000 $24,362 $11,278 $13,590
3/31/2000 $23,001 $12,382 $14,359
4/30/2000 $20,473 $12,009 $13,620
5/31/2000 $19,116 $11,763 $12,900
6/30/2000 $21,957 $12,053 $13,923
7/31/2000 $21,363 $11,864 $13,300
8/31/2000 $24,473 $12,601 $14,517
9/30/2000 $23,694 $11,936 $13,187
10/31/2000 $21,615 $11,886 $12,532
11/30/2000 $16,992 $10,949 $10,656
12/31/2000 $17,857 $11,002 $10,383
1/31/2001 $18,160 $11,392 $11,109
2/28/2001 $14,795 $10,354 $ 9,248
3/31/2001 $13,193 $ 9,698 $ 8,254
4/30/2001 $14,668 $10,451 $ 9,295
5/31/2001 $14,659 $10,521 $ 9,185
6/30/2001 $14,558 $10,265 $ 9,007
7/31/2001 $14,005 $10,164 $ 8,744
8/31/2001 $13,290 $ 9,528 $ 8,040
9/30/2001 $11,438 $ 8,759 $ 7,205
10/31/2001 $12,219 $ 8,926 $ 7,602
11/30/2001 $13,360 $ 9,610 $ 8,326
12/31/2001 $13,610 $ 9,694 $ 8,345
1/31/2002 $13,312 $ 9,553 $ 8,187
2/28/2002 $12,794 $ 9,369 $ 7,835
3/31/2002 $13,768 $ 9,721 $ 8,133
4/30/2002 $13,123 $ 9,132 $ 7,503
5/31/2002 $12,825 $ 9,064 $ 7,302
6/30/2002 $11,785 $ 8,419 $ 6,631
7/31/2002 $10,556 $ 7,763 $ 6,221
8/31/2002 $10,495 $ 7,813 $ 6,238
9/30/2002 $ 9,701 $ 6,964 $ 5,603
10/31/2002 $10,219 $ 7,577 $ 6,103
11/30/2002 $10,846 $ 8,023 $ 6,451
12/31/2002 $10,140 $ 7,552 $ 6,005
1/31/2003 $10,148 $ 7,354 $ 5,859
2/28/2003 $10,091 $ 7,244 $ 5,823
3/31/2003 $10,175 $ 7,314 $ 5,931
4/30/2003 $10,846 $ 7,917 $ 6,377
5/31/2003 $11,649 $ 8,334 $ 6,721
6/30/2003 $11,719 $ 8,440 $ 6,816
7/31/2003 $12,189 $ 8,589 $ 7,009
8/31/2003 $12,772 $ 8,756 $ 7,198
9/30/2003 $12,386 $ 8,663 $ 7,113
10/31/2003 $13,457 $ 9,153 $ 7,528
11/30/2003 $13,873 $ 9,234 $ 7,620
12/31/2003 $14,137 $ 9,718 $ 7,866
1/31/2004 $14,356 $ 9,897 $ 8,045
2/29/2004 $14,466 $10,034 $ 8,091
3/31/2004 $14,523 $ 9,883 $ 7,956
4/30/2004 $14,216 $ 9,728 $ 7,839
5/31/2004 $14,632 $ 9,861 $ 7,986
6/30/2004 $14,882 $10,053 $ 8,098
7/31/2004 $13,970 $ 9,720 $ 7,618
8/31/2004 $13,887 $ 9,759 $ 7,570
9/30/2004 $14,356 $ 9,865 $ 7,670
10/31/2004 $14,676 $10,016 $ 7,795
11/30/2004 $15,286 $10,421 $ 8,095
12/31/2004 $15,852 $10,776 $ 8,410
1/31/2005 $15,264 $10,513 $ 8,121
2/28/2005 $15,532 $10,734 $ 8,210
3/31/2005 $15,163 $10,544 $ 8,047
4/30/2005 $14,738 $10,344 $ 7,863
5/31/2005 $15,453 $10,673 $ 8,258
6/30/2005 $15,339 $10,689 $ 8,252
7/31/2005 $16,014 $11,086 $ 8,670
8/31/2005 $15,892 $10,985 $ 8,558
9/30/2005 $16,054 $11,074 $ 8,600
10/31/2005 $15,791 $10,889 $ 8,495
11/30/2005 $16,699 $11,301 $ 8,872
12/31/2005 $16,708 $11,305 $ 8,845
1/31/2006 $17,528 $11,604 $ 9,061
2/28/2006 $17,541 $11,636 $ 9,044
3/31/2006 $17,704 $11,781 $ 9,205
4/30/2006 $17,612 $11,939 $ 9,192
5/31/2006 $16,567 $11,595 $ 8,848
6/30/2006 $16,756 $11,611 $ 8,817
7/31/2006 $16,392 $11,683 $ 8,623
8/31/2006 $16,668 $11,961 $ 8,891
9/30/2006 $16,984 $12,269 $ 9,120
10/31/2006 $17,383 $12,669 $ 9,463
11/30/2006 $17,778 $12,909 $ 9,654
12/31/2006 $17,541 $13,091 $ 9,682
1/31/2007 $18,095 $13,289 $ 9,925
2/28/2007 $17,770 $13,029 $ 9,751
3/31/2007 $17,926 $13,174 $ 9,807
4/30/2007 $18,661 $13,758 $10,252
5/31/2007 $19,249 $14,238 $10,628
6/30/2007 $19,156 $14,001 $10,478
7/31/2007 $19,028 $13,567 $10,283
8/31/2007 $19,645 $13,771 $10,454
9/30/2007 $20,890 $14,286 $10,881
10/31/2007 $21,481 $14,513 $11,261
11/30/2007 $20,497 $13,906 $10,816
12/31/2007 $20,354 $13,810 $10,785
1/31/2008 $18,351 $12,981 $ 9,932
2/29/2008 $17,793 $12,560 $ 9,723
3/31/2008 $17,855 $12,505 $ 9,664
4/30/2008 $19,218 $13,115 $10,171
10 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/08
- ------- -------
1-Year +1.21%
5-Year +11.90%
10-Year +6.62%
CLASS C (5/1/98-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN FLEX CAP S&P 500 RUSSELL 3000
DATE GROWTH FUND - CLASS C INDEX GROWTH INDEX
- ---------- --------------------- ------- ------------
5/1/1998 $10,000 $10,000 $10,000
5/31/1998 $ 9,468 $ 9,828 $ 9,675
6/30/1998 $ 9,682 $10,227 $10,223
7/31/1998 $ 9,214 $10,118 $10,086
8/31/1998 $ 7,687 $ 8,656 $ 8,505
9/30/1998 $ 8,191 $ 9,210 $ 9,175
10/31/1998 $ 8,642 $ 9,959 $ 9,892
11/30/1998 $ 9,263 $10,563 $10,645
12/31/1998 $ 9,974 $11,171 $11,605
1/31/1999 $10,609 $11,639 $12,275
2/28/1999 $ 9,768 $11,277 $11,673
3/31/1999 $10,337 $11,728 $12,274
4/30/1999 $10,567 $12,182 $12,363
5/31/1999 $10,526 $11,895 $12,013
6/30/1999 $11,586 $12,555 $12,838
7/31/1999 $11,689 $12,163 $12,431
8/31/1999 $12,151 $12,102 $12,585
9/30/1999 $12,382 $11,771 $12,355
10/31/1999 $13,908 $12,516 $13,245
11/30/1999 $15,893 $12,770 $14,005
12/31/1999 $19,330 $13,522 $15,531
1/31/2000 $19,334 $12,843 $14,844
2/29/2000 $24,330 $12,600 $15,772
3/31/2000 $22,973 $13,832 $16,664
4/30/2000 $20,444 $13,416 $15,807
5/31/2000 $19,091 $13,141 $14,971
6/30/2000 $21,925 $13,465 $16,158
7/31/2000 $21,331 $13,254 $15,435
8/31/2000 $24,434 $14,078 $16,847
9/30/2000 $23,658 $13,334 $15,304
10/31/2000 $21,583 $13,278 $14,544
11/30/2000 $16,966 $12,231 $12,367
12/31/2000 $17,834 $12,291 $12,049
1/31/2001 $18,131 $12,727 $12,892
2/28/2001 $14,770 $11,567 $10,733
3/31/2001 $13,171 $10,834 $ 9,579
4/30/2001 $14,639 $11,676 $10,788
5/31/2001 $14,635 $11,754 $10,659
6/30/2001 $14,530 $11,468 $10,453
7/31/2001 $13,975 $11,355 $10,148
8/31/2001 $13,263 $10,644 $ 9,331
9/30/2001 $11,419 $ 9,785 $ 8,361
10/31/2001 $12,196 $ 9,971 $ 8,823
11/30/2001 $13,337 $10,736 $ 9,663
12/31/2001 $13,582 $10,830 $ 9,685
1/31/2002 $13,284 $10,672 $ 9,502
2/28/2002 $12,769 $10,466 $ 9,093
3/31/2002 $13,743 $10,860 $ 9,438
4/30/2002 $13,097 $10,201 $ 8,707
5/31/2002 $12,799 $10,126 $ 8,474
6/30/2002 $11,764 $ 9,405 $ 7,695
7/31/2002 $10,536 $ 8,672 $ 7,220
8/31/2002 $10,475 $ 8,729 $ 7,240
9/30/2002 $ 9,684 $ 7,780 $ 6,503
10/31/2002 $10,199 $ 8,465 $ 7,082
11/30/2002 $10,824 $ 8,963 $ 7,487
12/31/2002 $10,121 $ 8,437 $ 6,970
1/31/2003 $10,129 $ 8,216 $ 6,799
2/28/2003 $10,073 $ 8,092 $ 6,758
3/31/2003 $10,156 $ 8,171 $ 6,883
4/30/2003 $10,824 $ 8,844 $ 7,400
5/31/2003 $11,628 $ 9,310 $ 7,799
6/30/2003 $11,694 $ 9,429 $ 7,910
7/31/2003 $12,161 $ 9,595 $ 8,134
8/31/2003 $12,747 $ 9,782 $ 8,353
9/30/2003 $12,362 $ 9,678 $ 8,255
10/31/2003 $13,429 $10,226 $ 8,737
11/30/2003 $13,848 $10,316 $ 8,843
12/31/2003 $14,110 $10,857 $ 9,128
1/31/2004 $14,325 $11,056 $ 9,337
2/29/2004 $14,438 $11,210 $ 9,390
3/31/2004 $14,495 $11,040 $ 9,233
4/30/2004 $14,189 $10,867 $ 9,097
5/31/2004 $14,604 $11,016 $ 9,268
6/30/2004 $14,853 $11,230 $ 9,398
7/31/2004 $13,944 $10,859 $ 8,841
8/31/2004 $13,857 $10,903 $ 8,786
9/30/2004 $14,325 $11,021 $ 8,901
10/31/2004 $14,648 $11,189 $ 9,046
11/30/2004 $15,255 $11,642 $ 9,395
12/31/2004 $15,819 $12,038 $ 9,761
1/31/2005 $15,233 $11,745 $ 9,425
2/28/2005 $15,500 $11,992 $ 9,528
3/31/2005 $15,133 $11,779 $ 9,338
4/30/2005 $14,709 $11,556 $ 9,125
5/31/2005 $15,421 $11,924 $ 9,583
6/30/2005 $15,308 $11,941 $ 9,577
7/31/2005 $15,981 $12,385 $10,062
8/31/2005 $15,858 $12,272 $ 9,931
9/30/2005 $16,020 $12,371 $ 9,980
10/31/2005 $15,758 $12,165 $ 9,859
11/30/2005 $16,662 $12,625 $10,296
12/31/2005 $16,676 $12,629 $10,265
1/31/2006 $17,493 $12,964 $10,516
2/28/2006 $17,510 $12,999 $10,495
3/31/2006 $17,668 $13,161 $10,683
4/30/2006 $17,576 $13,337 $10,667
5/31/2006 $16,531 $12,954 $10,268
6/30/2006 $16,724 $12,971 $10,232
7/31/2006 $16,361 $13,051 $10,008
8/31/2006 $16,632 $13,362 $10,318
9/30/2006 $16,951 $13,706 $10,584
10/31/2006 $17,349 $14,153 $10,982
11/30/2006 $17,746 $14,422 $11,204
12/31/2006 $17,506 $14,624 $11,236
1/31/2007 $18,048 $14,845 $11,518
2/28/2007 $17,711 $14,555 $11,316
3/31/2007 $17,860 $14,718 $11,381
4/30/2007 $18,581 $15,370 $11,897
5/31/2007 $19,153 $15,906 $12,335
6/30/2007 $19,048 $15,642 $12,160
7/31/2007 $18,909 $15,157 $11,933
8/31/2007 $19,507 $15,384 $12,133
9/30/2007 $20,731 $15,959 $12,628
10/31/2007 $21,308 $16,213 $13,069
11/30/2007 $20,316 $15,535 $12,552
12/31/2007 $20,164 $15,427 $12,517
1/31/2008 $18,166 $14,502 $11,527
2/29/2008 $17,602 $14,031 $11,284
3/31/2008 $17,655 $13,970 $11,216
4/30/2008 $18,992 $14,651 $11,804
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/08
- ------- -------
1-Year +2.73%
5-Year +12.46%
Since Inception (1/1/02) +5.93%
CLASS R (1/1/02-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN FLEX CAP S&P 500 RUSSELL 3000
DATE GROWTH FUND - CLASS R INDEX GROWTH INDEX
- ---------- --------------------- ------- ------------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $ 9,758 $ 9,854 $ 9,811
2/28/2002 $ 9,384 $ 9,664 $ 9,389
3/31/2002 $10,103 $10,027 $ 9,746
4/30/2002 $ 9,632 $ 9,420 $ 8,991
5/31/2002 $ 9,415 $ 9,350 $ 8,750
6/30/2002 $ 8,659 $ 8,684 $ 7,946
7/31/2002 $ 7,760 $ 8,007 $ 7,455
8/31/2002 $ 7,719 $ 8,060 $ 7,476
9/30/2002 $ 7,139 $ 7,184 $ 6,715
10/31/2002 $ 7,525 $ 7,816 $ 7,313
11/30/2002 $ 7,987 $ 8,276 $ 7,730
12/31/2002 $ 7,471 $ 7,790 $ 7,197
1/31/2003 $ 7,481 $ 7,586 $ 7,021
2/28/2003 $ 7,443 $ 7,472 $ 6,978
3/31/2003 $ 7,506 $ 7,545 $ 7,107
4/30/2003 $ 8,005 $ 8,166 $ 7,641
5/31/2003 $ 8,602 $ 8,596 $ 8,053
6/30/2003 $ 8,655 $ 8,706 $ 8,167
7/31/2003 $ 9,007 $ 8,859 $ 8,399
8/31/2003 $ 9,444 $ 9,032 $ 8,626
9/30/2003 $ 9,165 $ 8,936 $ 8,524
10/31/2003 $ 9,955 $ 9,442 $ 9,021
11/30/2003 $10,273 $ 9,525 $ 9,131
12/31/2003 $10,470 $10,024 $ 9,426
1/31/2004 $10,634 $10,208 $ 9,641
2/29/2004 $10,722 $10,350 $ 9,696
3/31/2004 $10,765 $10,194 $ 9,533
4/30/2004 $10,543 $10,034 $ 9,394
5/31/2004 $10,857 $10,172 $ 9,570
6/30/2004 $11,046 $10,370 $ 9,704
7/31/2004 $10,376 $10,026 $ 9,129
8/31/2004 $10,317 $10,067 $ 9,072
9/30/2004 $10,669 $10,176 $ 9,191
10/31/2004 $10,913 $10,332 $ 9,341
11/30/2004 $11,369 $10,750 $ 9,701
12/31/2004 $11,796 $11,115 $10,078
1/31/2005 $11,363 $10,844 $ 9,732
2/28/2005 $11,566 $11,073 $ 9,838
3/31/2005 $11,296 $10,877 $ 9,643
4/30/2005 $10,986 $10,670 $ 9,422
5/31/2005 $11,522 $11,010 $ 9,895
6/30/2005 $11,441 $11,025 $ 9,889
7/31/2005 $11,952 $11,435 $10,390
8/31/2005 $11,865 $11,331 $10,255
9/30/2005 $11,990 $11,423 $10,305
10/31/2005 $11,799 $11,232 $10,180
11/30/2005 $12,484 $11,657 $10,631
12/31/2005 $12,496 $11,661 $10,599
1/31/2006 $13,114 $11,970 $10,858
2/28/2006 $13,130 $12,003 $10,837
3/31/2006 $13,256 $12,152 $11,031
4/30/2006 $13,190 $12,315 $11,014
5/31/2006 $12,414 $11,961 $10,603
6/30/2006 $12,562 $11,977 $10,565
7/31/2006 $12,295 $12,051 $10,334
8/31/2006 $12,506 $12,338 $10,654
9/30/2006 $12,747 $12,655 $10,929
10/31/2006 $13,056 $13,068 $11,340
11/30/2006 $13,357 $13,316 $11,568
12/31/2006 $13,182 $13,503 $11,602
1/31/2007 $13,597 $13,707 $11,893
2/28/2007 $13,349 $13,439 $11,685
3/31/2007 $13,466 $13,590 $11,752
4/30/2007 $14,015 $14,192 $12,285
5/31/2007 $14,455 $14,687 $12,736
6/30/2007 $14,378 $14,443 $12,556
7/31/2007 $14,280 $13,995 $12,322
8/31/2007 $14,739 $14,205 $12,528
9/30/2007 $15,670 $14,736 $13,039
10/31/2007 $16,113 $14,970 $13,495
11/30/2007 $15,372 $14,344 $12,961
12/31/2007 $15,259 $14,245 $12,925
1/31/2008 $13,753 $13,391 $11,902
2/29/2008 $13,334 $12,956 $11,652
3/31/2008 $13,379 $12,900 $11,581
4/30/2008 $14,398 $13,528 $12,188
Annual Report | 11
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(6) 4/30/08
- ---------------- -------
1-Year +3.23%
5-Year +12.94%
10-Year +7.52%
ADVISOR CLASS (5/1/98-4/30/08)(6)
(PERFORMANCE GRAPH)
FRANKLIN FLEX CAP S&P 500 RUSSELL 3000
DATE GROWTH FUND - ADVISOR CLASS INDEX GROWTH INDEX
- ---------- --------------------------- ------- ------------
5/1/1998 $10,000 $10,000 $10,000
5/31/1998 $ 9,472 $ 9,828 $ 9,675
6/30/1998 $ 9,694 $10,227 $10,223
7/31/1998 $ 9,233 $10,118 $10,086
8/31/1998 $ 7,705 $ 8,656 $ 8,505
9/30/1998 $ 8,214 $ 9,210 $ 9,175
10/31/1998 $ 8,671 $ 9,959 $ 9,892
11/30/1998 $ 9,305 $10,563 $10,645
12/31/1998 $10,021 $11,171 $11,605
1/31/1999 $10,664 $11,639 $12,275
2/28/1999 $ 9,823 $11,277 $11,673
3/31/1999 $10,405 $11,728 $12,274
4/30/1999 $10,639 $12,182 $12,363
5/31/1999 $10,606 $11,895 $12,013
6/30/1999 $11,681 $12,555 $12,838
7/31/1999 $11,793 $12,163 $12,431
8/31/1999 $12,264 $12,102 $12,585
9/30/1999 $12,508 $11,771 $12,355
10/31/1999 $14,055 $12,516 $13,245
11/30/1999 $16,072 $12,770 $14,005
12/31/1999 $19,558 $13,522 $15,531
1/31/2000 $19,575 $12,843 $14,844
2/29/2000 $24,648 $12,600 $15,772
3/31/2000 $23,288 $13,832 $16,664
4/30/2000 $20,737 $13,416 $15,807
5/31/2000 $19,376 $13,141 $14,971
6/30/2000 $22,271 $13,465 $16,158
7/31/2000 $21,679 $13,254 $15,435
8/31/2000 $24,851 $14,078 $16,847
9/30/2000 $24,078 $13,334 $15,304
10/31/2000 $21,981 $13,278 $14,544
11/30/2000 $17,292 $12,231 $12,367
12/31/2000 $18,181 $12,291 $12,049
1/31/2001 $18,502 $12,727 $12,892
2/28/2001 $15,078 $11,567 $10,733
3/31/2001 $13,457 $10,834 $ 9,579
4/30/2001 $14,964 $11,676 $10,788
5/31/2001 $14,968 $11,754 $10,659
6/30/2001 $14,876 $11,468 $10,453
7/31/2001 $14,318 $11,355 $10,148
8/31/2001 $13,593 $10,644 $ 9,331
9/30/2001 $11,712 $ 9,785 $ 8,361
10/31/2001 $12,521 $ 9,971 $ 8,823
11/30/2001 $13,694 $10,736 $ 9,663
12/31/2001 $13,958 $10,830 $ 9,685
1/31/2002 $13,659 $10,672 $ 9,502
2/28/2002 $13,136 $10,466 $ 9,093
3/31/2002 $14,147 $10,860 $ 9,438
4/30/2002 $13,492 $10,201 $ 8,707
5/31/2002 $13,193 $10,126 $ 8,474
6/30/2002 $12,129 $ 9,405 $ 7,695
7/31/2002 $10,873 $ 8,672 $ 7,220
8/31/2002 $10,815 $ 8,729 $ 7,240
9/30/2002 $10,002 $ 7,780 $ 6,503
10/31/2002 $10,547 $ 8,465 $ 7,082
11/30/2002 $11,198 $ 8,963 $ 7,487
12/31/2002 $10,477 $ 8,437 $ 6,970
1/31/2003 $10,495 $ 8,216 $ 6,799
2/28/2003 $10,442 $ 8,092 $ 6,758
3/31/2003 $10,534 $ 8,171 $ 6,883
4/30/2003 $11,233 $ 8,844 $ 7,400
5/31/2003 $12,077 $ 9,310 $ 7,799
6/30/2003 $12,151 $ 9,429 $ 7,910
7/31/2003 $12,648 $ 9,595 $ 8,134
8/31/2003 $13,263 $ 9,782 $ 8,353
9/30/2003 $12,872 $ 9,678 $ 8,255
10/31/2003 $13,993 $10,226 $ 8,737
11/30/2003 $14,437 $10,316 $ 8,843
12/31/2003 $14,718 $10,857 $ 9,128
1/31/2004 $14,951 $11,056 $ 9,337
2/29/2004 $15,078 $11,210 $ 9,390
3/31/2004 $15,144 $11,040 $ 9,233
4/30/2004 $14,837 $10,867 $ 9,097
5/31/2004 $15,281 $11,016 $ 9,268
6/30/2004 $15,549 $11,230 $ 9,398
7/31/2004 $14,608 $10,859 $ 8,841
8/31/2004 $14,529 $10,903 $ 8,786
9/30/2004 $15,030 $11,021 $ 8,901
10/31/2004 $15,382 $11,189 $ 9,046
11/30/2004 $16,032 $11,642 $ 9,395
12/31/2004 $16,638 $12,038 $ 9,761
1/31/2005 $16,036 $11,745 $ 9,425
2/28/2005 $16,331 $11,992 $ 9,528
3/31/2005 $15,953 $11,779 $ 9,338
4/30/2005 $15,522 $11,556 $ 9,125
5/31/2005 $16,287 $11,924 $ 9,583
6/30/2005 $16,181 $11,941 $ 9,577
7/31/2005 $16,907 $12,385 $10,062
8/31/2005 $16,792 $12,272 $ 9,931
9/30/2005 $16,977 $12,371 $ 9,980
10/31/2005 $16,713 $12,165 $ 9,859
11/30/2005 $17,689 $12,625 $10,296
12/31/2005 $17,715 $12,629 $10,265
1/31/2006 $18,599 $12,964 $10,516
2/28/2006 $18,629 $12,999 $10,495
3/31/2006 $18,814 $13,161 $10,683
4/30/2006 $18,730 $13,337 $10,667
5/31/2006 $17,636 $12,954 $10,268
6/30/2006 $17,851 $12,971 $10,232
7/31/2006 $17,482 $13,051 $10,008
8/31/2006 $17,786 $13,362 $10,318
9/30/2006 $18,141 $13,706 $10,584
10/31/2006 $18,585 $14,153 $10,982
11/30/2006 $19,020 $14,422 $11,204
12/31/2006 $18,783 $14,624 $11,236
1/31/2007 $19,378 $14,845 $11,518
2/28/2007 $19,034 $14,555 $11,316
3/31/2007 $19,206 $14,718 $11,381
4/30/2007 $19,999 $15,370 $11,897
5/31/2007 $20,633 $15,906 $12,335
6/30/2007 $20,534 $15,642 $12,160
7/31/2007 $20,406 $15,157 $11,933
8/31/2007 $21,067 $15,384 $12,133
9/30/2007 $22,406 $15,959 $12,628
10/31/2007 $23,045 $16,213 $13,069
11/30/2007 $21,997 $15,535 $12,552
12/31/2007 $21,849 $15,427 $12,517
1/31/2008 $19,701 $14,502 $11,527
2/29/2008 $19,106 $14,031 $11,284
3/31/2008 $19,178 $13,970 $11,216
4/30/2008 $20,645 $14,651 $11,804
ENDNOTES
SMALL- AND MIDSIZED-COMPANY STOCKS CAN BE VOLATILE, ESPECIALLY OVER THE SHORT
TERM. SMALLER, MIDSIZED AND 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. 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.
(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 +40.86% and +9.59%.
(7.) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
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.
12 | Annual Report
Your Fund's Expenses
FRANKLIN FLEX CAP GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600/$1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 13
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE 11/1/07 VALUE 4/30/08 PERIOD* 11/1/07-4/30/08
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $ 894.70 $4.38
Hypothetical (5% return before expenses) $1,000 $1,020.24 $4.67
CLASS B
Actual $1,000 $ 891.30 $7.90
Hypothetical (5% return before expenses) $1,000 $1,016.51 $8.42
CLASS C
Actual $1,000 $ 891.30 $7.95
Hypothetical (5% return before expenses) $1,000 $1,016.46 $8.47
CLASS R
Actual $1,000 $ 893.50 $5.56
Hypothetical (5% return before expenses) $1,000 $1,019.00 $5.92
ADVISOR CLASS
Actual $1,000 $ 895.80 $3.21
Hypothetical (5% return before expenses) $1,000 $1,021.48 $3.42
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.93%; B:1.68%; C: 1.69%; R: 1.18%; and
Advisor: 0.68%), multiplied by the average account value over the period,
multiplied by 182/366 to reflect the one-half year period.
14 | Annual Report
Franklin Growth Opportunities Fund
(Formerly, Franklin Aggressive Growth Fund)
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Opportunities 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.
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 Growth Opportunities Fund's annual report
for the fiscal year ended April 30, 2008.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Growth Opportunities Fund - Class A had
a cumulative total return of +8.20%. The Fund outperformed its narrow benchmark,
the Russell 3000 Growth Index, which had a -0.79% return, and its broad
benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -4.68% return
for the same period.(1) You can find the Fund's long-term performance data in
the Performance Summary beginning on page 18.
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 59.
Annual Report | 15
PORTFOLIO BREAKDOWN
Franklin Growth Opportunities Fund
Based on Total Net Assets as of 4/30/08
Information Technology* 33.8%
Industrials 18.8%
Health Care 12.6%
Consumer Discretionary 9.0%
Energy 8.0%
Telecommunication Services 7.8%
Financials 3.8%
Materials 2.6%
Consumer Staples 2.1%
Short-Term Investments & Other Net Assets 1.5%
* 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 12 months under review were Apple and Visa in the information technology
sector, and FMC Technologies in the energy sector. Apple is a computer hardware,
software and electronics device maker, while Visa is the world's largest
consumer payment system operator. FMC Technologies is a leading manufacturer of
undersea oil and gas drilling and production systems.
From a sector perspective, our investments in the information technology, energy
and health care sectors contributed to absolute results. Key information
technology performers included Juniper Networks, a network infrastructure
designer, and Concur Technologies, a corporate expense management software
developer. In the energy sector, Schlumberger, one of the world's largest oil
field services companies, and McMoRan Exploration, an oil and gas exploration
and production company, were notable contributors. In the health care sector,
biotechnology stocks Celgene, Gilead Sciences and Millennium Pharmaceuticals
helped the Fund's results. We sold our positions in Juniper Networks, McMoRan
Exploration and Millennium Pharmaceuticals by period-end.
By contrast, the Fund had some disappointments during the reporting period.
Major detractors included NII Holdings in the telecommunication services sector,
and DealerTrack Holdings and Limelight Networks (sold by period-end) in the
information technology sector. NII Holdings is an international mobile
telecommunication network provider. DealerTrack Holdings designs and customizes
software for automotive dealerships, while Limelight Networks offers services
for delivering media content including video and music files via the Internet.
By sector, our holdings in the consumer discretionary, telecommunication
services and financials sectors weighed on the Fund's absolute performance.
Bakery-cafe chain Panera Bread and discount department store chain Kohl's in the
consumer discretionary sector declined in value. Other major detractors included
mobile services provider Leap Wireless International in the telecommunication
services sector and brokerage firm Goldman Sachs Group in the financials sector.
We sold our positions in Panera Bread, Kohl's and Leap Wireless by period-end.
16 | Annual Report
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 Growth Opportunities
Fund. We look forward to serving your future investment needs.
(PHOTO OF GRANT BOWERS)
/s/ Grant Bowers
Grant Bowers
Portfolio Manager
Franklin Growth Opportunities Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
TOP 10 HOLDINGS
Franklin Growth Opportunities Fund
4/30/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- ----------------------------- ----------
Apple Inc. 3.8%
INFORMATION TECHNOLOGY
Google Inc., A 3.6%
INFORMATION TECHNOLOGY
SBA Communications Corp. 3.0%
TELECOMMUNICATION SERVICES
Gilead Sciences Inc. 3.0%
HEALTH CARE
FLIR Systems Inc. 2.9%
INFORMATION TECHNOLOGY
Celgene Corp. 2.9%
HEALTH CARE
NII Holdings Inc. 2.8%
TELECOMMUNICATION SERVICES
Precision Castparts Corp. 2.8%
INDUSTRIALS
Visa Inc., A 2.8%
INFORMATION TECHNOLOGY
Activision Inc. 2.6%
INFORMATION TECHNOLOGY
Annual Report | 17
Performance Summary as of 4/30/08
FRANKLIN GROWTH OPPORTUNITIES FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
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: FGRAX) CHANGE 4/30/08 4/30/07
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) +$1.52 $20.06 $18.54
CLASS B (SYMBOL: FKABX) CHANGE 4/30/08 4/30/07
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) +$1.31 $18.95 $17.64
CLASS C (SYMBOL: FKACX) CHANGE 4/30/08 4/30/07
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) +$1.30 $18.91 $17.61
CLASS R (SYMBOL: FKARX) CHANGE 4/30/08 4/30/07
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) +$1.47 $19.80 $18.33
ADVISOR CLASS (SYMBOL: FRAAX) CHANGE 4/30/08 4/30/07
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) +$1.61 $20.60 $18.99
18 | Annual 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. UNTIL AUGUST
31, 2008, THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF
PURCHASE.
CLASS A 1-YEAR 5-YEAR INCEPTION (6/23/99)
- ------------------------------------- ------- -------- -------------------
Cumulative Total Return(1) +8.20% +111.16% +105.40%
Average Annual Total Return(2) +1.98% +14.76% +7.75%
Value of $10,000 Investment(3) $10,198 $ 19,901 $ 19,359
Avg. Ann. Total Return (3/31/08)(4) -5.56% +14.17% +6.60%
Total Annual Operating Expenses(5) 1.42%
CLASS B 1-YEAR 5-YEAR INCEPTION (6/23/99)
- ------------------------------------- ------- -------- -------------------
Cumulative Total Return(1) +7.43% +103.76% +95.09%
Average Annual Total Return(2) +3.43% +15.07% +7.84%
Value of $10,000 Investment(3) $10,343 $20,176 $19,509
Avg. Ann. Total Return (3/31/08)(4) -4.45% +14.52% +6.70%
Total Annual Operating Expenses(5) 2.12%
CLASS C 1-YEAR 5-YEAR INCEPTION (6/23/99)
- ------------------------------------- ------- -------- -------------------
Cumulative Total Return(1) +7.38% +103.77% +93.46%
Average Annual Total Return(2) +6.38% +15.30% +7.74%
Value of $10,000 Investment(3) $10,638 $ 20,377 $19,346
Avg. Ann. Total Return (3/31/08)(4) -1.52% +14.72% +6.60%
Total Annual Operating Expenses(5) 2.13%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------------------------------------- ------- -------- -------------------
Cumulative Total Return(1) +8.02% +109.08% +44.00%
Average Annual Total Return(2) +8.02% +15.89% +5.94%
Value of $10,000 Investment(3) $10,802 $ 20,908 $14,400
Avg. Ann. Total Return (3/31/08)(4) 0.00% +15.30% +4.33%
Total Annual Operating Expenses(5) 1.63%
ADVISOR CLASS 1-YEAR 5-YEAR INCEPTION (6/23/99)
- ------------------------------------- ------- -------- -------------------
Cumulative Total Return(1) +8.48% +114.14% +111.02%
Average Annual Total Return(2) +8.48% +16.45% +8.80%
Value of $10,000 Investment(3) $10,848 $ 21,414 $ 21,102
Avg. Ann. Total Return (3/31/08)(4) +0.48% +15.87% +7.66%
Total Annual Operating Expenses(5) 1.13%
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.
Annual Report | 19
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/08
- ------------------------- -------
1-Year +1.98%
5-Year +14.76%
Since Inception (6/23/99) +7.75%
CLASS A (6/23/99-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH RUSSELL 3000
DATE OPPORTUNITIES FUND - CLASS A S&P 500 INDEX GROWTH INDEX
- ---------- ---------------------------- ------------- ------------
6/23/1999 $ 9,425 $10,000 $10,000
6/30/1999 $10,160 $10,129 $10,160
7/31/1999 $11,235 $ 9,813 $ 9,838
8/31/1999 $12,385 $ 9,765 $ 9,960
9/30/1999 $13,195 $ 9,497 $ 9,778
10/31/1999 $15,438 $10,098 $10,482
11/30/1999 $18,596 $10,303 $11,084
12/31/1999 $23,095 $10,910 $12,291
1/31/2000 $22,603 $10,362 $11,748
2/29/2000 $30,639 $10,166 $12,482
3/31/2000 $28,536 $11,160 $13,188
4/30/2000 $24,330 $10,824 $12,510
5/31/2000 $21,899 $10,602 $11,848
6/30/2000 $26,443 $10,864 $12,788
7/31/2000 $25,594 $10,694 $12,215
8/31/2000 $28,401 $11,358 $13,333
9/30/2000 $27,147 $10,759 $12,112
10/31/2000 $23,896 $10,713 $11,510
11/30/2000 $17,239 $ 9,868 $ 9,787
12/31/2000 $17,130 $ 9,917 $ 9,536
1/31/2001 $19,340 $10,269 $10,203
2/28/2001 $14,833 $ 9,332 $ 8,494
3/31/2001 $12,874 $ 8,741 $ 7,581
4/30/2001 $14,766 $ 9,420 $ 8,537
5/31/2001 $14,717 $ 9,483 $ 8,436
6/30/2001 $14,611 $ 9,253 $ 8,273
7/31/2001 $13,694 $ 9,162 $ 8,031
8/31/2001 $12,411 $ 8,588 $ 7,385
9/30/2001 $10,046 $ 7,895 $ 6,617
10/31/2001 $11,253 $ 8,045 $ 6,982
11/30/2001 $12,835 $ 8,662 $ 7,647
12/31/2001 $13,260 $ 8,738 $ 7,665
1/31/2002 $12,652 $ 8,611 $ 7,520
2/28/2002 $11,726 $ 8,444 $ 7,196
3/31/2002 $12,652 $ 8,762 $ 7,470
4/30/2002 $11,948 $ 8,231 $ 6,891
5/31/2002 $11,523 $ 8,170 $ 6,707
6/30/2002 $10,268 $ 7,588 $ 6,090
7/31/2002 $ 8,850 $ 6,997 $ 5,714
8/31/2002 $ 8,657 $ 7,043 $ 5,730
9/30/2002 $ 7,798 $ 6,277 $ 5,147
10/31/2002 $ 8,531 $ 6,830 $ 5,605
11/30/2002 $ 9,458 $ 7,232 $ 5,925
12/31/2002 $ 8,522 $ 6,807 $ 5,516
1/31/2003 $ 8,483 $ 6,629 $ 5,381
2/28/2003 $ 8,415 $ 6,529 $ 5,349
3/31/2003 $ 8,512 $ 6,593 $ 5,447
4/30/2003 $ 9,168 $ 7,136 $ 5,857
5/31/2003 $ 9,959 $ 7,512 $ 6,173
6/30/2003 $10,046 $ 7,607 $ 6,260
7/31/2003 $10,539 $ 7,741 $ 6,438
8/31/2003 $11,060 $ 7,892 $ 6,611
9/30/2003 $10,712 $ 7,809 $ 6,533
10/31/2003 $11,668 $ 8,250 $ 6,915
11/30/2003 $11,967 $ 8,323 $ 6,998
12/31/2003 $12,266 $ 8,759 $ 7,224
1/31/2004 $12,546 $ 8,920 $ 7,389
2/29/2004 $12,565 $ 9,044 $ 7,432
3/31/2004 $12,613 $ 8,908 $ 7,307
4/30/2004 $12,131 $ 8,768 $ 7,200
5/31/2004 $12,469 $ 8,888 $ 7,335
6/30/2004 $12,913 $ 9,061 $ 7,438
7/31/2004 $11,996 $ 8,761 $ 6,997
8/31/2004 $11,812 $ 8,797 $ 6,953
9/30/2004 $12,498 $ 8,892 $ 7,044
10/31/2004 $12,903 $ 9,028 $ 7,159
11/30/2004 $13,800 $ 9,393 $ 7,435
12/31/2004 $14,389 $ 9,713 $ 7,725
1/31/2005 $13,849 $ 9,476 $ 7,459
2/28/2005 $13,849 $ 9,675 $ 7,540
3/31/2005 $13,472 $ 9,504 $ 7,391
4/30/2005 $12,864 $ 9,324 $ 7,222
5/31/2005 $13,714 $ 9,620 $ 7,584
6/30/2005 $13,907 $ 9,634 $ 7,579
7/31/2005 $14,669 $ 9,992 $ 7,963
8/31/2005 $14,582 $ 9,901 $ 7,860
9/30/2005 $14,881 $ 9,981 $ 7,898
10/31/2005 $14,891 $ 9,815 $ 7,803
11/30/2005 $15,895 $10,186 $ 8,148
12/31/2005 $15,982 $10,190 $ 8,124
1/31/2006 $17,082 $10,460 $ 8,322
2/28/2006 $17,188 $10,488 $ 8,306
3/31/2006 $17,738 $10,618 $ 8,455
4/30/2006 $17,661 $10,761 $ 8,442
5/31/2006 $16,281 $10,451 $ 8,126
6/30/2006 $16,474 $10,465 $ 8,098
7/31/2006 $15,711 $10,530 $ 7,920
8/31/2006 $15,846 $10,781 $ 8,166
9/30/2006 $16,242 $11,058 $ 8,376
10/31/2006 $16,618 $11,419 $ 8,691
11/30/2006 $17,178 $11,636 $ 8,867
12/31/2006 $17,062 $11,799 $ 8,892
1/31/2007 $17,487 $11,978 $ 9,116
2/28/2007 $17,217 $11,743 $ 8,956
3/31/2007 $17,487 $11,875 $ 9,007
4/30/2007 $17,892 $12,401 $ 9,416
5/31/2007 $18,529 $12,833 $ 9,762
6/30/2007 $18,655 $12,620 $ 9,624
7/31/2007 $18,635 $12,229 $ 9,444
8/31/2007 $19,243 $12,412 $ 9,602
9/30/2007 $21,145 $12,876 $ 9,994
10/31/2007 $22,351 $13,081 $10,343
11/30/2007 $20,604 $12,534 $ 9,934
12/31/2007 $20,633 $12,447 $ 9,906
1/31/2008 $18,317 $11,701 $ 9,122
2/29/2008 $17,574 $11,321 $ 8,931
3/31/2008 $17,526 $11,272 $ 8,876
4/30/2008 $19,359 $11,821 $ 9,342
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/08
- ------------------------- -------
1-Year +3.43%
5-Year +15.07%
Since Inception (6/23/99) +7.84%
CLASS B (6/23/99-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH OPPORTUNITIES RUSSELL 3000
DATE FUND - CLASS B S&P 500 INDEX GROWTH INDEX
- ---------- ----------------------------- ------------- ------------
6/23/1999 $10,000 $10,000 $10,000
6/30/1999 $10,780 $10,129 $10,160
7/31/1999 $11,920 $ 9,813 $ 9,838
8/31/1999 $13,140 $ 9,765 $ 9,960
9/30/1999 $13,970 $ 9,497 $ 9,778
10/31/1999 $16,380 $10,098 $10,482
11/30/1999 $19,720 $10,303 $11,084
12/31/1999 $24,486 $10,910 $12,291
1/31/2000 $23,975 $10,362 $11,748
2/29/2000 $32,485 $10,166 $12,482
3/31/2000 $30,245 $11,160 $13,188
4/30/2000 $25,755 $10,824 $12,510
5/31/2000 $23,177 $10,602 $11,848
6/30/2000 $27,964 $10,864 $12,788
7/31/2000 $27,043 $10,694 $12,215
8/31/2000 $29,999 $11,358 $13,333
9/30/2000 $28,660 $10,759 $12,112
10/31/2000 $25,213 $10,713 $11,510
11/30/2000 $18,176 $ 9,868 $ 9,787
12/31/2000 $18,049 $ 9,917 $ 9,536
1/31/2001 $20,362 $10,269 $10,203
2/28/2001 $15,604 $ 9,332 $ 8,494
3/31/2001 $13,547 $ 8,741 $ 7,581
4/30/2001 $15,522 $ 9,420 $ 8,537
5/31/2001 $15,461 $ 9,483 $ 8,436
6/30/2001 $15,348 $ 9,253 $ 8,273
7/31/2001 $14,376 $ 9,162 $ 8,031
8/31/2001 $13,015 $ 8,588 $ 7,385
9/30/2001 $10,529 $ 7,895 $ 6,617
10/31/2001 $11,798 $ 8,045 $ 6,982
11/30/2001 $13,435 $ 8,662 $ 7,647
12/31/2001 $13,875 $ 8,738 $ 7,665
1/31/2002 $13,230 $ 8,611 $ 7,520
2/28/2002 $12,258 $ 8,444 $ 7,196
3/31/2002 $13,220 $ 8,762 $ 7,470
4/30/2002 $12,483 $ 8,231 $ 6,891
5/31/2002 $12,023 $ 8,170 $ 6,707
6/30/2002 $10,713 $ 7,588 $ 6,090
7/31/2002 $ 9,219 $ 6,997 $ 5,714
8/31/2002 $ 9,014 $ 7,043 $ 5,730
9/30/2002 $ 8,114 $ 6,277 $ 5,147
10/31/2002 $ 8,881 $ 6,830 $ 5,605
11/30/2002 $ 9,843 $ 7,232 $ 5,925
12/31/2002 $ 8,861 $ 6,807 $ 5,516
1/31/2003 $ 8,820 $ 6,629 $ 5,381
2/28/2003 $ 8,738 $ 6,529 $ 5,349
3/31/2003 $ 8,830 $ 6,593 $ 5,447
4/30/2003 $ 9,516 $ 7,136 $ 5,857
5/31/2003 $10,324 $ 7,512 $ 6,173
6/30/2003 $10,406 $ 7,607 $ 6,260
7/31/2003 $10,907 $ 7,741 $ 6,438
8/31/2003 $11,450 $ 7,892 $ 6,611
9/30/2003 $11,081 $ 7,809 $ 6,533
10/31/2003 $12,064 $ 8,250 $ 6,915
11/30/2003 $12,360 $ 8,323 $ 6,998
12/31/2003 $12,667 $ 8,759 $ 7,224
1/31/2004 $12,943 $ 8,920 $ 7,389
2/29/2004 $12,964 $ 9,044 $ 7,432
3/31/2004 $13,005 $ 8,908 $ 7,307
4/30/2004 $12,504 $ 8,768 $ 7,200
5/31/2004 $12,841 $ 8,888 $ 7,335
6/30/2004 $13,291 $ 9,061 $ 7,438
7/31/2004 $12,340 $ 8,761 $ 6,997
8/31/2004 $12,135 $ 8,797 $ 6,953
9/30/2004 $12,841 $ 8,892 $ 7,044
10/31/2004 $13,250 $ 9,028 $ 7,159
11/30/2004 $14,161 $ 9,393 $ 7,435
12/31/2004 $14,755 $ 9,713 $ 7,725
1/31/2005 $14,202 $ 9,476 $ 7,459
2/28/2005 $14,192 $ 9,675 $ 7,540
3/31/2005 $13,793 $ 9,504 $ 7,391
4/30/2005 $13,169 $ 9,324 $ 7,222
5/31/2005 $14,028 $ 9,620 $ 7,584
6/30/2005 $14,212 $ 9,634 $ 7,579
7/31/2005 $14,980 $ 9,992 $ 7,963
8/31/2005 $14,888 $ 9,901 $ 7,860
9/30/2005 $15,184 $ 9,981 $ 7,898
10/31/2005 $15,184 $ 9,815 $ 7,803
11/30/2005 $16,187 $10,186 $ 8,148
12/31/2005 $16,279 $10,190 $ 8,124
1/31/2006 $17,384 $10,460 $ 8,322
2/28/2006 $17,476 $10,488 $ 8,306
3/31/2006 $18,019 $10,618 $ 8,455
4/30/2006 $17,937 $10,761 $ 8,442
5/31/2006 $16,525 $10,451 $ 8,126
6/30/2006 $16,709 $10,465 $ 8,098
7/31/2006 $15,931 $10,530 $ 7,920
8/31/2006 $16,064 $10,781 $ 8,166
9/30/2006 $16,453 $11,058 $ 8,376
10/31/2006 $16,821 $11,419 $ 8,691
11/30/2006 $17,384 $11,636 $ 8,867
12/31/2006 $17,251 $11,799 $ 8,892
1/31/2007 $17,671 $11,978 $ 9,116
2/28/2007 $17,384 $11,743 $ 8,956
3/31/2007 $18,049 $11,875 $ 9,007
4/30/2007 $18,049 $12,401 $ 9,416
5/31/2007 $18,694 $12,833 $ 9,762
6/30/2007 $18,796 $12,620 $ 9,624
7/31/2007 $18,777 $12,229 $ 9,444
8/31/2007 $19,389 $12,412 $ 9,602
9/30/2007 $21,305 $12,876 $ 9,994
10/31/2007 $22,522 $13,081 $10,343
11/30/2007 $20,760 $12,534 $ 9,934
12/31/2007 $20,789 $12,447 $ 9,906
1/31/2008 $18,455 $11,701 $ 9,122
2/29/2008 $17,705 $11,321 $ 8,931
3/31/2008 $17,658 $11,272 $ 8,876
4/30/2008 $19,509 $11,821 $ 9,342
20 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/08
- ------------------------- -------
1-Year +6.38%
5-Year +15.30%
Since Inception (6/23/99) +7.74%
CLASS C (6/23/99-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH RUSSELL 3000
DATE OPPORTUNITIES FUND - CLASS C S&P 500 INDEX GROWTH INDEX
- ---------- ---------------------------- ------------- ------------
6/23/1999 $10,000 $10,000 $10,000
6/30/1999 $10,780 $10,129 $10,160
7/31/1999 $11,920 $ 9,813 $ 9,838
8/31/1999 $13,150 $ 9,765 $ 9,960
9/30/1999 $13,980 $ 9,497 $ 9,778
10/31/1999 $16,370 $10,098 $10,482
11/30/1999 $19,710 $10,303 $11,084
12/31/1999 $24,443 $10,910 $12,291
1/31/2000 $23,921 $10,362 $11,748
2/29/2000 $32,389 $10,166 $12,482
3/31/2000 $30,149 $11,160 $13,188
4/30/2000 $25,690 $10,824 $12,510
5/31/2000 $23,123 $10,602 $11,848
6/30/2000 $27,899 $10,864 $12,788
7/31/2000 $26,989 $10,694 $12,215
8/31/2000 $29,935 $11,358 $13,333
9/30/2000 $28,595 $10,759 $12,112
10/31/2000 $25,158 $10,713 $11,510
11/30/2000 $18,133 $ 9,868 $ 9,787
12/31/2000 $18,016 $ 9,917 $ 9,536
1/31/2001 $20,329 $10,269 $10,203
2/28/2001 $15,582 $ 9,332 $ 8,494
3/31/2001 $13,515 $ 8,741 $ 7,581
4/30/2001 $15,489 $ 9,420 $ 8,537
5/31/2001 $15,428 $ 9,483 $ 8,436
6/30/2001 $15,316 $ 9,253 $ 8,273
7/31/2001 $14,344 $ 9,162 $ 8,031
8/31/2001 $12,983 $ 8,588 $ 7,385
9/30/2001 $10,507 $ 7,895 $ 6,617
10/31/2001 $11,776 $ 8,045 $ 6,982
11/30/2001 $13,413 $ 8,662 $ 7,647
12/31/2001 $13,853 $ 8,738 $ 7,665
1/31/2002 $13,208 $ 8,611 $ 7,520
2/28/2002 $12,236 $ 8,444 $ 7,196
3/31/2002 $13,198 $ 8,762 $ 7,470
4/30/2002 $12,461 $ 8,231 $ 6,891
5/31/2002 $12,001 $ 8,170 $ 6,707
6/30/2002 $10,691 $ 7,588 $ 6,090
7/31/2002 $ 9,208 $ 6,997 $ 5,714
8/31/2002 $ 9,003 $ 7,043 $ 5,730
9/30/2002 $ 8,103 $ 6,277 $ 5,147
10/31/2002 $ 8,870 $ 6,830 $ 5,605
11/30/2002 $ 9,822 $ 7,232 $ 5,925
12/31/2002 $ 8,839 $ 6,807 $ 5,516
1/31/2003 $ 8,798 $ 6,629 $ 5,381
2/28/2003 $ 8,727 $ 6,529 $ 5,349
3/31/2003 $ 8,819 $ 6,593 $ 5,447
4/30/2003 $ 9,494 $ 7,136 $ 5,857
5/31/2003 $10,302 $ 7,512 $ 6,173
6/30/2003 $10,384 $ 7,607 $ 6,260
7/31/2003 $10,886 $ 7,741 $ 6,438
8/31/2003 $11,428 $ 7,892 $ 6,611
9/30/2003 $11,059 $ 7,809 $ 6,533
10/31/2003 $12,042 $ 8,250 $ 6,915
11/30/2003 $12,338 $ 8,323 $ 6,998
12/31/2003 $12,635 $ 8,759 $ 7,224
1/31/2004 $12,921 $ 8,920 $ 7,389
2/29/2004 $12,942 $ 9,044 $ 7,432
3/31/2004 $12,973 $ 8,908 $ 7,307
4/30/2004 $12,471 $ 8,768 $ 7,200
5/31/2004 $12,809 $ 8,888 $ 7,335
6/30/2004 $13,259 $ 9,061 $ 7,438
7/31/2004 $12,308 $ 8,761 $ 6,997
8/31/2004 $12,113 $ 8,797 $ 6,953
9/30/2004 $12,819 $ 8,892 $ 7,044
10/31/2004 $13,218 $ 9,028 $ 7,159
11/30/2004 $14,139 $ 9,393 $ 7,435
12/31/2004 $14,722 $ 9,713 $ 7,725
1/31/2005 $14,170 $ 9,476 $ 7,459
2/28/2005 $14,159 $ 9,675 $ 7,540
3/31/2005 $13,760 $ 9,504 $ 7,391
4/30/2005 $13,136 $ 9,324 $ 7,222
5/31/2005 $13,996 $ 9,620 $ 7,584
6/30/2005 $14,180 $ 9,634 $ 7,579
7/31/2005 $14,947 $ 9,992 $ 7,963
8/31/2005 $14,855 $ 9,901 $ 7,860
9/30/2005 $15,152 $ 9,981 $ 7,898
10/31/2005 $15,152 $ 9,815 $ 7,803
11/30/2005 $16,154 $10,186 $ 8,148
12/31/2005 $16,236 $10,190 $ 8,124
1/31/2006 $17,351 $10,460 $ 8,322
2/28/2006 $17,433 $10,488 $ 8,306
3/31/2006 $17,986 $10,618 $ 8,455
4/30/2006 $17,894 $10,761 $ 8,442
5/31/2006 $16,492 $10,451 $ 8,126
6/30/2006 $16,676 $10,465 $ 8,098
7/31/2006 $15,899 $10,530 $ 7,920
8/31/2006 $16,032 $10,781 $ 8,166
9/30/2006 $16,410 $11,058 $ 8,376
10/31/2006 $16,779 $11,419 $ 8,691
11/30/2006 $17,341 $11,636 $ 8,867
12/31/2006 $17,208 $11,799 $ 8,892
1/31/2007 $17,628 $11,978 $ 9,116
2/28/2007 $17,351 $11,743 $ 8,956
3/31/2007 $17,617 $11,875 $ 9,007
4/30/2007 $18,016 $12,401 $ 9,416
5/31/2007 $18,641 $12,833 $ 9,762
6/30/2007 $18,753 $12,620 $ 9,624
7/31/2007 $18,733 $12,229 $ 9,444
8/31/2007 $19,326 $12,412 $ 9,602
9/30/2007 $21,219 $12,876 $ 9,994
10/31/2007 $22,416 $13,081 $10,343
11/30/2007 $20,656 $12,534 $ 9,934
12/31/2007 $20,666 $12,447 $ 9,906
1/31/2008 $18,334 $11,701 $ 9,122
2/29/2008 $17,577 $11,321 $ 8,931
3/31/2008 $17,525 $11,272 $ 8,876
4/30/2008 $19,346 $11,821 $ 9,342
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/08
- ------------------------ -------
1-Year +8.02%
5-Year +15.89%
Since Inception (1/1/02) +5.94%
CLASS R (1/1/02-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH RUSSELL 3000
DATE OPPORTUNITIES FUND - CLASS R S&P 500 INDEX GROWTH INDEX
- ---------- ---------------------------- ------------- ------------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $ 9,535 $ 9,854 $ 9,811
2/28/2002 $ 8,837 $ 9,664 $ 9,389
3/31/2002 $ 9,535 $10,027 $ 9,746
4/30/2002 $ 8,997 $ 9,420 $ 8,991
5/31/2002 $ 8,678 $ 9,350 $ 8,750
6/30/2002 $ 7,731 $ 8,684 $ 7,946
7/31/2002 $ 6,655 $ 8,007 $ 7,455
8/31/2002 $ 6,510 $ 8,060 $ 7,476
9/30/2002 $ 5,862 $ 7,184 $ 6,715
10/31/2002 $ 6,415 $ 7,816 $ 7,313
11/30/2002 $ 7,114 $ 8,276 $ 7,730
12/31/2002 $ 6,408 $ 7,790 $ 7,197
1/31/2003 $ 6,379 $ 7,586 $ 7,021
2/28/2003 $ 6,321 $ 7,472 $ 6,978
3/31/2003 $ 6,393 $ 7,545 $ 7,107
4/30/2003 $ 6,888 $ 8,166 $ 7,641
5/31/2003 $ 7,477 $ 8,596 $ 8,053
6/30/2003 $ 7,542 $ 8,706 $ 8,167
7/31/2003 $ 7,906 $ 8,859 $ 8,399
8/31/2003 $ 8,299 $ 9,032 $ 8,626
9/30/2003 $ 8,037 $ 8,936 $ 8,524
10/31/2003 $ 8,757 $ 9,442 $ 9,021
11/30/2003 $ 8,975 $ 9,525 $ 9,131
12/31/2003 $ 9,201 $10,024 $ 9,426
1/31/2004 $ 9,412 $10,208 $ 9,641
2/29/2004 $ 9,426 $10,350 $ 9,696
3/31/2004 $ 9,455 $10,194 $ 9,533
4/30/2004 $ 9,099 $10,034 $ 9,394
5/31/2004 $ 9,346 $10,172 $ 9,570
6/30/2004 $ 9,674 $10,370 $ 9,704
7/31/2004 $ 8,982 $10,026 $ 9,129
8/31/2004 $ 8,844 $10,067 $ 9,072
9/30/2004 $ 9,361 $10,176 $ 9,191
10/31/2004 $ 9,659 $10,332 $ 9,341
11/30/2004 $10,335 $10,750 $ 9,701
12/31/2004 $10,772 $11,115 $10,078
1/31/2005 $10,371 $10,844 $ 9,732
2/28/2005 $10,364 $11,073 $ 9,838
3/31/2005 $10,081 $10,877 $ 9,643
4/30/2005 $ 9,630 $10,670 $ 9,422
5/31/2005 $10,263 $11,010 $ 9,895
6/30/2005 $10,400 $11,025 $ 9,889
7/31/2005 $10,968 $11,435 $10,390
8/31/2005 $10,903 $11,331 $10,255
9/30/2005 $11,128 $11,423 $10,305
10/31/2005 $11,136 $11,232 $10,180
11/30/2005 $11,871 $11,657 $10,631
12/31/2005 $11,942 $11,661 $10,599
1/31/2006 $12,758 $11,970 $10,858
2/28/2006 $12,830 $12,003 $10,837
3/31/2006 $13,238 $12,152 $11,031
4/30/2006 $13,180 $12,315 $11,014
5/31/2006 $12,146 $11,961 $10,603
6/30/2006 $12,292 $11,977 $10,565
7/31/2006 $11,725 $12,051 $10,334
8/31/2006 $11,820 $12,338 $10,654
9/30/2006 $12,110 $12,655 $10,929
10/31/2006 $12,386 $13,068 $11,340
11/30/2006 $12,808 $13,316 $11,568
12/31/2006 $12,714 $13,503 $11,602
1/31/2007 $13,034 $13,707 $11,893
2/28/2007 $12,830 $13,439 $11,685
3/31/2007 $13,027 $13,590 $11,752
4/30/2007 $13,332 $14,192 $12,285
5/31/2007 $13,797 $14,687 $12,736
6/30/2007 $13,885 $14,443 $12,556
7/31/2007 $13,877 $13,995 $12,322
8/31/2007 $14,321 $14,205 $12,528
9/30/2007 $15,732 $14,736 $13,039
10/31/2007 $16,627 $14,970 $13,495
11/30/2007 $15,332 $14,344 $12,961
12/31/2007 $15,346 $14,245 $12,925
1/31/2008 $13,615 $13,391 $11,902
2/29/2008 $13,063 $12,956 $11,652
3/31/2008 $13,027 $12,900 $11,581
4/30/2008 $14,400 $13,528 $12,188
Annual Report | 21
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/08
- ------------------------- -------
1-Year +8.48%
5-Year +16.45%
Since Inception (6/23/99) +8.80%
ADVISOR CLASS (6/23/99-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH OPPORTUNITIES RUSSELL 3000
DATE FUND - ADVISOR CLASS S&P 500 INDEX GROWTH INDEX
- ---------- ----------------------------- ------------- ------------
6/23/1999 $10,000 $10,000 $10,000
6/30/1999 $10,780 $10,129 $10,160
7/31/1999 $11,920 $ 9,813 $ 9,838
8/31/1999 $13,150 $ 9,765 $ 9,960
9/30/1999 $14,000 $ 9,497 $ 9,778
10/31/1999 $16,410 $10,098 $10,482
11/30/1999 $19,770 $10,303 $11,084
12/31/1999 $24,566 $10,910 $12,291
1/31/2000 $24,064 $10,362 $11,748
2/29/2000 $32,615 $10,166 $12,482
3/31/2000 $30,393 $11,160 $13,188
4/30/2000 $25,918 $10,824 $12,510
5/31/2000 $23,337 $10,602 $11,848
6/30/2000 $28,191 $10,864 $12,788
7/31/2000 $27,280 $10,694 $12,215
8/31/2000 $30,290 $11,358 $13,333
9/30/2000 $28,959 $10,759 $12,112
10/31/2000 $25,498 $10,713 $11,510
11/30/2000 $18,402 $ 9,868 $ 9,787
12/31/2000 $18,285 $ 9,917 $ 9,536
1/31/2001 $20,652 $10,269 $10,203
2/28/2001 $15,837 $ 9,332 $ 8,494
3/31/2001 $13,747 $ 8,741 $ 7,581
4/30/2001 $15,776 $ 9,420 $ 8,537
5/31/2001 $15,724 $ 9,483 $ 8,436
6/30/2001 $15,622 $ 9,253 $ 8,273
7/31/2001 $14,649 $ 9,162 $ 8,031
8/31/2001 $13,266 $ 8,588 $ 7,385
9/30/2001 $10,746 $ 7,895 $ 6,617
10/31/2001 $12,047 $ 8,045 $ 6,982
11/30/2001 $13,737 $ 8,662 $ 7,647
12/31/2001 $14,198 $ 8,738 $ 7,665
1/31/2002 $13,542 $ 8,611 $ 7,520
2/28/2002 $12,559 $ 8,444 $ 7,196
3/31/2002 $13,563 $ 8,762 $ 7,470
4/30/2002 $12,805 $ 8,231 $ 6,891
5/31/2002 $12,344 $ 8,170 $ 6,707
6/30/2002 $11,002 $ 7,588 $ 6,090
7/31/2002 $ 9,486 $ 6,997 $ 5,714
8/31/2002 $ 9,281 $ 7,043 $ 5,730
9/30/2002 $ 8,359 $ 6,277 $ 5,147
10/31/2002 $ 9,158 $ 6,830 $ 5,605
11/30/2002 $10,152 $ 7,232 $ 5,925
12/31/2002 $ 9,148 $ 6,807 $ 5,516
1/31/2003 $ 9,117 $ 6,629 $ 5,381
2/28/2003 $ 9,035 $ 6,529 $ 5,349
3/31/2003 $ 9,148 $ 6,593 $ 5,447
4/30/2003 $ 9,855 $ 7,136 $ 5,857
5/31/2003 $10,705 $ 7,512 $ 6,173
6/30/2003 $10,797 $ 7,607 $ 6,260
7/31/2003 $11,330 $ 7,741 $ 6,438
8/31/2003 $11,893 $ 7,892 $ 6,611
9/30/2003 $11,524 $ 7,809 $ 6,533
10/31/2003 $12,559 $ 8,250 $ 6,915
11/30/2003 $12,887 $ 8,323 $ 6,998
12/31/2003 $13,204 $ 8,759 $ 7,224
1/31/2004 $13,512 $ 8,920 $ 7,389
2/29/2004 $13,542 $ 9,044 $ 7,432
3/31/2004 $13,594 $ 8,908 $ 7,307
4/30/2004 $13,081 $ 8,768 $ 7,200
5/31/2004 $13,440 $ 8,888 $ 7,335
6/30/2004 $13,921 $ 9,061 $ 7,438
7/31/2004 $12,938 $ 8,761 $ 6,997
8/31/2004 $12,743 $ 8,797 $ 6,953
9/30/2004 $13,491 $ 8,892 $ 7,044
10/31/2004 $13,932 $ 9,028 $ 7,159
11/30/2004 $14,905 $ 9,393 $ 7,435
12/31/2004 $15,540 $ 9,713 $ 7,725
1/31/2005 $14,966 $ 9,476 $ 7,459
2/28/2005 $14,977 $ 9,675 $ 7,540
3/31/2005 $14,557 $ 9,504 $ 7,391
4/30/2005 $13,911 $ 9,324 $ 7,222
5/31/2005 $14,833 $ 9,620 $ 7,584
6/30/2005 $15,048 $ 9,634 $ 7,579
7/31/2005 $15,878 $ 9,992 $ 7,963
8/31/2005 $15,786 $ 9,901 $ 7,860
9/30/2005 $16,114 $ 9,981 $ 7,898
10/31/2005 $16,124 $ 9,815 $ 7,803
11/30/2005 $17,210 $10,186 $ 8,148
12/31/2005 $17,312 $10,190 $ 8,124
1/31/2006 $18,511 $10,460 $ 8,322
2/28/2006 $18,623 $10,488 $ 8,306
3/31/2006 $19,217 $10,618 $ 8,455
4/30/2006 $19,136 $10,761 $ 8,442
5/31/2006 $17,650 $10,451 $ 8,126
6/30/2006 $17,865 $10,465 $ 8,098
7/31/2006 $17,046 $10,530 $ 7,920
8/31/2006 $17,199 $10,781 $ 8,166
9/30/2006 $17,630 $11,058 $ 8,376
10/31/2006 $18,039 $11,419 $ 8,691
11/30/2006 $18,654 $11,636 $ 8,867
12/31/2006 $18,531 $11,799 $ 8,892
1/31/2007 $19,002 $11,978 $ 9,116
2/28/2007 $18,705 $11,743 $ 8,956
3/31/2007 $19,013 $11,875 $ 9,007
4/30/2007 $19,453 $12,401 $ 9,416
5/31/2007 $20,150 $12,833 $ 9,762
6/30/2007 $20,293 $12,620 $ 9,624
7/31/2007 $20,283 $12,229 $ 9,444
8/31/2007 $20,949 $12,412 $ 9,602
9/30/2007 $23,008 $12,876 $ 9,994
10/31/2007 $24,329 $13,081 $10,343
11/30/2007 $22,444 $12,534 $ 9,934
12/31/2007 $22,475 $12,447 $ 9,906
1/31/2008 $19,955 $11,701 $ 9,122
2/29/2008 $19,146 $11,321 $ 8,931
3/31/2008 $19,105 $11,272 $ 8,876
4/30/2008 $21,102 $11,821 $ 9,342
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
INVESTORS. 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, A SECTOR THAT
HAS BEEN ONE OF THE MOST 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.
(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.) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The 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.
22 | Annual Report
Your Fund's Expenses
FRANKLIN GROWTH OPPORTUNITIES FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600/$1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 23
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE 11/1/07 VALUE 4/30/08 PERIOD* 11/1/07-4/30/08
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $ 866.10 $5.80
Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.27
CLASS B
Actual $1,000 $ 863.30 $9.08
Hypothetical (5% return before expenses) $1,000 $1,015.12 $9.82
CLASS C
Actual $1,000 $ 863.10 $9.08
Hypothetical (5% return before expenses) $1,000 $1,015.12 $9.82
CLASS R
Actual $1,000 $ 866.10 $6.77
Hypothetical (5% return before expenses) $1,000 $1,017.60 $7.32
ADVISOR CLASS
Actual $1,000 $ 867.40 $4.46
Hypothetical (5% return before expenses) $1,000 $1,020.09 $4.82
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.25%; B: 1.96%; C: 1.96%; R: 1.46%; and
Advisor: 0.96%), multiplied by the average account value over the period,
multiplied by 182/366 to reflect the one-half year period.
24 | Annual Report
Franklin Small Cap Growth Fund
(Formerly, Franklin Small Cap Growth Fund II)
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small Cap Growth Fund 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 annual report for Franklin Small Cap Growth Fund covers the fiscal year
ended April 30, 2008.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Small Cap Growth Fund - Class A had a
- -14.73% cumulative total return. The Fund underperformed its narrow benchmark,
the Russell 2000 Growth Index, which had a -6.70% return, and its broad
benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -4.68% return
for the same period.(2) You can find the Fund's long-term performance data in
the Performance Summary beginning on page 28.
Effective March 31, 2008, the Fund's name changed to Franklin Small Cap Growth
Fund. Our strategy remains the same.
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
(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 67.
Annual Report | 25
PORTFOLIO BREAKDOWN
Franklin Small Cap Growth Fund
Based on Total Net Assets as of 4/30/08
Information Technology* 37.2%
Consumer Discretionary 18.2%
Health Care 14.3%
Industrials 8.8%
Energy 8.5%
Financials 4.5%
Consumer Staples 2.3%
Materials 1.8%
Telecommunication Services 1.3%
Short-Term Investments & Other Net Assets 3.1%
* 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.
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.
MANAGER'S DISCUSSION
Among the most significant contributors to Fund performance relative to the
Russell 2000 Growth Index for the 12 months under review were McMoRan
Exploration (sold by period-end), an oil and gas exploration and production
company; FLIR Systems, a specialized imaging systems manufacturer; and drug
maker Adams Respiratory Therapeutics (sold by period-end).
Driven by stock selection, our investments in the energy, materials and
information technology sectors benefited relative Fund performance. In addition
to McMoRan Exploration, key contributors in the energy sector included oil and
gas exploration and production companies Bill Barrett and Mariner Energy, and
Superior Energy Services,(3) a specialized oil field services provider.
Materials sector holding FMC Corp.,(3) an industrial chemicals company, and
information technology sector holdings Power Integrations(3) and FARO
Technologies, also helped the Fund. Power Integrations makes high voltage analog
integrated circuitry and semiconductors found in PCs, cell phones, cable boxes
and other electronic devices, while FARO Technologies makes computerized
measurement devices and software.
The Fund also had some significant detractors from relative performance during
the reporting period, including military armored land vehicles manufacturer
Force Protection,(3) gaming and entertainment products manufacturer Shuffle
Master, and drug maker Keryx Biopharmaceuticals (sold by period-end).
Stock selection in the financials, health care and industrials sectors weighed
on relative Fund performance. In the financials sector, major detractors
included real estate and mortgage financier RAIT Financial Trust(3) (sold by
period-end) and Clayton Holdings, which provides technology-based analysis and
risk-management services for lenders, investors and financial services firms. In
addition to Keryx Biopharmaceuticals, health care holdings Allscripts Healthcare
Solutions (sold by period-end), a clinical software and information systems
developer, and Penwest Pharmaceuticals, a designer of a time-released drug
delivery system, hindered Fund performance. Additionally, an underweighted
(3.) Not an index component.
26 | Annual Report
position in the industrials sector and owning Huron Consulting Group, which
offers financial consulting services to companies in financial distress or under
litigation, hurt Fund performance.
Thank you for your continued participation in Franklin Small Cap Growth Fund. We
look forward to serving your future investment needs.
(PHOTO OF MICHAEL P. MCCARTHY)
/s/ Michael P. McCarthy
Michael P. McCarthy, CFA
Portfolio Manager
Franklin Small Cap Growth Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
TOP 10 HOLDINGS
Franklin Small Cap Growth Fund
4/30/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- ------------------------------ ----------
Power Integrations Inc. 2.2%
INFORMATION TECHNOLOGY
Psychiatric Solutions Inc. 2.0%
HEALTH CARE
Orbital Sciences Corp. 2.0%
INDUSTRIALS
Mariner Energy Inc. 2.0%
ENERGY
Superior Energy Services Inc. 1.9%
ENERGY
Sapient Corp. 1.9%
INFORMATION TECHNOLOGY
Netlogic Microsystems Inc. 1.8%
INFORMATION TECHNOLOGY
FLIR Systems Inc. 1.8%
INFORMATION TECHNOLOGY
Chipotle Mexican Grill Inc., B 1.8%
CONSUMER DISCRETIONARY
Microsemi Corp. 1.7%
INFORMATION TECHNOLOGY
Annual Report | 27
Performance Summary as of 4/30/08
FRANKLIN SMALL 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 and graphs do 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: FSGRX) CHANGE 4/30/08 4/30/07
- ------------------------------ ------ ------- -------
Net Asset Value (NAV) -$3.96 $9.09 $13.05
DISTRIBUTIONS (5/1/07-4/30/08)
Short-Term Capital Gain $0.0763
Long-Term Capital Gain $2.1993
TOTAL $2.2756
CLASS B (SYMBOL: FBSGX) CHANGE 4/30/08 4/30/07
- ------------------------------ ------ ------- -------
Net Asset Value (NAV) -$3.92 $8.43 $12.35
DISTRIBUTIONS (5/1/07-4/30/08)
Short-Term Capital Gain $0.0763
Long-Term Capital Gain $2.1993
TOTAL $2.2756
CLASS C (SYMBOL: FCSGX) CHANGE 4/30/08 4/30/07
- ------------------------------ ------ ------- -------
Net Asset Value (NAV) -$3.93 $8.43 $12.36
DISTRIBUTIONS (5/1/07-4/30/08)
Short-Term Capital Gain $0.0763
Long-Term Capital Gain $2.1993
TOTAL $2.2756
CLASS R (SYMBOL: FSSRX) CHANGE 4/30/08 4/30/07
- ------------------------------ ------ ------- -------
Net Asset Value (NAV) -$3.95 $8.91 $12.86
DISTRIBUTIONS (5/1/07-4/30/08)
Short-Term Capital Gain $0.0763
Long-Term Capital Gain $2.1993
TOTAL $2.2756
ADVISOR CLASS (SYMBOL: FSSAX) CHANGE 4/30/08 4/30/07
- ------------------------------ ------ ------- -------
Net Asset Value (NAV) -$3.97 $9.37 $13.34
DISTRIBUTIONS (5/1/07-4/30/08)
Short-Term Capital Gain $0.0763
Long-Term Capital Gain $2.1993
TOTAL $2.2756
28 | Annual 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.UNTIL AUGUST
31, 2008, THEFUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF
PURCHASE.
CLASS A 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ------------------------------------- ------- -------- ------------------
Cumulative Total Return(1) -14.73% +65.28% +23.30%
Average Annual Total Return(2) -19.65% +9.26% +1.90%
Value of $10,000 Investment(3) $ 8,035 $15,568 $11,621
Avg. Ann. Total Return (3/31/08)(4) -22.73% +9.86% +1.12%
Total Annual Operating Expenses(5) 1.25%
CLASS B 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ------------------------------------- ------- -------- ------------------
Cumulative Total Return(1) -15.27% +59.01% +16.55%
Average Annual Total Return(2) -18.00% +9.44% +1.93%
Value of $10,000 Investment(3) $ 8,200 $15,701 $11,655
Avg. Ann. Total Return (3/31/08)(4) -21.17% +10.09% +1.15%
Total Annual Operating Expenses(5) 2.01%
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ------------------------------------- ------- -------- ------------------
Cumulative Total Return(1) -15.35% +58.96% +16.52%
Average Annual Total Return(2) -16.04% +9.71% +1.93%
Value of $10,000 Investment(3) $ 8,396 $15,896 $11,652
Avg. Ann. Total Return (3/31/08)(4) -19.29% +10.32% +1.15%
Total Annual Operating Expenses(5) 2.00%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------------------------------------- ------- -------- ------------------
Cumulative Total Return(1) -14.87% +63.04% +22.94%
Average Annual Total Return(2) -14.87% +10.27% +3.32%
Value of $10,000 Investment(3) $ 8,513 $16,304 $12,294
Avg. Ann. Total Return (3/31/08)(4) -18.28% +10.88% +2.31%
Total Annual Operating Expenses(5) 1.51%
ADVISOR CLASS 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ------------------------------------- ------- -------- ------------------
Cumulative Total Return(1) -14.46% +67.11% +26.16%
Average Annual Total Return(2) -14.46% +10.81% +2.95%
Value of $10,000 Investment(3) $ 8,554 $16,711 $12,616
Avg. Ann. Total Return (3/31/08)(4) -17.82% +11.45% +2.17%
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.
Annual Report | 29
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/08
- ------------------------ -------
1-Year -19.65%
5-Year +9.26%
Since Inception (5/1/00) +1.90%
CLASS A (5/1/00-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000
DATE GROWTH FUND - CLASS A INDEX GROWTH INDEX
- ---------- --------------------- ------- ------------
5/1/2000 $ 9,425 $10,000 $10,000
5/31/2000 $ 8,982 $ 9,795 $ 9,124
6/30/2000 $11,178 $10,036 $10,303
7/31/2000 $10,688 $ 9,879 $ 9,420
8/31/2000 $12,319 $10,493 $10,411
9/30/2000 $11,744 $ 9,939 $ 9,894
10/31/2000 $11,008 $ 9,897 $ 9,091
11/30/2000 $ 9,048 $ 9,117 $ 7,440
12/31/2000 $ 9,623 $ 9,161 $ 7,895
1/31/2001 $10,707 $ 9,486 $ 8,534
2/28/2001 $ 9,161 $ 8,621 $ 7,365
3/31/2001 $ 8,539 $ 8,075 $ 6,695
4/30/2001 $ 9,680 $ 8,703 $ 7,515
5/31/2001 $ 9,623 $ 8,761 $ 7,689
6/30/2001 $ 9,906 $ 8,548 $ 7,898
7/31/2001 $ 9,444 $ 8,464 $ 7,225
8/31/2001 $ 8,954 $ 7,934 $ 6,773
9/30/2001 $ 7,333 $ 7,293 $ 5,680
10/31/2001 $ 8,096 $ 7,432 $ 6,227
11/30/2001 $ 8,822 $ 8,002 $ 6,747
12/31/2001 $ 9,303 $ 8,072 $ 7,167
1/31/2002 $ 9,161 $ 7,955 $ 6,912
2/28/2002 $ 8,775 $ 7,801 $ 6,464
3/31/2002 $ 9,510 $ 8,095 $ 7,026
4/30/2002 $ 9,227 $ 7,604 $ 6,874
5/31/2002 $ 8,803 $ 7,548 $ 6,472
6/30/2002 $ 8,096 $ 7,010 $ 5,923
7/31/2002 $ 6,814 $ 6,464 $ 5,013
8/31/2002 $ 6,795 $ 6,506 $ 5,011
9/30/2002 $ 6,013 $ 5,799 $ 4,649
10/31/2002 $ 6,579 $ 6,310 $ 4,884
11/30/2002 $ 7,220 $ 6,681 $ 5,368
12/31/2002 $ 6,767 $ 6,288 $ 4,998
1/31/2003 $ 6,692 $ 6,124 $ 4,862
2/28/2003 $ 6,550 $ 6,032 $ 4,733
3/31/2003 $ 6,428 $ 6,090 $ 4,804
4/30/2003 $ 7,031 $ 6,592 $ 5,259
5/31/2003 $ 7,729 $ 6,939 $ 5,851
6/30/2003 $ 7,851 $ 7,028 $ 5,964
7/31/2003 $ 8,238 $ 7,152 $ 6,415
8/31/2003 $ 9,048 $ 7,291 $ 6,760
9/30/2003 $ 8,577 $ 7,214 $ 6,589
10/31/2003 $ 9,595 $ 7,622 $ 7,158
11/30/2003 $ 9,953 $ 7,689 $ 7,391
12/31/2003 $10,047 $ 8,092 $ 7,424
1/31/2004 $10,415 $ 8,241 $ 7,814
2/29/2004 $10,358 $ 8,355 $ 7,802
3/31/2004 $10,320 $ 8,229 $ 7,839
4/30/2004 $ 9,943 $ 8,100 $ 7,445
5/31/2004 $10,236 $ 8,211 $ 7,593
6/30/2004 $10,622 $ 8,371 $ 7,846
7/31/2004 $ 9,774 $ 8,094 $ 7,142
8/31/2004 $ 9,548 $ 8,127 $ 6,988
9/30/2004 $10,057 $ 8,215 $ 7,374
10/31/2004 $10,207 $ 8,340 $ 7,553
11/30/2004 $10,782 $ 8,678 $ 8,192
12/31/2004 $11,159 $ 8,973 $ 8,486
1/31/2005 $10,707 $ 8,754 $ 8,104
2/28/2005 $10,999 $ 8,938 $ 8,215
3/31/2005 $10,688 $ 8,780 $ 7,907
4/30/2005 $10,019 $ 8,614 $ 7,404
5/31/2005 $10,669 $ 8,888 $ 7,926
6/30/2005 $11,018 $ 8,900 $ 8,182
7/31/2005 $11,640 $ 9,231 $ 8,754
8/31/2005 $11,404 $ 9,147 $ 8,631
9/30/2005 $11,508 $ 9,221 $ 8,699
10/31/2005 $10,971 $ 9,067 $ 8,378
11/30/2005 $11,762 $ 9,410 $ 8,852
12/31/2005 $11,659 $ 9,414 $ 8,839
1/31/2006 $12,592 $ 9,663 $ 9,691
2/28/2006 $12,743 $ 9,689 $ 9,640
3/31/2006 $13,148 $ 9,810 $10,108
4/30/2006 $13,101 $ 9,941 $10,079
5/31/2006 $12,224 $ 9,655 $ 9,370
6/30/2006 $12,205 $ 9,668 $ 9,375
7/31/2006 $11,480 $ 9,728 $ 8,888
8/31/2006 $11,772 $ 9,959 $ 9,149
9/30/2006 $11,744 $10,216 $ 9,211
10/31/2006 $12,356 $10,549 $ 9,807
11/30/2006 $12,771 $10,750 $10,042
12/31/2006 $12,761 $10,900 $10,018
1/31/2007 $13,106 $11,065 $10,205
2/28/2007 $13,263 $10,849 $10,172
3/31/2007 $13,315 $10,970 $10,266
4/30/2007 $13,628 $11,456 $10,535
5/31/2007 $14,161 $11,856 $11,016
6/30/2007 $14,025 $11,659 $10,954
7/31/2007 $13,263 $11,297 $10,385
8/31/2007 $13,492 $11,467 $10,646
9/30/2007 $13,868 $11,896 $10,956
10/31/2007 $14,464 $12,085 $11,449
11/30/2007 $13,263 $11,580 $10,658
12/31/2007 $13,181 $11,499 $10,725
1/31/2008 $11,736 $10,810 $ 9,741
2/29/2008 $11,225 $10,458 $ 9,404
3/31/2008 $10,918 $10,413 $ 9,349
4/30/2008 $11,621 $10,920 $ 9,830
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/08
- ------------------------ -------
1-Year -18.00%
5-Year +9.44%
Since Inception (5/1/00) +1.93%
CLASS B (5/1/00-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000
DATE GROWTH FUND - CLASS B INDEX GROWTH INDEX
- ---------- --------------------- ------- ------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,530 $ 9,795 $ 9,124
6/30/2000 $11,850 $10,036 $10,303
7/31/2000 $11,330 $ 9,879 $ 9,420
8/31/2000 $13,040 $10,493 $10,411
9/30/2000 $12,430 $ 9,939 $ 9,894
10/31/2000 $11,640 $ 9,897 $ 9,091
11/30/2000 $ 9,570 $ 9,117 $ 7,440
12/31/2000 $10,170 $ 9,161 $ 7,895
1/31/2001 $11,300 $ 9,486 $ 8,534
2/28/2001 $ 9,670 $ 8,621 $ 7,365
3/31/2001 $ 9,010 $ 8,075 $ 6,695
4/30/2001 $10,200 $ 8,703 $ 7,515
5/31/2001 $10,140 $ 8,761 $ 7,689
6/30/2001 $10,430 $ 8,548 $ 7,898
7/31/2001 $ 9,940 $ 8,464 $ 7,225
8/31/2001 $ 9,420 $ 7,934 $ 6,773
9/30/2001 $ 7,710 $ 7,293 $ 5,680
10/31/2001 $ 8,510 $ 7,432 $ 6,227
11/30/2001 $ 9,270 $ 8,002 $ 6,747
12/31/2001 $ 9,760 $ 8,072 $ 7,167
1/31/2002 $ 9,610 $ 7,955 $ 6,912
2/28/2002 $ 9,200 $ 7,801 $ 6,464
3/31/2002 $ 9,970 $ 8,095 $ 7,026
4/30/2002 $ 9,660 $ 7,604 $ 6,874
5/31/2002 $ 9,220 $ 7,548 $ 6,472
6/30/2002 $ 8,470 $ 7,010 $ 5,923
7/31/2002 $ 7,130 $ 6,464 $ 5,013
8/31/2002 $ 7,100 $ 6,506 $ 5,011
9/30/2002 $ 6,280 $ 5,799 $ 4,649
10/31/2002 $ 6,870 $ 6,310 $ 4,884
11/30/2002 $ 7,540 $ 6,681 $ 5,368
12/31/2002 $ 7,060 $ 6,288 $ 4,998
1/31/2003 $ 6,980 $ 6,124 $ 4,862
2/28/2003 $ 6,830 $ 6,032 $ 4,733
3/31/2003 $ 6,690 $ 6,090 $ 4,804
4/30/2003 $ 7,330 $ 6,592 $ 5,259
5/31/2003 $ 8,040 $ 6,939 $ 5,851
6/30/2003 $ 8,160 $ 7,028 $ 5,964
7/31/2003 $ 8,560 $ 7,152 $ 6,415
8/31/2003 $ 9,400 $ 7,291 $ 6,760
9/30/2003 $ 8,900 $ 7,214 $ 6,589
10/31/2003 $ 9,950 $ 7,622 $ 7,158
11/30/2003 $10,320 $ 7,689 $ 7,391
12/31/2003 $10,410 $ 8,092 $ 7,424
1/31/2004 $10,780 $ 8,241 $ 7,814
2/29/2004 $10,710 $ 8,355 $ 7,802
3/31/2004 $10,670 $ 8,229 $ 7,839
4/30/2004 $10,270 $ 8,100 $ 7,445
5/31/2004 $10,560 $ 8,211 $ 7,593
6/30/2004 $10,960 $ 8,371 $ 7,846
7/31/2004 $10,070 $ 8,094 $ 7,142
8/31/2004 $ 9,840 $ 8,127 $ 6,988
9/30/2004 $10,350 $ 8,215 $ 7,374
10/31/2004 $10,500 $ 8,340 $ 7,553
11/30/2004 $11,090 $ 8,678 $ 8,192
12/31/2004 $11,470 $ 8,973 $ 8,486
1/31/2005 $10,990 $ 8,754 $ 8,104
2/28/2005 $11,290 $ 8,938 $ 8,215
3/31/2005 $10,960 $ 8,780 $ 7,907
4/30/2005 $10,260 $ 8,614 $ 7,404
5/31/2005 $10,930 $ 8,888 $ 7,926
6/30/2005 $11,280 $ 8,900 $ 8,182
7/31/2005 $11,910 $ 9,231 $ 8,754
8/31/2005 $11,660 $ 9,147 $ 8,631
9/30/2005 $11,750 $ 9,221 $ 8,699
10/31/2005 $11,200 $ 9,067 $ 8,378
11/30/2005 $12,000 $ 9,410 $ 8,852
12/31/2005 $11,890 $ 9,414 $ 8,839
1/31/2006 $12,830 $ 9,663 $ 9,691
2/28/2006 $12,980 $ 9,689 $ 9,640
3/31/2006 $13,380 $ 9,810 $10,108
4/30/2006 $13,320 $ 9,941 $10,079
5/31/2006 $12,420 $ 9,655 $ 9,370
6/30/2006 $12,400 $ 9,668 $ 9,375
7/31/2006 $11,650 $ 9,728 $ 8,888
8/31/2006 $11,940 $ 9,959 $ 9,149
9/30/2006 $11,910 $10,216 $ 9,211
10/31/2006 $12,520 $10,549 $ 9,807
11/30/2006 $12,930 $10,750 $10,042
12/31/2006 $12,920 $10,900 $10,018
1/31/2007 $13,254 $11,065 $10,205
2/28/2007 $13,410 $10,849 $10,172
3/31/2007 $13,444 $10,970 $10,266
4/30/2007 $13,756 $11,456 $10,535
5/31/2007 $14,290 $11,856 $11,016
6/30/2007 $14,134 $11,659 $10,954
7/31/2007 $13,366 $11,297 $10,385
8/31/2007 $13,589 $11,467 $10,646
9/30/2007 $13,956 $11,896 $10,956
10/31/2007 $14,546 $12,085 $11,449
11/30/2007 $13,332 $11,580 $10,658
12/31/2007 $13,231 $11,499 $10,725
1/31/2008 $11,780 $10,810 $ 9,741
2/29/2008 $11,268 $10,458 $ 9,404
3/31/2008 $10,950 $10,413 $ 9,349
4/30/2008 $11,655 $10,920 $ 9,830
30 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/08
- ------------------------ -------
1-Year -16.04%
5-Year +9.71%
Since Inception (5/1/00) +1.93%
CLASS C (5/1/00-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000
DATE GROWTH FUND - CLASS C INDEX GROWTH INDEX
- ---------- --------------------- ------- ------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,530 $ 9,795 $ 9,124
6/30/2000 $11,840 $10,036 $10,303
7/31/2000 $11,330 $ 9,879 $ 9,420
8/31/2000 $13,040 $10,493 $10,411
9/30/2000 $12,430 $ 9,939 $ 9,894
10/31/2000 $11,650 $ 9,897 $ 9,091
11/30/2000 $ 9,570 $ 9,117 $ 7,440
12/31/2000 $10,180 $ 9,161 $ 7,895
1/31/2001 $11,310 $ 9,486 $ 8,534
2/28/2001 $ 9,680 $ 8,621 $ 7,365
3/31/2001 $ 9,020 $ 8,075 $ 6,695
4/30/2001 $10,210 $ 8,703 $ 7,515
5/31/2001 $10,150 $ 8,761 $ 7,689
6/30/2001 $10,440 $ 8,548 $ 7,898
7/31/2001 $ 9,950 $ 8,464 $ 7,225
8/31/2001 $ 9,420 $ 7,934 $ 6,773
9/30/2001 $ 7,720 $ 7,293 $ 5,680
10/31/2001 $ 8,520 $ 7,432 $ 6,227
11/30/2001 $ 9,270 $ 8,002 $ 6,747
12/31/2001 $ 9,770 $ 8,072 $ 7,167
1/31/2002 $ 9,620 $ 7,955 $ 6,912
2/28/2002 $ 9,210 $ 7,801 $ 6,464
3/31/2002 $ 9,970 $ 8,095 $ 7,026
4/30/2002 $ 9,670 $ 7,604 $ 6,874
5/31/2002 $ 9,230 $ 7,548 $ 6,472
6/30/2002 $ 8,470 $ 7,010 $ 5,923
7/31/2002 $ 7,130 $ 6,464 $ 5,013
8/31/2002 $ 7,110 $ 6,506 $ 5,011
9/30/2002 $ 6,280 $ 5,799 $ 4,649
10/31/2002 $ 6,870 $ 6,310 $ 4,884
11/30/2002 $ 7,550 $ 6,681 $ 5,368
12/31/2002 $ 7,070 $ 6,288 $ 4,998
1/31/2003 $ 6,990 $ 6,124 $ 4,862
2/28/2003 $ 6,830 $ 6,032 $ 4,733
3/31/2003 $ 6,700 $ 6,090 $ 4,804
4/30/2003 $ 7,330 $ 6,592 $ 5,259
5/31/2003 $ 8,050 $ 6,939 $ 5,851
6/30/2003 $ 8,170 $ 7,028 $ 5,964
7/31/2003 $ 8,570 $ 7,152 $ 6,415
8/31/2003 $ 9,400 $ 7,291 $ 6,760
9/30/2003 $ 8,910 $ 7,214 $ 6,589
10/31/2003 $ 9,960 $ 7,622 $ 7,158
11/30/2003 $10,330 $ 7,689 $ 7,391
12/31/2003 $10,410 $ 8,092 $ 7,424
1/31/2004 $10,780 $ 8,241 $ 7,814
2/29/2004 $10,720 $ 8,355 $ 7,802
3/31/2004 $10,670 $ 8,229 $ 7,839
4/30/2004 $10,270 $ 8,100 $ 7,445
5/31/2004 $10,570 $ 8,211 $ 7,593
6/30/2004 $10,960 $ 8,371 $ 7,846
7/31/2004 $10,080 $ 8,094 $ 7,142
8/31/2004 $ 9,840 $ 8,127 $ 6,988
9/30/2004 $10,360 $ 8,215 $ 7,374
10/31/2004 $10,500 $ 8,340 $ 7,553
11/30/2004 $11,090 $ 8,678 $ 8,192
12/31/2004 $11,480 $ 8,973 $ 8,486
1/31/2005 $11,000 $ 8,754 $ 8,104
2/28/2005 $11,290 $ 8,938 $ 8,215
3/31/2005 $10,970 $ 8,780 $ 7,907
4/30/2005 $10,270 $ 8,614 $ 7,404
5/31/2005 $10,930 $ 8,888 $ 7,926
6/30/2005 $11,280 $ 8,900 $ 8,182
7/31/2005 $11,920 $ 9,231 $ 8,754
8/31/2005 $11,660 $ 9,147 $ 8,631
9/30/2005 $11,760 $ 9,221 $ 8,699
10/31/2005 $11,210 $ 9,067 $ 8,378
11/30/2005 $12,010 $ 9,410 $ 8,852
12/31/2005 $11,900 $ 9,414 $ 8,839
1/31/2006 $12,840 $ 9,663 $ 9,691
2/28/2006 $12,990 $ 9,689 $ 9,640
3/31/2006 $13,380 $ 9,810 $10,108
4/30/2006 $13,330 $ 9,941 $10,079
5/31/2006 $12,430 $ 9,655 $ 9,370
6/30/2006 $12,400 $ 9,668 $ 9,375
7/31/2006 $11,660 $ 9,728 $ 8,888
8/31/2006 $11,950 $ 9,959 $ 9,149
9/30/2006 $11,920 $10,216 $ 9,211
10/31/2006 $12,530 $10,549 $ 9,807
11/30/2006 $12,940 $10,750 $10,042
12/31/2006 $12,919 $10,900 $10,018
1/31/2007 $13,264 $11,065 $10,205
2/28/2007 $13,420 $10,849 $10,172
3/31/2007 $13,454 $10,970 $10,266
4/30/2007 $13,766 $11,456 $10,535
5/31/2007 $14,300 $11,856 $11,016
6/30/2007 $14,144 $11,659 $10,954
7/31/2007 $13,376 $11,297 $10,385
8/31/2007 $13,599 $11,467 $10,646
9/30/2007 $13,966 $11,896 $10,956
10/31/2007 $14,556 $12,085 $11,449
11/30/2007 $13,342 $11,580 $10,658
12/31/2007 $13,241 $11,499 $10,725
1/31/2008 $11,790 $10,810 $ 9,741
2/29/2008 $11,265 $10,458 $ 9,404
3/31/2008 $10,947 $10,413 $ 9,349
4/30/2008 $11,652 $10,920 $ 9,830
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/08
- ------------------------ -------
1-Year -14.87%
5-Year +10.27%
Since Inception (1/1/02) +3.32%
CLASS R (1/1/02-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000
DATE GROWTH FUND - CLASS C INDEX GROWTH INDEX
- ---------- --------------------- ------- ------------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $ 9,838 $ 9,854 $ 9,644
2/28/2002 $ 9,423 $ 9,664 $ 9,020
3/31/2002 $10,213 $10,027 $ 9,804
4/30/2002 $ 9,909 $ 9,420 $ 9,592
5/31/2002 $ 9,463 $ 9,350 $ 9,031
6/30/2002 $ 8,694 $ 8,684 $ 8,265
7/31/2002 $ 7,318 $ 8,007 $ 6,995
8/31/2002 $ 7,288 $ 8,060 $ 6,992
9/30/2002 $ 6,447 $ 7,184 $ 6,487
10/31/2002 $ 7,045 $ 7,816 $ 6,815
11/30/2002 $ 7,743 $ 8,276 $ 7,490
12/31/2002 $ 7,257 $ 7,790 $ 6,974
1/31/2003 $ 7,176 $ 7,586 $ 6,784
2/28/2003 $ 7,014 $ 7,472 $ 6,603
3/31/2003 $ 6,883 $ 7,545 $ 6,703
4/30/2003 $ 7,540 $ 8,166 $ 7,338
5/31/2003 $ 8,280 $ 8,596 $ 8,165
6/30/2003 $ 8,400 $ 8,706 $ 8,322
7/31/2003 $ 8,816 $ 8,859 $ 8,951
8/31/2003 $ 9,686 $ 9,032 $ 9,432
9/30/2003 $ 9,180 $ 8,936 $ 9,193
10/31/2003 $10,263 $ 9,442 $ 9,987
11/30/2003 $10,647 $ 9,525 $10,313
12/31/2003 $10,739 $10,024 $10,359
1/31/2004 $11,124 $10,208 $10,903
2/29/2004 $11,063 $10,350 $10,886
3/31/2004 $11,022 $10,194 $10,937
4/30/2004 $10,617 $10,034 $10,388
5/31/2004 $10,921 $10,172 $10,595
6/30/2004 $11,335 $10,370 $10,948
7/31/2004 $10,425 $10,026 $ 9,965
8/31/2004 $10,193 $10,067 $ 9,750
9/30/2004 $10,729 $10,176 $10,289
10/31/2004 $10,881 $10,332 $10,539
11/30/2004 $11,498 $10,750 $11,430
12/31/2004 $11,903 $11,115 $11,841
1/31/2005 $11,406 $10,844 $11,308
2/28/2005 $11,720 $11,073 $11,463
3/31/2005 $11,386 $10,877 $11,033
4/30/2005 $10,668 $10,670 $10,331
5/31/2005 $11,356 $11,010 $11,059
6/30/2005 $11,731 $11,025 $11,417
7/31/2005 $12,388 $11,435 $12,215
8/31/2005 $12,136 $11,331 $12,043
9/30/2005 $12,237 $11,423 $12,138
10/31/2005 $11,670 $11,232 $11,690
11/30/2005 $12,510 $11,657 $12,351
12/31/2005 $12,398 $11,661 $12,333
1/31/2006 $13,390 $11,970 $13,523
2/28/2006 $13,542 $12,003 $13,450
3/31/2006 $13,968 $12,152 $14,104
4/30/2006 $13,917 $12,315 $14,063
5/31/2006 $12,976 $11,961 $13,074
6/30/2006 $12,955 $11,977 $13,082
7/31/2006 $12,186 $12,051 $12,402
8/31/2006 $12,500 $12,338 $12,765
9/30/2006 $12,469 $12,655 $12,852
10/31/2006 $13,118 $13,068 $13,685
11/30/2006 $13,542 $13,316 $14,012
12/31/2006 $13,532 $13,503 $13,979
1/31/2007 $13,891 $13,707 $14,239
2/28/2007 $14,060 $13,439 $14,194
3/31/2007 $14,116 $13,590 $14,325
4/30/2007 $14,441 $14,192 $14,700
5/31/2007 $15,003 $14,687 $15,371
6/30/2007 $14,857 $14,443 $15,284
7/31/2007 $14,049 $13,995 $14,491
8/31/2007 $14,284 $14,205 $14,855
9/30/2007 $14,688 $14,736 $15,287
10/31/2007 $15,306 $14,970 $15,975
11/30/2007 $14,037 $14,344 $14,872
12/31/2007 $13,936 $14,245 $14,965
1/31/2008 $12,418 $13,391 $13,592
2/29/2008 $11,866 $12,956 $13,122
3/31/2008 $11,535 $12,900 $13,046
4/30/2008 $12,294 $13,528 $13,716
Annual Report | 31
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/08
- ------------------------ -------
1-Year -14.46%
5-Year +10.81%
Since Inception (5/1/00) +2.95%
ADVISOR CLASS (5/1/00-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000
DATE GROWTH FUND - ADVISOR CLASS INDEX GROWTH INDEX
- ---------- --------------------------- ------- -------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,530 $ 9,795 $ 9,124
6/30/2000 $11,870 $10,036 $10,303
7/31/2000 $11,350 $ 9,879 $ 9,420
8/31/2000 $13,080 $10,493 $10,411
9/30/2000 $12,490 $ 9,939 $ 9,894
10/31/2000 $11,710 $ 9,897 $ 9,091
11/30/2000 $ 9,630 $ 9,117 $ 7,440
12/31/2000 $10,240 $ 9,161 $ 7,895
1/31/2001 $11,390 $ 9,486 $ 8,534
2/28/2001 $ 9,760 $ 8,621 $ 7,365
3/31/2001 $ 9,100 $ 8,075 $ 6,695
4/30/2001 $10,310 $ 8,703 $ 7,515
5/31/2001 $10,250 $ 8,761 $ 7,689
6/30/2001 $10,560 $ 8,548 $ 7,898
7/31/2001 $10,070 $ 8,464 $ 7,225
8/31/2001 $ 9,550 $ 7,934 $ 6,773
9/30/2001 $ 7,830 $ 7,293 $ 5,680
10/31/2001 $ 8,640 $ 7,432 $ 6,227
11/30/2001 $ 9,420 $ 8,002 $ 6,747
12/31/2001 $ 9,930 $ 8,072 $ 7,167
1/31/2002 $ 9,780 $ 7,955 $ 6,912
2/28/2002 $ 9,370 $ 7,801 $ 6,464
3/31/2002 $10,160 $ 8,095 $ 7,026
4/30/2002 $ 9,860 $ 7,604 $ 6,874
5/31/2002 $ 9,420 $ 7,548 $ 6,472
6/30/2002 $ 8,660 $ 7,010 $ 5,923
7/31/2002 $ 7,290 $ 6,464 $ 5,013
8/31/2002 $ 7,270 $ 6,506 $ 5,011
9/30/2002 $ 6,430 $ 5,799 $ 4,649
10/31/2002 $ 7,040 $ 6,310 $ 4,884
11/30/2002 $ 7,740 $ 6,681 $ 5,368
12/31/2002 $ 7,250 $ 6,288 $ 4,998
1/31/2003 $ 7,180 $ 6,124 $ 4,862
2/28/2003 $ 7,030 $ 6,032 $ 4,733
3/31/2003 $ 6,890 $ 6,090 $ 4,804
4/30/2003 $ 7,550 $ 6,592 $ 5,259
5/31/2003 $ 8,300 $ 6,939 $ 5,851
6/30/2003 $ 8,430 $ 7,028 $ 5,964
7/31/2003 $ 8,850 $ 7,152 $ 6,415
8/31/2003 $ 9,720 $ 7,291 $ 6,760
9/30/2003 $ 9,220 $ 7,214 $ 6,589
10/31/2003 $10,310 $ 7,622 $ 7,158
11/30/2003 $10,700 $ 7,689 $ 7,391
12/31/2003 $10,800 $ 8,092 $ 7,424
1/31/2004 $11,190 $ 8,241 $ 7,814
2/29/2004 $11,140 $ 8,355 $ 7,802
3/31/2004 $11,100 $ 8,229 $ 7,839
4/30/2004 $10,690 $ 8,100 $ 7,445
5/31/2004 $11,010 $ 8,211 $ 7,593
6/30/2004 $11,430 $ 8,371 $ 7,846
7/31/2004 $10,510 $ 8,094 $ 7,142
8/31/2004 $10,280 $ 8,127 $ 6,988
9/30/2004 $10,820 $ 8,215 $ 7,374
10/31/2004 $10,980 $ 8,340 $ 7,553
11/30/2004 $11,610 $ 8,678 $ 8,192
12/31/2004 $12,020 $ 8,973 $ 8,486
1/31/2005 $11,530 $ 8,754 $ 8,104
2/28/2005 $11,850 $ 8,938 $ 8,215
3/31/2005 $11,520 $ 8,780 $ 7,907
4/30/2005 $10,790 $ 8,614 $ 7,404
5/31/2005 $11,500 $ 8,888 $ 7,926
6/30/2005 $11,880 $ 8,900 $ 8,182
7/31/2005 $12,550 $ 9,231 $ 8,754
8/31/2005 $12,300 $ 9,147 $ 8,631
9/30/2005 $12,410 $ 9,221 $ 8,699
10/31/2005 $11,840 $ 9,067 $ 8,378
11/30/2005 $12,690 $ 9,410 $ 8,852
12/31/2005 $12,590 $ 9,414 $ 8,839
1/31/2006 $13,600 $ 9,663 $ 9,691
2/28/2006 $13,760 $ 9,689 $ 9,640
3/31/2006 $14,200 $ 9,810 $10,108
4/30/2006 $14,150 $ 9,941 $10,079
5/31/2006 $13,200 $ 9,655 $ 9,370
6/30/2006 $13,190 $ 9,668 $ 9,375
7/31/2006 $12,400 $ 9,728 $ 8,888
8/31/2006 $12,730 $ 9,959 $ 9,149
9/30/2006 $12,700 $10,216 $ 9,211
10/31/2006 $13,370 $10,549 $ 9,807
11/30/2006 $13,810 $10,750 $10,042
12/31/2006 $13,810 $10,900 $10,018
1/31/2007 $14,186 $11,065 $10,205
2/28/2007 $14,363 $10,849 $10,172
3/31/2007 $14,418 $10,970 $10,266
4/30/2007 $14,750 $11,456 $10,535
5/31/2007 $15,336 $11,856 $11,016
6/30/2007 $15,192 $11,659 $10,954
7/31/2007 $14,374 $11,297 $10,385
8/31/2007 $14,617 $11,467 $10,646
9/30/2007 $15,037 $11,896 $10,956
10/31/2007 $15,679 $12,085 $11,449
11/30/2007 $14,385 $11,580 $10,658
12/31/2007 $14,300 $11,499 $10,725
1/31/2008 $12,738 $10,810 $ 9,741
2/29/2008 $12,186 $10,458 $ 9,404
3/31/2008 $11,849 $10,413 $ 9,349
4/30/2008 $12,616 $10,920 $ 9,830
ENDNOTES
SMALLER AND 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.
(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.) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The 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.
32 | Annual Report
Your Fund's Expenses
FRANKLIN SMALL CAP GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600/$1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 33
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE 11/1/07 VALUE 4/30/08 PERIOD* 11/1/07-4/30/08
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $ 803.50 $4.93
Hypothetical (5% return before expenses) $1,000 $1,019.39 $5.52
CLASS B
Actual $1,000 $ 801.20 $8.33
Hypothetical (5% return before expenses) $1,000 $1,015.61 $9.32
CLASS C
Actual $1,000 $ 800.50 $8.28
Hypothetical (5% return before expenses) $1,000 $1,015.66 $9.27
CLASS R
Actual $1,000 $ 803.20 $6.10
Hypothetical (5% return before expenses) $1,000 $1,018.10 $6.82
ADVISOR CLASS
Actual $1,000 $ 804.70 $3.81
Hypothetical (5% return before expenses) $1,000 $1,020.64 $4.27
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.10%; B: 1.86%; C: 1.85%; R: 1.36%; and
Advisor: 0.85%), multiplied by the average account value over the period,
multiplied by 182/366 to reflect the one-half year period.
34 | Annual 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.
This annual report for Franklin Small-Mid Cap Growth Fund covers the fiscal year
ended April 30, 2008.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Small-Mid Cap Growth Fund - Class A had
a -6.24% cumulative total return. The Fund underperformed its benchmarks, the
Russell Midcap Growth Index and the Standard & Poor's 500 Index (S&P 500), which
had total returns of -1.93% and -4.68% for the same period.(2) You can find the
Fund's long-term performance data in the Performance Summary beginning on page
38.
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(R) 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 75.
Annual Report | 35
PORTFOLIO BREAKDOWN
Franklin Small-Mid Cap Growth Fund
Based on Total Net Assets as of 4/30/08
Information Technology* 26.5%
Industrials 15.7%
Energy 15.0%
Health Care 13.6%
Consumer Discretionary 11.2%
Telecommunication Services 4.7%
Financials 3.8%
Consumer Staples 1.7%
Utilities 1.0%
Materials 0.1%
Short-Term Investments & Other Net Assets 6.7%
* 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
During the 12 months under review, among the holdings that contributed most to
Fund performance relative to the Russell Midcap Growth Index were specialized
imaging systems manufacturer FLIR Systems;(3) undersea oil and gas drilling and
production systems manufacturer FMC Technologies; and oil and gas exploration
and production company Bill Barrett.(3)
Driven by stock selection, our investments in the energy, consumer discretionary
and information technology sectors supported relative Fund performance. In
addition to FMC Technologies and Bill Barrett, energy holdings Southwestern
Energy, an oil and gas exploration and production company, and National Oilwell
Varco, an oil and gas drilling equipment manufacturer, also fared well. An
underweighted position in the consumer discretionary sector and owning Chipotle
Mexican Grill,(3) a fast-food operator in almost 30 states, helped Fund returns.
Additional contributors in the information technology sector included solar
energy systems manufacturer SunPower and navigational systems and software maker
Trimble Navigation.
By contrast, major detractors from relative Fund performance during the
reporting period included semiconductor company FormFactor,(3) military armored
land vehicles manufacturer Force Protection,(3) and online brokerage E*TRADE
Financial (sold by period-end).
On a sector basis, stock selection in financials weighed on relative Fund
performance, and detractors besides E*TRADE Financial included regional bank
East West Bancorp(sold by period-end) and real estate investment trust iStar
Financial.(3) Stock selection also negatively impacted the industrials sector,
where our positions in railcar and construction equipment manufacturer Trinity
Industries (sold by period-end) and European discount airline Ryanair Holdings
(3) declined in value. In the telecommunication services sector, an overweighted
allocation hurt relative Fund performance, and underperformers included wireless
services providers NII Holdings and Leap Wireless International (sold by
period-end).
(3.) Not an index component.
36 | Annual Report
Thank you for your continued participation in Franklin Small-Mid Cap Growth
Fund. We look forward to serving your future investment needs.
(PHOTO OF EDWARD B. JAMIESON)
/s/ Edward B. Jamieson
Edward B. Jamieson
Portfolio Manager
Franklin Small-Mid Cap Growth Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
TOP 10 HOLDINGS
Franklin Small-Mid Cap Growth Fund
4/30/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- -------------------------- ----------
Smith International Inc. 3.3%
ENERGY
FLIR Systems Inc. 3.2%
INFORMATION TECHNOLOGY
FMC Technologies 2.6%
ENERGY
AMTEK Inc. 2.5%
INDUSTRIALS
Harris Corp. 2.5%
INFORMATION TECHNOLOGY
Noble Energy Inc. 2.4%
ENERGY
Precision Castparts Corp. 2.4%
INDUSTRIALS
Microsemi Corp. 2.1%
INFORMATION TECHNOLOGY
Silicon Laboratories Inc. 2.1%
INFORMATION TECHNOLOGY
Nuance Communications Inc. 2.0%
INFORMATION TECHNOLOGY
Annual Report | 37
Performance Summary as of 4/30/08
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 and graphs do 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: FRSGX) CHANGE 4/30/08 4/30/07
- ------------------------------- ------ ------- -------
Net Asset Value (NAV) -$8.84 $32.70 $41.54
DISTRIBUTIONS (5/1/07-4/30/08)
Short-Term Capital Gain $0.2258
Long-Term Capital Gain $6.4943
TOTAL $6.7201
CLASS B (SYMBOL: FBSMX) CHANGE 4/30/08 4/30/07
- ------------------------------- ------ ------- -------
Net Asset Value (NAV) -$9.00 $31.00 $40.00
DISTRIBUTIONS (5/1/07-4/30/08)
Short-Term Capital Gain $0.2258
Long-Term Capital Gain $6.4943
TOTAL $6.7201
CLASS C (SYMBOL: FRSIX) CHANGE 4/30/08 4/30/07
- ------------------------------- ------ ------- -------
Net Asset Value (NAV) -$8.93 $29.92 $38.85
DISTRIBUTIONS (5/1/07-4/30/08)
Short-Term Capital Gain $0.2258
Long-Term Capital Gain $6.4943
TOTAL $6.7201
CLASS R (SYMBOL: FSMRX) CHANGE 4/30/08 4/30/07
- ------------------------------- ------ ------- -------
Net Asset Value (NAV) -$8.90 $32.06 $40.96
DISTRIBUTIONS (5/1/07-4/30/08)
Short-Term Capital Gain $0.2258
Long-Term Capital Gain $6.4943
TOTAL $6.7201
ADVISOR CLASS (SYMBOL: FSGAX) CHANGE 4/30/08 4/30/07
- ------------------------------- ------ ------- -------
Net Asset Value (NAV) -$8.79 $33.43 $42.22
DISTRIBUTIONS (5/1/07-4/30/08)
Short-Term Capital Gain $0.2258
Long-Term Capital Gain $6.4943
TOTAL $6.7201
38 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETU RNS
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.UNTIL AUGUST
31, 2008, THEFUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYSOF
PURCHASE.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- ------- ------- -------
Cumulative Total Return(1) -6.24% +80.95% +67.79%
Average Annual Total Return(2) -11.62% +11.27% +4.69%
Value of $10,000 Investment(3) $ 8,838 $17,055 $15,815
Avg. Ann. Total Return (3/31/08)(4) -15.41% +11.17% +4.02%
Total Annual Operating Expenses(5) 1.00%
CLASS B 1-YEAR 5-YEAR INCEPTION (7/1/02)
- ------------------------------------- ------- ------- ------------------
Cumulative Total Return(1) -6.92% +74.25% +64.73%
Average Annual Total Return(2) -10.02% +11.49% +8.82%
Value of $10,000 Investment(3) $ 8,998 $17,225 $16,373
Avg. Ann. Total Return (3/31/08)(4) -13.87% +11.40% +7.42%
Total Annual Operating Expenses(5) 1.75%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- ------- ------- -------
Cumulative Total Return(1) -6.94% +74.33% +55.80%
Average Annual Total Return(2) -7.71% +11.76% +4.53%
Value of $10,000 Investment(3) $ 9,229 $17,433 $15,580
Avg. Ann. Total Return (3/31/08)(4) -11.64% +11.68% +3.86%
Total Annual Operating Expenses(5) 1.74%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------------------------------------- ------- ------- ------------------
Cumulative Total Return(1) -6.48% +78.64% +32.20%
Average Annual Total Return(2) -6.48% +12.30% +4.51%
Value of $10,000 Investment(3) $ 9,352 $17,864 $16,353
Avg. Ann. Total Return (3/31/08)(4) -10.47% +12.21% +3.22%
Total Annual Operating Expenses(5) 1.25%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- ------- ------- -------
Cumulative Total Return(1) -6.00% +83.21% +72.07%
Average Annual Total Return(2) -6.00% +12.87% +5.58%
Value of $10,000 Investment(3) $ 9,400 $18,321 $17,207
Avg. Ann. Total Return (3/31/08)(4) -10.02% +12.78% +4.91%
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.
Annual Report | 39
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/08
- ------- -------
1-Year -11.62%
5-Year +11.27%
10-Year +4.69%
CLASS A (5/1/98-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP RUSSELL MIDCAP
DATE GROWTH FUND - CLASS A S&P 500 INDEX GROWTH INDEX
- ---------- ---------------------- ------------- --------------
5/1/1998 $ 9,426 $10,000 $10,000
5/31/1998 $ 8,797 $ 9,828 $ 9,589
6/30/1998 $ 8,840 $10,227 $ 9,860
7/31/1998 $ 7,986 $10,118 $ 9,438
8/31/1998 $ 6,194 $ 8,656 $ 7,636
9/30/1998 $ 6,758 $ 9,210 $ 8,214
10/31/1998 $ 7,183 $ 9,959 $ 8,819
11/30/1998 $ 7,743 $10,563 $ 9,414
12/31/1998 $ 8,333 $11,171 $10,389
1/31/1999 $ 8,795 $11,639 $10,700
2/28/1999 $ 8,016 $11,277 $10,177
3/31/1999 $ 8,485 $11,728 $10,744
4/30/1999 $ 9,101 $12,182 $11,233
5/31/1999 $ 9,064 $11,895 $11,089
6/30/1999 $ 9,821 $12,555 $11,863
7/31/1999 $ 9,770 $12,163 $11,485
8/31/1999 $ 9,917 $12,102 $11,366
9/30/1999 $10,279 $11,771 $11,269
10/31/1999 $11,483 $12,516 $12,140
11/30/1999 $13,196 $12,770 $13,397
12/31/1999 $16,424 $13,522 $15,717
1/31/2000 $16,174 $12,843 $15,714
2/29/2000 $20,398 $12,600 $19,018
3/31/2000 $18,675 $13,832 $19,037
4/30/2000 $16,926 $13,416 $17,189
5/31/2000 $15,813 $13,141 $15,936
6/30/2000 $18,262 $13,465 $17,627
7/31/2000 $17,157 $13,254 $16,511
8/31/2000 $19,513 $14,078 $19,001
9/30/2000 $18,861 $13,334 $18,072
10/31/2000 $17,402 $13,278 $16,835
11/30/2000 $13,673 $12,231 $13,177
12/31/2000 $14,814 $12,291 $13,871
1/31/2001 $15,545 $12,727 $14,663
2/28/2001 $12,607 $11,567 $12,127
3/31/2001 $11,243 $10,834 $10,391
4/30/2001 $12,863 $11,676 $12,123
5/31/2001 $12,750 $11,754 $12,066
6/30/2001 $12,614 $11,468 $12,073
7/31/2001 $11,955 $11,355 $11,258
8/31/2001 $11,138 $10,644 $10,442
9/30/2001 $ 9,443 $ 9,785 $ 8,717
10/31/2001 $10,249 $ 9,971 $ 9,633
11/30/2001 $11,194 $10,736 $10,670
12/31/2001 $11,773 $10,830 $11,075
1/31/2002 $11,316 $10,672 $10,716
2/28/2002 $10,674 $10,466 $10,108
3/31/2002 $11,448 $10,860 $10,880
4/30/2002 $10,897 $10,201 $10,304
5/31/2002 $10,546 $10,126 $ 9,996
6/30/2002 $ 9,545 $ 9,405 $ 8,893
7/31/2002 $ 8,332 $ 8,672 $ 8,029
8/31/2002 $ 8,287 $ 8,729 $ 8,001
9/30/2002 $ 7,558 $ 7,780 $ 7,366
10/31/2002 $ 8,215 $ 8,465 $ 7,936
11/30/2002 $ 8,925 $ 8,963 $ 8,557
12/31/2002 $ 8,291 $ 8,437 $ 8,040
1/31/2003 $ 8,181 $ 8,216 $ 7,961
2/28/2003 $ 8,079 $ 8,092 $ 7,892
3/31/2003 $ 8,091 $ 8,171 $ 8,039
4/30/2003 $ 8,740 $ 8,844 $ 8,586
5/31/2003 $ 9,560 $ 9,310 $ 9,413
6/30/2003 $ 9,613 $ 9,429 $ 9,547
7/31/2003 $ 9,854 $ 9,595 $ 9,888
8/31/2003 $10,364 $ 9,782 $10,432
9/30/2003 $10,036 $ 9,678 $10,230
10/31/2003 $10,837 $10,226 $11,055
11/30/2003 $11,207 $10,316 $11,350
12/31/2003 $11,414 $10,857 $11,474
1/31/2004 $11,739 $11,056 $11,853
2/29/2004 $11,747 $11,210 $12,052
3/31/2004 $11,671 $11,040 $12,029
4/30/2004 $11,214 $10,867 $11,689
5/31/2004 $11,566 $11,016 $11,965
6/30/2004 $11,913 $11,230 $12,156
7/31/2004 $11,116 $10,859 $11,351
8/31/2004 $10,969 $10,903 $11,211
9/30/2004 $11,411 $11,021 $11,629
10/31/2004 $11,811 $11,189 $12,024
11/30/2004 $12,404 $11,642 $12,645
12/31/2004 $12,903 $12,038 $13,250
1/31/2005 $12,548 $11,745 $12,896
2/28/2005 $12,853 $11,992 $13,222
3/31/2005 $12,423 $11,779 $13,029
4/30/2005 $11,826 $11,556 $12,514
5/31/2005 $12,544 $11,924 $13,230
6/30/2005 $12,921 $11,941 $13,476
7/31/2005 $13,707 $12,385 $14,263
8/31/2005 $13,696 $12,272 $14,176
9/30/2005 $13,832 $12,371 $14,359
10/31/2005 $13,514 $12,165 $13,936
11/30/2005 $14,225 $12,625 $14,693
12/31/2005 $14,263 $12,629 $14,854
1/31/2006 $15,057 $12,964 $15,743
2/28/2006 $15,027 $12,999 $15,549
3/31/2006 $15,330 $13,161 $15,984
4/30/2006 $15,280 $13,337 $16,052
5/31/2006 $14,452 $12,954 $15,296
6/30/2006 $14,414 $12,971 $15,234
7/31/2006 $13,949 $13,051 $14,688
8/31/2006 $14,305 $13,362 $15,026
9/30/2006 $14,437 $13,706 $15,369
10/31/2006 $14,895 $14,153 $15,959
11/30/2006 $15,481 $14,422 $16,585
12/31/2006 $15,336 $14,624 $16,437
1/31/2007 $15,799 $14,845 $17,035
2/28/2007 $15,977 $14,555 $16,998
3/31/2007 $16,241 $14,718 $17,087
4/30/2007 $16,867 $15,370 $17,837
5/31/2007 $17,610 $15,906 $18,561
6/30/2007 $17,407 $15,642 $18,239
7/31/2007 $16,984 $15,157 $17,831
8/31/2007 $17,277 $15,384 $17,927
9/30/2007 $18,259 $15,959 $18,631
10/31/2007 $18,747 $16,213 $19,106
11/30/2007 $17,131 $15,535 $18,265
12/31/2007 $17,126 $15,427 $18,315
1/31/2008 $15,351 $14,502 $16,859
2/29/2008 $14,915 $14,031 $16,602
3/31/2008 $14,577 $13,970 $16,309
4/30/2008 $15,815 $14,651 $17,493
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/08
- ------------------------ -------
1-Year -10.02%
5-Year +11.49%
Since Inception (7/1/02) +8.82%
CLASS B (7/1/02-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP RUSSELL MIDCAP
DATE GROWTH FUND - CLASS B S&P 500 INDEX GROWTH INDEX
- ---------- ---------------------- ------------- --------------
7/1/2002 $10,000 $10,000 $10,000
7/31/2002 $ 9,063 $ 9,220 $ 9,028
8/31/2002 $ 9,001 $ 9,281 $ 8,997
9/30/2002 $ 8,208 $ 8,272 $ 8,282
10/31/2002 $ 8,915 $ 9,000 $ 8,924
11/30/2002 $ 9,684 $ 9,530 $ 9,622
12/31/2002 $ 8,989 $ 8,970 $ 9,041
1/31/2003 $ 8,861 $ 8,735 $ 8,952
2/28/2003 $ 8,751 $ 8,604 $ 8,874
3/31/2003 $ 8,755 $ 8,688 $ 9,039
4/30/2003 $ 9,453 $ 9,403 $ 9,655
5/31/2003 $10,329 $ 9,899 $10,584
6/30/2003 $10,382 $10,025 $10,735
7/31/2003 $10,637 $10,202 $11,119
8/31/2003 $11,180 $10,401 $11,731
9/30/2003 $10,814 $10,290 $11,503
10/31/2003 $11,673 $10,873 $12,430
11/30/2003 $12,063 $10,968 $12,763
12/31/2003 $12,277 $11,543 $12,902
1/31/2004 $12,618 $11,755 $13,328
2/29/2004 $12,622 $11,919 $13,552
3/31/2004 $12,532 $11,739 $13,526
4/30/2004 $12,035 $11,555 $13,144
5/31/2004 $12,400 $11,713 $13,454
6/30/2004 $12,766 $11,941 $13,669
7/31/2004 $11,903 $11,546 $12,763
8/31/2004 $11,739 $11,592 $12,606
9/30/2004 $12,207 $11,718 $13,077
10/31/2004 $12,626 $11,897 $13,520
11/30/2004 $13,251 $12,378 $14,218
12/31/2004 $13,777 $12,800 $14,900
1/31/2005 $13,391 $12,488 $14,501
2/28/2005 $13,707 $12,750 $14,868
3/31/2005 $13,239 $12,525 $14,651
4/30/2005 $12,598 $12,287 $14,071
5/31/2005 $13,350 $12,678 $14,877
6/30/2005 $13,744 $12,696 $15,153
7/31/2005 $14,570 $13,168 $16,038
8/31/2005 $14,550 $13,048 $15,940
9/30/2005 $14,686 $13,154 $16,146
10/31/2005 $14,340 $12,934 $15,671
11/30/2005 $15,080 $13,424 $16,521
12/31/2005 $15,113 $13,428 $16,702
1/31/2006 $15,943 $13,784 $17,702
2/28/2006 $15,902 $13,821 $17,485
3/31/2006 $16,219 $13,993 $17,973
4/30/2006 $16,157 $14,181 $18,049
5/31/2006 $15,269 $13,773 $17,200
6/30/2006 $15,216 $13,792 $17,130
7/31/2006 $14,718 $13,877 $16,516
8/31/2006 $15,080 $14,207 $16,896
9/30/2006 $15,212 $14,573 $17,282
10/31/2006 $15,688 $15,048 $17,945
11/30/2006 $16,293 $15,334 $18,649
12/31/2006 $16,131 $15,549 $18,482
1/31/2007 $16,608 $15,784 $19,155
2/28/2007 $16,785 $15,476 $19,113
3/31/2007 $17,051 $15,649 $19,214
4/30/2007 $17,697 $16,342 $20,057
5/31/2007 $18,467 $16,912 $20,871
6/30/2007 $18,241 $16,631 $20,509
7/31/2007 $17,790 $16,116 $20,050
8/31/2007 $18,082 $16,357 $20,158
9/30/2007 $19,099 $16,969 $20,949
10/31/2007 $19,595 $17,239 $21,484
11/30/2007 $17,896 $16,518 $20,538
12/31/2007 $17,876 $16,403 $20,594
1/31/2008 $16,016 $15,420 $18,958
2/29/2008 $15,554 $14,919 $18,669
3/31/2008 $15,192 $14,854 $18,339
4/30/2008 $16,373 $15,578 $19,670
40 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/08
- ------- -------
1-Year -7.71%
5-Year +11.76%
10-Year +4.53%
CLASS C (5/1/98-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP S&P 500 RUSSELL MIDCAP
DATE GROWTH FUND - CLASS C INDEX GROWTH INDEX
- ---------- ---------------------- ------- --------------
5/1/1998 $10,000 $10,000 $10,000
5/31/1998 $ 9,328 $ 9,828 $ 9,589
6/30/1998 $ 9,367 $10,227 $ 9,860
7/31/1998 $ 8,456 $10,118 $ 9,438
8/31/1998 $ 6,556 $ 8,656 $ 7,636
9/30/1998 $ 7,150 $ 9,210 $ 8,214
10/31/1998 $ 7,596 $ 9,959 $ 8,819
11/30/1998 $ 8,178 $10,563 $ 9,414
12/31/1998 $ 8,803 $11,171 $10,389
1/31/1999 $ 9,280 $11,639 $10,700
2/28/1999 $ 8,456 $11,277 $10,177
3/31/1999 $ 8,949 $11,728 $10,744
4/30/1999 $ 9,592 $12,182 $11,233
5/31/1999 $ 9,548 $11,895 $11,089
6/30/1999 $10,337 $12,555 $11,863
7/31/1999 $10,278 $12,163 $11,485
8/31/1999 $10,424 $12,102 $11,366
9/30/1999 $10,799 $11,771 $11,269
10/31/1999 $12,057 $12,516 $12,140
11/30/1999 $13,847 $12,770 $13,397
12/31/1999 $17,220 $13,522 $15,717
1/31/2000 $16,950 $12,843 $15,714
2/29/2000 $21,366 $12,600 $19,018
3/31/2000 $19,547 $13,832 $19,037
4/30/2000 $17,705 $13,416 $17,189
5/31/2000 $16,529 $13,141 $15,936
6/30/2000 $19,079 $13,465 $17,627
7/31/2000 $17,911 $13,254 $16,511
8/31/2000 $20,357 $14,078 $19,001
9/30/2000 $19,666 $13,334 $18,072
10/31/2000 $18,133 $13,278 $16,835
11/30/2000 $14,238 $12,231 $13,177
12/31/2000 $15,413 $12,291 $13,871
1/31/2001 $16,169 $12,727 $14,663
2/28/2001 $13,100 $11,567 $12,127
3/31/2001 $11,678 $10,834 $10,391
4/30/2001 $13,348 $11,676 $12,123
5/31/2001 $13,228 $11,754 $12,066
6/30/2001 $13,076 $11,468 $12,073
7/31/2001 $12,385 $11,355 $11,258
8/31/2001 $11,534 $10,644 $10,442
9/30/2001 $ 9,768 $ 9,785 $ 8,717
10/31/2001 $10,599 $ 9,971 $ 9,633
11/30/2001 $11,566 $10,736 $10,670
12/31/2001 $12,157 $10,830 $11,075
1/31/2002 $11,678 $10,672 $10,716
2/28/2002 $11,011 $10,466 $10,108
3/31/2002 $11,802 $10,860 $10,880
4/30/2002 $11,222 $10,201 $10,304
5/31/2002 $10,855 $10,126 $ 9,996
6/30/2002 $ 9,820 $ 9,405 $ 8,893
7/31/2002 $ 8,570 $ 8,672 $ 8,029
8/31/2002 $ 8,514 $ 8,729 $ 8,001
9/30/2002 $ 7,763 $ 7,780 $ 7,366
10/31/2002 $ 8,430 $ 8,465 $ 7,936
11/30/2002 $ 9,153 $ 8,963 $ 8,557
12/31/2002 $ 8,498 $ 8,437 $ 8,040
1/31/2003 $ 8,378 $ 8,216 $ 7,961
2/28/2003 $ 8,270 $ 8,092 $ 7,892
3/31/2003 $ 8,274 $ 8,171 $ 8,039
4/30/2003 $ 8,937 $ 8,844 $ 8,586
5/31/2003 $ 9,768 $ 9,310 $ 9,413
6/30/2003 $ 9,816 $ 9,429 $ 9,547
7/31/2003 $10,060 $ 9,595 $ 9,888
8/31/2003 $10,571 $ 9,782 $10,432
9/30/2003 $10,228 $ 9,678 $10,230
10/31/2003 $11,039 $10,226 $11,055
11/30/2003 $11,406 $10,316 $11,350
12/31/2003 $11,610 $10,857 $11,474
1/31/2004 $11,934 $11,056 $11,853
2/29/2004 $11,938 $11,210 $12,052
3/31/2004 $11,854 $11,040 $12,029
4/30/2004 $11,382 $10,867 $11,689
5/31/2004 $11,730 $11,016 $11,965
6/30/2004 $12,081 $11,230 $12,156
7/31/2004 $11,266 $10,859 $11,351
8/31/2004 $11,111 $10,903 $11,211
9/30/2004 $11,554 $11,021 $11,629
10/31/2004 $11,954 $11,189 $12,024
11/30/2004 $12,545 $11,642 $12,645
12/31/2004 $13,032 $12,038 $13,250
1/31/2005 $12,665 $11,745 $12,896
2/28/2005 $12,968 $11,992 $13,222
3/31/2005 $12,521 $11,779 $13,029
4/30/2005 $11,914 $11,556 $12,514
5/31/2005 $12,629 $11,924 $13,230
6/30/2005 $13,000 $11,941 $13,476
7/31/2005 $13,783 $12,385 $14,263
8/31/2005 $13,763 $12,272 $14,176
9/30/2005 $13,891 $12,371 $14,359
10/31/2005 $13,564 $12,165 $13,936
11/30/2005 $14,267 $12,625 $14,693
12/31/2005 $14,299 $12,629 $14,854
1/31/2006 $15,082 $12,964 $15,743
2/28/2006 $15,046 $12,999 $15,549
3/31/2006 $15,342 $13,161 $15,984
4/30/2006 $15,282 $13,337 $16,052
5/31/2006 $14,443 $12,954 $15,296
6/30/2006 $14,395 $12,971 $15,234
7/31/2006 $13,923 $13,051 $14,688
8/31/2006 $14,267 $13,362 $15,026
9/30/2006 $14,391 $13,706 $15,369
10/31/2006 $14,838 $14,153 $15,959
11/30/2006 $15,413 $14,422 $16,585
12/31/2006 $15,256 $14,624 $16,437
1/31/2007 $15,713 $14,845 $17,035
2/28/2007 $15,881 $14,555 $16,998
3/31/2007 $16,131 $14,718 $17,087
4/30/2007 $16,743 $15,370 $17,837
5/31/2007 $17,467 $15,906 $18,561
6/30/2007 $17,256 $15,642 $18,239
7/31/2007 $16,829 $15,157 $17,831
8/31/2007 $17,105 $15,384 $17,927
9/30/2007 $18,066 $15,959 $18,631
10/31/2007 $18,540 $16,213 $19,106
11/30/2007 $16,928 $15,535 $18,265
12/31/2007 $16,913 $15,427 $18,315
1/31/2008 $15,153 $14,502 $16,859
2/29/2008 $14,711 $14,031 $16,602
3/31/2008 $14,372 $13,970 $16,309
4/30/2008 $15,580 $14,651 $17,493
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/08
- ------------------------ -------
1-Year -6.48%
5-Year +12.30%
Since Inception (1/1/02) +4.51%
CLASS R (1/1/02-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP S&P 500 RUSSELL MIDCAP
DATE GROWTH FUND - CLASS R INDEX GROWTH INDEX
- ---------- ---------------------- ------- --------------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $ 9,612 $ 9,854 $ 9,675
2/28/2002 $ 9,067 $ 9,664 $ 9,127
3/31/2002 $ 9,722 $10,027 $ 9,823
4/30/2002 $ 9,247 $ 9,420 $ 9,303
5/31/2002 $ 8,952 $ 9,350 $ 9,026
6/30/2002 $ 8,104 $ 8,684 $ 8,030
7/31/2002 $ 7,074 $ 8,007 $ 7,250
8/31/2002 $ 7,029 $ 8,060 $ 7,224
9/30/2002 $ 6,413 $ 7,184 $ 6,650
10/31/2002 $ 6,965 $ 7,816 $ 7,165
11/30/2002 $ 7,568 $ 8,276 $ 7,726
12/31/2002 $ 7,026 $ 7,790 $ 7,259
1/31/2003 $ 6,933 $ 7,586 $ 7,188
2/28/2003 $ 6,846 $ 7,472 $ 7,126
3/31/2003 $ 6,852 $ 7,545 $ 7,258
4/30/2003 $ 7,401 $ 8,166 $ 7,753
5/31/2003 $ 8,094 $ 8,596 $ 8,499
6/30/2003 $ 8,132 $ 8,706 $ 8,620
7/31/2003 $ 8,338 $ 8,859 $ 8,928
8/31/2003 $ 8,766 $ 9,032 $ 9,419
9/30/2003 $ 8,486 $ 8,936 $ 9,237
10/31/2003 $ 9,163 $ 9,442 $ 9,981
11/30/2003 $ 9,471 $ 9,525 $10,248
12/31/2003 $ 9,645 $10,024 $10,360
1/31/2004 $ 9,917 $10,208 $10,702
2/29/2004 $ 9,924 $10,350 $10,882
3/31/2004 $ 9,856 $10,194 $10,861
4/30/2004 $ 9,468 $10,034 $10,554
5/31/2004 $ 9,763 $10,172 $10,803
6/30/2004 $10,052 $10,370 $10,975
7/31/2004 $ 9,378 $10,026 $10,248
8/31/2004 $ 9,253 $10,067 $10,122
9/30/2004 $ 9,625 $10,176 $10,500
10/31/2004 $ 9,962 $10,332 $10,856
11/30/2004 $10,456 $10,750 $11,417
12/31/2004 $10,877 $11,115 $11,964
1/31/2005 $10,575 $10,844 $11,644
2/28/2005 $10,833 $11,073 $11,938
3/31/2005 $10,466 $10,877 $11,764
4/30/2005 $ 9,962 $10,670 $11,298
5/31/2005 $10,562 $11,010 $11,946
6/30/2005 $10,881 $11,025 $12,168
7/31/2005 $11,538 $11,435 $12,878
8/31/2005 $11,526 $11,331 $12,799
9/30/2005 $11,638 $11,423 $12,965
10/31/2005 $11,368 $11,232 $12,583
11/30/2005 $11,962 $11,657 $13,266
12/31/2005 $11,995 $11,661 $13,411
1/31/2006 $12,656 $11,970 $14,214
2/28/2006 $12,630 $12,003 $14,040
3/31/2006 $12,884 $12,152 $14,432
4/30/2006 $12,839 $12,315 $14,493
5/31/2006 $12,143 $11,961 $13,811
6/30/2006 $12,104 $11,977 $13,754
7/31/2006 $11,716 $12,051 $13,261
8/31/2006 $12,008 $12,338 $13,567
9/30/2006 $12,117 $12,655 $13,877
10/31/2006 $12,502 $13,068 $14,409
11/30/2006 $12,990 $13,316 $14,975
12/31/2006 $12,864 $13,503 $14,840
1/31/2007 $13,251 $13,707 $15,381
2/28/2007 $13,396 $13,439 $15,347
3/31/2007 $13,617 $13,590 $15,428
4/30/2007 $14,138 $14,192 $16,105
5/31/2007 $14,756 $14,687 $16,759
6/30/2007 $14,583 $14,443 $16,468
7/31/2007 $14,228 $13,995 $16,099
8/31/2007 $14,469 $14,205 $16,186
9/30/2007 $15,287 $14,736 $16,822
10/31/2007 $15,692 $14,970 $17,251
11/30/2007 $14,335 $14,344 $16,491
12/31/2007 $14,331 $14,245 $16,536
1/31/2008 $12,842 $13,391 $15,222
2/29/2008 $12,475 $12,956 $14,990
3/31/2008 $12,190 $12,900 $14,726
4/30/2008 $13,220 $13,528 $15,794
Annual Report | 41
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/08
- ------------- -------
1-Year -6.00%
5-Year +12.87%
10-Year +5.58%
ADVISOR CLASS (5/1/98-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP S&P 500 RUSSELL MIDCAP
DATE GROWTH FUND - ADVISOR CLASS INDEX GROWTH INDEX
- ---------- --------------------------- ------- --------------
5/1/1998 $10,000 $10,000 $10,000
5/31/1998 $ 9,335 $ 9,828 $ 9,589
6/30/1998 $ 9,385 $10,227 $ 9,860
7/31/1998 $ 8,481 $10,118 $ 9,438
8/31/1998 $ 6,577 $ 8,656 $ 7,636
9/30/1998 $ 7,177 $ 9,210 $ 8,214
10/31/1998 $ 7,635 $ 9,959 $ 8,819
11/30/1998 $ 8,227 $10,563 $ 9,414
12/31/1998 $ 8,858 $11,171 $10,389
1/31/1999 $ 9,351 $11,639 $10,700
2/28/1999 $ 8,525 $11,277 $10,177
3/31/1999 $ 9,034 $11,728 $10,744
4/30/1999 $ 9,688 $12,182 $11,233
5/31/1999 $ 9,649 $11,895 $11,089
6/30/1999 $10,455 $12,555 $11,863
7/31/1999 $10,405 $12,163 $11,485
8/31/1999 $10,561 $12,102 $11,366
9/30/1999 $10,949 $11,771 $11,269
10/31/1999 $12,237 $12,516 $12,140
11/30/1999 $14,070 $12,770 $13,397
12/31/1999 $17,508 $13,522 $15,717
1/31/2000 $17,248 $12,843 $15,714
2/29/2000 $21,753 $12,600 $19,018
3/31/2000 $19,921 $13,832 $19,037
4/30/2000 $18,061 $13,416 $17,189
5/31/2000 $16,881 $13,141 $15,936
6/30/2000 $19,499 $13,465 $17,627
7/31/2000 $18,322 $13,254 $16,511
8/31/2000 $20,841 $14,078 $19,001
9/30/2000 $20,150 $13,334 $18,072
10/31/2000 $18,594 $13,278 $16,835
11/30/2000 $14,614 $12,231 $13,177
12/31/2000 $15,835 $12,291 $13,871
1/31/2001 $16,623 $12,727 $14,663
2/28/2001 $13,477 $11,567 $12,127
3/31/2001 $12,024 $10,834 $10,391
4/30/2001 $13,757 $11,676 $12,123
5/31/2001 $13,641 $11,754 $12,066
6/30/2001 $13,497 $11,468 $12,073
7/31/2001 $12,797 $11,355 $11,258
8/31/2001 $11,920 $10,644 $10,442
9/30/2001 $10,107 $ 9,785 $ 8,717
10/31/2001 $10,971 $ 9,971 $ 9,633
11/30/2001 $11,984 $10,736 $10,670
12/31/2001 $12,610 $10,830 $11,075
1/31/2002 $12,119 $10,672 $10,716
2/28/2002 $11,438 $10,466 $10,108
3/31/2002 $12,268 $10,860 $10,880
4/30/2002 $11,680 $10,201 $10,304
5/31/2002 $11,305 $10,126 $ 9,996
6/30/2002 $10,234 $ 9,405 $ 8,893
7/31/2002 $ 8,937 $ 8,672 $ 8,029
8/31/2002 $ 8,889 $ 8,729 $ 8,001
9/30/2002 $ 8,111 $ 7,780 $ 7,366
10/31/2002 $ 8,812 $ 8,465 $ 7,936
11/30/2002 $ 9,581 $ 8,963 $ 8,557
12/31/2002 $ 8,901 $ 8,437 $ 8,040
1/31/2003 $ 8,784 $ 8,216 $ 7,961
2/28/2003 $ 8,679 $ 8,092 $ 7,892
3/31/2003 $ 8,691 $ 8,171 $ 8,039
4/30/2003 $ 9,392 $ 8,844 $ 8,586
5/31/2003 $10,274 $ 9,310 $ 9,413
6/30/2003 $10,334 $ 9,429 $ 9,547
7/31/2003 $10,596 $ 9,595 $ 9,888
8/31/2003 $11,148 $ 9,782 $10,432
9/30/2003 $10,794 $ 9,678 $10,230
10/31/2003 $11,659 $10,226 $11,055
11/30/2003 $12,058 $10,316 $11,350
12/31/2003 $12,284 $10,857 $11,474
1/31/2004 $12,638 $11,056 $11,853
2/29/2004 $12,650 $11,210 $12,052
3/31/2004 $12,570 $11,040 $12,029
4/30/2004 $12,078 $10,867 $11,689
5/31/2004 $12,461 $11,016 $11,965
6/30/2004 $12,835 $11,230 $12,156
7/31/2004 $11,982 $10,859 $11,351
8/31/2004 $11,825 $10,903 $11,211
9/30/2004 $12,304 $11,021 $11,629
10/31/2004 $12,739 $11,189 $12,024
11/30/2004 $13,379 $11,642 $12,645
12/31/2004 $13,923 $12,038 $13,250
1/31/2005 $13,544 $11,745 $12,896
2/28/2005 $13,874 $11,992 $13,222
3/31/2005 $13,411 $11,779 $13,029
4/30/2005 $12,771 $11,556 $12,514
5/31/2005 $13,548 $11,924 $13,230
6/30/2005 $13,959 $11,941 $13,476
7/31/2005 $14,809 $12,385 $14,263
8/31/2005 $14,801 $12,272 $14,176
9/30/2005 $14,954 $12,371 $14,359
10/31/2005 $14,612 $12,165 $13,936
11/30/2005 $15,381 $12,625 $14,693
12/31/2005 $15,429 $12,629 $14,854
1/31/2006 $16,290 $12,964 $15,743
2/28/2006 $16,257 $12,999 $15,549
3/31/2006 $16,593 $13,161 $15,984
4/30/2006 $16,544 $13,337 $16,052
5/31/2006 $15,651 $12,954 $15,296
6/30/2006 $15,611 $12,971 $15,234
7/31/2006 $15,113 $13,051 $14,688
8/31/2006 $15,497 $13,362 $15,026
9/30/2006 $15,647 $13,706 $15,369
10/31/2006 $16,148 $14,153 $15,959
11/30/2006 $16,783 $14,422 $16,585
12/31/2006 $16,628 $14,624 $16,437
1/31/2007 $17,140 $14,845 $17,035
2/28/2007 $17,335 $14,555 $16,998
3/31/2007 $17,625 $14,718 $17,087
4/30/2007 $18,306 $15,370 $17,837
5/31/2007 $19,117 $15,906 $18,561
6/30/2007 $18,904 $15,642 $18,239
7/31/2007 $18,449 $15,157 $17,831
8/31/2007 $18,770 $15,384 $17,927
9/30/2007 $19,841 $15,959 $18,631
10/31/2007 $20,374 $16,213 $19,106
11/30/2007 $18,618 $15,535 $18,265
12/31/2007 $18,618 $15,427 $18,315
1/31/2008 $16,693 $14,502 $16,859
2/29/2008 $16,224 $14,031 $16,602
3/31/2008 $15,859 $13,970 $16,309
4/30/2008 $17,207 $14,651 $17,493
ENDNOTES
SMALL- AND MIDSIZED-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 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.
(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.) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The 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.
42 | Annual Report
Your Fund's Expenses
FRANKLIN SMALL-MID CAP GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600/$1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 43
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE 11/1/07 VALUE 4/30/08 PERIOD* 11/1/07-4/30/08
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $ 843.60 $4.90
Hypothetical (5% return before expenses) $1,000 $1,019.54 $5.37
CLASS B
Actual $1,000 $ 840.70 $8.38
Hypothetical (5% return before expenses) $1,000 $1,015.76 $9.17
CLASS C
Actual $1,000 $ 840.40 $8.33
Hypothetical (5% return before expenses) $1,000 $1,015.81 $9.12
CLASS R
Actual $1,000 $ 842.60 $6.09
Hypothetical (5% return before expenses) $1,000 $1,018.25 $6.67
ADVISOR CLASS
Actual $1,000 $ 844.60 $3.76
Hypothetical (5% return before expenses) $1,000 $1,020.79 $4.12
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.07%; B: 1.83%; C: 1.82%; R: 1.33%; and
Advisor: 0.82%), multiplied by the average account value over the period,
multiplied by 182/366 to reflect the one-half year period.
44 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30,
----------------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year................... $ 45.15 $ 42.45 $ 35.26 $ 33.76 $ 25.56
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income (loss)(b)................... (0.05) 0.06 0.11 (0.10) (0.09)
Net realized and unrealized gains (losses)........ 1.43 2.70 7.08 1.60 8.29
---------- ---------- ---------- ---------- ----------
Total from investment operations..................... 1.38 2.76 7.19 1.50 8.20
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income............................. (0.02) (0.06) -- -- --
Net realized gains................................ (0.74) -- -- -- --
---------- ---------- ---------- ---------- ----------
Total distributions.................................. (0.76) (0.06) -- -- --
---------- ---------- ---------- ---------- ----------
Redemption fees...................................... --(d) --(d) --(d) --(d) --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year......................... $ 45.77 $ 45.15 $ 42.45 $ 35.26 $ 33.76
========== ========== ========== ========== ==========
Total return(c)...................................... 2.98% 6.50% 20.39% 4.44% 32.08%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates.... 0.94% 0.96% 0.93% 0.96% 1.01%
Expenses net of waiver and payments by affiliates.... 0.93%(e) 0.96%(e) 0.93%(e) 0.96%(e) 1.01%
Net investment income (loss)......................... (0.10)% 0.15% 0.27% (0.29)% (0.29)%
SUPPLEMENTAL DATA
Net assets, end of year (000's)...................... $2,011,348 $1,977,605 $2,070,364 $1,505,342 $1,456,685
Portfolio turnover rate.............................. 36.70% 62.54% 66.63% 41.91% 39.92%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
Annual Report | The accompanying notes are an integral part of these
financial statements. | 45
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30,
----------------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ----------------------------------------------------- ------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year................... $ 42.43 $ 40.14 $ 33.59 $ 32.40 $ 24.72
------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b)................... (0.37) (0.23) (0.19) (0.35) (0.31)
Net realized and unrealized gains (losses)........ 1.34 2.52 6.74 1.54 7.99
------- -------- -------- -------- --------
Total from investment operations..................... 0.97 2.29 6.55 1.19 7.68
------- -------- -------- -------- --------
Less distributions from net realized gains........... (0.74) -- -- -- --
------- -------- -------- -------- --------
Redemption fees...................................... --(d) --(d) --(d) --(d) --
------- -------- -------- -------- --------
Net asset value, end of year......................... $ 42.66 $ 42.43 $ 40.14 $ 33.59 $ 32.40
======= ======== ======== ======== ========
Total return(c)...................................... 2.19% 5.71% 19.50% 3.67% 31.07%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates.... 1.69% 1.71% 1.68% 1.70% 1.76%
Expenses net of waiver and payments by affiliates.... 1.68%(e) 1.71%(e) 1.68%(e) 1.70%(e) 1.76%
Net investment income (loss)......................... (0.85)% (0.60)% (0.48)% (1.03)% (1.04)%
SUPPLEMENTAL DATA
Net assets, end of year (000's)...................... $95,600 $118,806 $143,477 $136,052 $134,589
Portfolio turnover rate.............................. 36.70% 62.54% 66.63% 41.91% 39.92%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
46 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30,
----------------------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ---------------------------------------------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year.................. $ 42.52 $ 40.22 $ 33.66 $ 32.47 $ 24.77
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b).................. (0.37) (0.23) (0.18) (0.35) (0.31)
Net realized and unrealized gains (losses)....... 1.35 2.53 6.74 1.54 8.01
-------- -------- -------- -------- --------
Total from investment operations.................... 0.98 2.30 6.56 1.19 7.70
-------- -------- -------- -------- --------
Less distributions from net realized gains.......... (0.74) -- -- -- --
-------- -------- -------- -------- --------
Redemption fees..................................... --(d) --(d) --(d) --(d) --
-------- -------- -------- -------- --------
Net asset value, end of year........................ $ 42.76 $ 42.52 $ 40.22 $ 33.66 $ 32.47
======== ======== ======== ======== ========
Total return(c)..................................... 2.21% 5.72% 19.49% 3.67% 31.09%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates... 1.69% 1.69% 1.68% 1.71% 1.76%
Expenses net of waiver and payments by affiliates... 1.68%(e) 1.69%(e) 1.68%(e) 1.71%(e) 1.76%
Net investment income (loss)........................ (0.85)% (0.58)% (0.48)% (1.04)% (1.04)%
SUPPLEMENTAL DATA
Net assets, end of year (000's)..................... $375,822 $371,164 $388,478 $296,868 $298,114
Portfolio turnover rate............................. 36.70% 62.54% 66.63% 41.91% 39.92%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
Annual Report | The accompanying notes are an integral part of these
financial statements. | 47
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------------
CLASS R 2008 2007 2006 2005 2004
- ---------------------------------------------------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year.................. $ 44.61 $ 42.01 $ 34.98 $ 33.57 $ 25.49
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b).................. (0.16) (0.04) 0.01 (0.19) (0.18)
Net realized and unrealized gains (losses)....... 1.41 2.66 7.02 1.60 8.26
------- ------- ------- ------- -------
Total from investment operations.................... 1.25 2.62 7.03 1.41 8.08
------- ------- ------- ------- -------
Less distributions from:
Net investment income............................ (0.02) (0.02) -- -- --
Net realized gains............................... (0.74) -- -- -- --
------- ------- ------- ------- -------
Total distributions................................. (0.76) (0.02) -- -- --
------- ------- ------- ------- -------
Redemption fees..................................... --(d) --(d) --(d) --(d) --
------- ------- ------- ------- -------
Net asset value, end of year........................ $ 45.10 $ 44.61 $ 42.01 $ 34.98 $ 33.57
======= ======= ======= ======= =======
Total return(c)..................................... 2.73% 6.25% 20.07% 4.20% 31.70%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates... 1.19% 1.21% 1.18% 1.21% 1.26%
Expenses net of waiver and payments by affiliates... 1.18%(e) 1.21%(e) 1.18%(e) 1.21%(e) 1.26%
Net investment income (loss)........................ (0.35)% (0.10)% 0.02% (0.54)% (0.54)%
SUPPLEMENTAL DATA
Net assets, end of year (000's)..................... $66,250 $81,398 $91,229 $69,103 $44,988
Portfolio turnover rate............................. 36.70% 62.54% 66.63% 41.91% 39.92%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
48 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30,
-------------------------------------------------
ADVISOR CLASS 2008 2007 2006 2005(f)
- ---------------------------------------------------- -------- -------- -------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year.................. $ 45.41 $ 42.63 $ 35.32 $ 33.35
-------- -------- -------- -------
Income from investment operations(a):
Net investment income (loss)(b).................. 0.07 0.16 0.23 (0.01)
Net realized and unrealized gains (losses)....... 1.43 2.71 7.08 1.98
-------- -------- -------- -------
Total from investment operations.................... 1.50 2.87 7.31 1.97
-------- -------- -------- -------
Less distributions from:
Net investment income............................ (0.02) (0.09) -- --
Net realized gains............................... (0.74) -- -- --
-------- -------- -------- -------
Total distributions................................. (0.76) (0.09) -- --
-------- -------- -------- -------
Redemption fees..................................... --(d) --(d) --(d) --(d)
-------- -------- -------- -------
Net asset value, end of year........................ $ 46.15 $ 45.41 $ 42.63 $ 35.32
======== ======== ======== =======
Total return........................................ 3.23% 6.77% 20.67% 5.91%
RATIOS TO AVERAGE NET ASSETS(c)
Expenses before waiver and payments by affiliates... 0.69% 0.71% 0.68% 0.71%
Expenses net of waiver and payments by affiliates... 0.68%(e) 0.71%(e) 0.68%(e) 0.71%(e)
Net investment income (loss)........................ 0.15% 0.40% 0.52% (0.04)%(f)
SUPPLEMENTAL DATA
Net assets, end of year (000's)..................... $348,245 $297,856 $209,680 $71,193
Portfolio turnover rate............................. 36.70% 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Ratios are annualized for periods less than one year.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
(f) For the period August 2, 2004 (effective date) to April 30, 2005.
Annual Report | The accompanying notes are an integral part of these
financial statements. | 49
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------ ---------- --------------
LONG TERM INVESTMENTS 98.3%
COMMON STOCKS 97.9%
BANKS 0.6%
Wells Fargo & Co. ..................................................... 600,000 $ 17,850,000
--------------
CAPITAL GOODS 5.7%
Danaher Corp. ......................................................... 550,000 42,911,000
Precision Castparts Corp. ............................................. 350,000 41,146,000
(a) SunPower Corp., A ..................................................... 250,000 21,817,500
(a) Terex Corp. ........................................................... 325,000 22,646,000
United Technologies Corp. ............................................. 494,300 35,821,921
--------------
164,342,421
--------------
COMMERCIAL SERVICES & SUPPLIES 1.2%
(a) Stericycle Inc. ....................................................... 650,000 34,697,000
--------------
CONSUMER DURABLES & APPAREL 0.6%
Harman International Industries Inc. .................................. 400,000 16,348,000
--------------
CONSUMER SERVICES 0.7%
(a, b) Chipotle Mexican Grill Inc., A ........................................ 200,000 19,626,000
--------------
DIVERSIFIED FINANCIALS 3.4%
CME Group Inc. ........................................................ 45,000 20,585,250
The Goldman Sachs Group Inc. .......................................... 125,000 23,921,250
SEI Investments Co. ................................................... 600,000 13,962,000
T. Rowe Price Group Inc. .............................................. 675,000 39,528,000
--------------
97,996,500
--------------
ENERGY 4.0%
Devon Energy Corp. .................................................... 350,000 39,690,000
Schlumberger Ltd. ..................................................... 350,000 35,192,500
Smith International Inc. .............................................. 550,000 42,080,500
--------------
116,963,000
--------------
FOOD & STAPLES RETAILING 1.9%
CVS Caremark Corp. .................................................... 1,400,000 56,518,000
--------------
FOOD, BEVERAGE & TOBACCO 2.9%
(a) Hansen Natural Corp. .................................................. 1,125,000 39,813,750
PepsiCo Inc. .......................................................... 650,000 44,544,500
--------------
84,358,250
--------------
HEALTH CARE EQUIPMENT & SERVICES 4.8%
(a) Hologic Inc. .......................................................... 450,000 13,135,500
(a) Masimo Corp. .......................................................... 1,043,181 30,408,726
(a) ResMed Inc. ........................................................... 350,000 15,092,000
Stryker Corp. ......................................................... 500,000 32,415,000
(a) Varian Medical Systems Inc. ........................................... 300,000 14,064,000
(a) VCA Antech Inc. ....................................................... 1,050,000 33,988,500
--------------
139,103,726
--------------
50 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------ ---------- --------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
HOUSEHOLD & PERSONAL PRODUCTS 2.1%
Clorox Co. ............................................................ 400,000 $ 21,200,000
The Procter & Gamble Co. .............................................. 600,000 40,230,000
--------------
61,430,000
--------------
INSURANCE 1.9%
AFLAC Inc. ............................................................ 525,000 35,001,750
Assurant Inc. ......................................................... 300,000 19,500,000
--------------
54,501,750
--------------
MATERIALS 3.2%
Ecolab Inc. ........................................................... 700,000 32,172,000
(a) Intrepid Potash Inc. .................................................. 56,100 2,664,189
Praxair Inc. .......................................................... 642,600 58,675,806
--------------
93,511,995
--------------
MEDIA 0.6%
The Walt Disney Co. ................................................... 500,000 16,215,000
--------------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 11.7%
(a) Celgene Corp. ......................................................... 800,000 49,712,000
(a) Covance Inc. .......................................................... 500,000 41,895,000
(a) Genentech Inc. ........................................................ 600,000 40,920,000
(a) Gilead Sciences Inc. .................................................. 1,600,000 82,816,000
Johnson & Johnson ..................................................... 600,000 40,254,000
Roche Holding AG, ADR (Switzerland) ................................... 300,000 24,915,000
Schering-Plough Corp. ................................................. 1,800,000 33,138,000
(a) Waters Corp. .......................................................... 400,000 24,584,000
--------------
338,234,000
--------------
RETAILING 2.6%
(a) Dick's Sporting Goods Inc. ............................................ 1,100,000 31,460,000
PetSmart Inc. ......................................................... 1,000,000 22,380,000
Target Corp. .......................................................... 400,000 21,252,000
--------------
75,092,000
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 5.0%
(a) Lam Research Corp. .................................................... 350,000 14,294,000
Microchip Technology Inc. ............................................. 1,150,000 42,262,500
(a) Microsemi Corp. ....................................................... 1,514,600 37,107,700
(a) NVIDIA Corp. .......................................................... 1,100,000 22,605,000
Texas Instruments Inc. ................................................ 988,700 28,830,492
--------------
145,099,692
--------------
SOFTWARE & SERVICES 18.9%
(a) Activision Inc. ....................................................... 1,400,000 37,870,000
(a) Adobe Systems Inc. .................................................... 939,200 35,022,768
(a) Autodesk Inc. ......................................................... 600,000 22,800,000
Annual Report | 51
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------ ---------- --------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
SOFTWARE & SERVICES (CONTINUED)
(a) Cognizant Technology Solutions Corp., A ............................... 500,000 $ 16,125,000
(a) Concur Technologies Inc. .............................................. 400,000 13,256,000
FactSet Research Systems Inc. ......................................... 725,000 43,521,750
(a) Google Inc., A ........................................................ 140,000 80,400,600
MasterCard Inc., A .................................................... 175,000 48,678,000
(a) Omniture Inc. ......................................................... 600,000 13,692,000
(a) Oracle Corp. .......................................................... 2,175,000 45,348,750
Paychex Inc. .......................................................... 1,050,000 38,188,500
(a) Salesforce.com Inc. ................................................... 550,000 36,701,500
(a) VeriSign Inc. ......................................................... 350,000 12,617,500
(a) Visa Inc., A .......................................................... 1,250,000 104,312,500
--------------
548,534,868
--------------
TECHNOLOGY HARDWARE & EQUIPMENT 15.5%
(a) Apple Inc. ............................................................ 450,000 78,277,500
(a) Cisco Systems Inc. .................................................... 2,700,000 69,228,000
(a) FLIR Systems Inc. ..................................................... 1,878,400 64,485,472
Harris Corp. .......................................................... 800,000 43,224,000
Hewlett-Packard Co. ................................................... 1,300,000 60,255,000
QUALCOMM Inc. ......................................................... 1,300,000 56,147,000
(a) Research In Motion Ltd. (Canada) ...................................... 350,000 42,570,500
(a) Trimble Navigation Ltd. ............................................... 1,050,000 34,429,500
--------------
448,616,972
--------------
TELECOMMUNICATION SERVICES 6.3%
America Movil SAB de CV, L, ADR (Mexico) .............................. 850,000 49,266,000
(a) American Tower Corp., A ............................................... 1,500,000 65,130,000
(a, c) Anda Networks ......................................................... 36,443 68,877
AT&T Inc. ............................................................. 600,000 23,226,000
(a) NII Holdings Inc. ..................................................... 988,700 45,223,138
--------------
182,914,015
--------------
TRANSPORTATION 4.3%
C.H. Robinson Worldwide Inc. .......................................... 741,500 46,477,220
Canadian National Railway Co. (Canada) ................................ 550,000 28,814,500
Expeditors International of Washington Inc. ........................... 1,050,000 48,919,500
--------------
124,211,220
--------------
TOTAL COMMON STOCKS (COST $2,082,731,183) ............................. 2,836,164,409
--------------
PREFERRED STOCK (COST $9,999,998) 0.4%
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.4%
(a, c) Fibrogen Inc., pfd., E ................................................ 2,227,171 13,140,309
--------------
TOTAL LONG TERM INVESTMENTS (COST $2,092,731,181) ..................... 2,849,304,718
--------------
52 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------ ---------- --------------
SHORT TERM INVESTMENTS 2.4%
MONEY MARKET FUND (COST $49,018,782) 1.7%
(d) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.29%... 49,018,782 $ 49,018,782
--------------
(e) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES
MONEY MARKET FUND (COST $20,200,000) 0.7%
(f) Bank of New York Institutional Cash Reserve Fund, 2.71% ............... 20,200,000 20,200,000
--------------
TOTAL INVESTMENTS (COST $2,161,949,963) 100.7% ........................ 2,918,523,500
OTHER ASSETS, LESS LIABILITIES (0.7)% ................................. (21,258,850)
--------------
NET ASSETS 100.0% ..................................................... $2,897,264,650
==============
See Selected Portfolio Abbreviations on page 79.
(a) Non-income producing for the twelve months ended April 30, 2008.
(b) A portion or all of the security is on loan as of April 30, 2008. See Note
1(f).
(c) See Note 8 regarding restricted securities.
(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.
(e) See Note 1(f) regarding securities on loan.
(f) The rate shown is the annualized seven-day yield at period end.
Annual Report | The accompanying notes are an integral part of these
financial statements. | 53
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30,
-------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------------------------------------------------ -------- -------- -------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 18.54 $ 18.30 $ 13.33 $ 12.57 $ 9.50
-------- -------- -------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) ............. (0.15) (0.12) (0.15) (0.14) (0.15)
Net realized and unrealized gains (losses) .. 1.67 0.36 5.12 0.90 3.22
-------- -------- -------- ------- -------
Total from investment operations ............... 1.52 0.24 4.97 0.76 3.07
-------- -------- -------- ------- -------
Redemption fees ................................ --(d) --(d) --(d) --(d) --
-------- -------- -------- ------- -------
Net asset value, end of year ................... $ 20.06 $ 18.54 $ 18.30 $ 13.33 $ 12.57
======== ======== ======== ======= =======
Total return(c) ................................ 8.20% 1.31% 37.28% 6.05% 32.32%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 1.27%(e) 1.38%(e) 1.39%(e) 1.51%(e) 1.62%
Net investment income (loss) ................... (0.77)% (0.70)% (0.92)% (1.05)% (1.26)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $137,313 $105,407 $113,713 $80,611 $86,983
Portfolio turnover rate ........................ 133.58% 176.15% 183.31% 157.48% 114.66%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
54 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ------------------------------------------------ ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 17.64 $ 17.53 $ 12.87 $ 12.22 $ 9.30
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) ............. (0.28) (0.23) (0.26) (0.23) (0.22)
Net realized and unrealized gains (losses) .. 1.59 0.34 4.92 0.88 3.14
------- ------- ------- ------- -------
Total from investment operations ............... 1.31 0.11 4.66 0.65 2.92
------- ------- ------- ------- -------
Redemption fees ................................ --(d) --(d) --(d) --(d) --
------- ------- ------- ------- -------
Net asset value, end of year ................... $ 18.95 $ 17.64 $ 17.53 $ 12.87 $ 12.22
======= ======= ======= ======= =======
Total return(c) ................................ 7.43% 0.63% 36.21% 5.32% 31.40%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 1.99%(e) 2.08%(e) 2.13%(e) 2.21%(e) 2.28%
Net investment income (loss) ................... (1.49)% (1.40)% (1.66)% (1.75)% (1.92)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $11,528 $15,638 $19,508 $17,017 $18,059
Portfolio turnover rate ........................ 133.58% 176.15% 183.31% 157.48% 114.66%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
Annual Report | The accompanying notes are an integral part of these
financial statements. | 55
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ----------------------------------------------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 17.61 $ 17.49 $ 12.84 $ 12.19 $ 9.28
------- ------- ------- ------- -------
Income from investment operations (a):
Net investment income (loss)(b) ............ (0.28) (0.23) (0.26) (0.23) (0.22)
Net realized and unrealized gains (losses).. 1.58 0.35 4.91 0.88 3.13
------- ------- ------- ------- -------
Total from investment operations .............. 1.30 0.12 4.65 0.65 2.91
------- ------- ------- ------- -------
Redemption fees ............................... --(d) --(d) --(d) --(d) --
------- ------- ------- ------- -------
Net asset value, end of year .................. $ 18.91 $ 17.61 $ 17.49 $ 12.84 $ 12.19
======= ======= ======= ======= =======
Total return(c) ............................... 7.38% 0.69% 36.21% 5.33% 31.36%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 1.99%(e) 2.09%(e) 2.14%(e) 2.22%(e) 2.29%
Net investment income (loss) .................. (1.49)% (1.41)% (1.67)% (1.76)% (1.93)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $40,253 $31,518 $31,167 $24,450 $30,054
Portfolio turnover rate ....................... 133.58% 176.15% 183.31% 157.48% 114.66%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
56 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------------
CLASS R 2008 2007 2006 2005 2004
- ----------------------------------------------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 18.33 $ 18.12 $ 13.24 $ 12.51 $ 9.47
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) ............ (0.20) (0.16) (0.19) (0.17) (0.17)
Net realized and unrealized gains (losses).. 1.67 0.37 5.07 0.90 3.21
------- ------- ------- ------- -------
Total from investment operations .............. 1.47 0.21 4.88 0.73 3.04
------- ------- ------- ------- -------
Redemption fees ............................... --(d) --(d) --(d) --(d) --
------- ------- ------- ------- -------
Net asset value, end of year .................. $ 19.80 $ 18.33 $ 18.12 $ 13.24 $ 12.51
======= ======= ======= ======= =======
Total return(c) ............................... 8.02% 1.16% 36.86% 5.84% 32.10%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 1.49%(e) 1.59%(e) 1.64%(e) 1.72%(e) 1.79%
Net investment income (loss) .................. (0.99)% (0.91)% (1.17)% (1.26)% (1.43)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $ 7,863 $ 7,413 $ 5,171 $ 3,041 $ 1,761
Portfolio turnover rate ....................... 133.58% 176.15% 183.31% 157.48% 114.66%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%
Annual Report | The accompanying notes are an integral part of these
financial statements. | 57
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------------
ADVISOR CLASS 2008 2007 2006 2005 2004
-------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 18.99 $ 18.68 $ 13.58 $ 12.77 $ 9.62
-------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) ............ (0.10) (0.07) (0.11) (0.10) (0.11)
Net realized and unrealized gains (losses) 1.71 0.38 5.21 0.91 3.26
-------- ------- ------- ------- -------
Total from investment operations .............. 1.61 0.31 5.10 0.81 3.15
-------- ------- ------- ------- -------
Redemption fees ............................... --(c) --(c) --(c) --(c) --
-------- ------- ------- ------- -------
Net asset value, end of year .................. $ 20.60 $ 18.99 $ 18.68 $ 13.58 $ 12.77
======== ======= ======= ======= =======
Total return .................................. 8.48% 1.66% 37.56% 6.34% 32.74%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 0.99%(d) 1.09%(d) 1.14%(d) 1.22%(d) 1.29%
Net investment income (loss) .................. (0.49)% (0.41)% (0.67)% (0.76)% (0.93)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $101,885 $85,486 $36,744 $22,731 $22,374
Portfolio turnover rate ....................... 133.58% 176.15% 183.31% 157.48% 114.66%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Amount rounds to less than $0.01 per share.
(d) Benefit of expense reduction rounds to less than 0.01%.
58 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------ ------------- --------- ------------
LONG TERM INVESTMENTS 98.5%
COMMON STOCKS 98.1%
CONSUMER DISCRETIONARY 9.0%
(a) Amazon.com Inc......................................................... United States 18,400 $ 1,446,792
(a) Chipotle Mexican Grill Inc., B......................................... United States 79,000 6,712,630
(a) Dick's Sporting Goods Inc.............................................. United States 87,500 2,502,500
Guess? Inc............................................................. United States 134,800 5,160,144
(a) Lululemon Athletica Inc................................................ Canada 44,900 1,390,553
Strayer Education Inc.................................................. United States 32,800 6,090,632
(a) Under Armour Inc., A................................................... United States 43,200 1,439,856
(a) Zumiez Inc............................................................. United States 106,090 2,222,585
-----------
26,965,692
-----------
CONSUMER STAPLES 2.1%
(a) Hansen Natural Corp.................................................... United States 177,500 6,281,725
-----------
ENERGY 8.0%
(a) FMC Technologies Inc................................................... United States 107,580 7,229,376
(a) Petrohawk Energy Corp.................................................. United States 140,800 3,328,512
Schlumberger Ltd....................................................... United States 58,280 5,860,054
(a) Weatherford International Ltd.......................................... United States 93,600 7,550,712
-----------
23,968,654
-----------
FINANCIALS 3.8%
BlackRock Inc.......................................................... United States 24,880 5,020,535
The Goldman Sachs Group Inc............................................ United States 11,850 2,267,735
iStar Financial Inc.................................................... United States 158,100 3,043,425
(a) MSCI Inc. Class A...................................................... United States 35,300 1,095,006
-----------
11,426,701
-----------
HEALTH CARE 12.6%
(a) Celgene Corp........................................................... United States 139,000 8,637,460
(a) Covance Inc............................................................ United States 30,460 2,552,243
(a) Gilead Sciences Inc.................................................... United States 170,660 8,833,361
(a) Hologic Inc............................................................ United States 157,000 4,582,830
(a) MWI Veterinary Supply Inc.............................................. United States 36,344 1,252,778
(a) Myriad Genetics Inc.................................................... United States 125,790 5,225,317
Roche Holding AG, ADR.................................................. Switzerland 50,800 4,218,940
Schering-Plough Corp................................................... United States 132,000 2,430,120
-----------
37,733,049
-----------
INDUSTRIALS 18.8%
ABB Ltd., ADR.......................................................... Switzerland 192,700 5,910,109
(a) AGCO Corp.............................................................. United States 53,700 3,228,981
AMTEK Inc.............................................................. United States 94,600 4,589,992
C.H. Robinson Worldwide Inc............................................ United States 93,230 5,843,656
DryShips Inc........................................................... Greece 32,800 2,706,000
(a) Energy Conversion Devices Inc.......................................... United States 13,800 449,742
(a) First Solar Inc........................................................ United States 10,500 3,065,895
(a, b) Force Protection Inc., 144A, PIPES..................................... United States 76,500 228,735
Annual Report | 59
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------ ------------- --------- ------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
INDUSTRIALS (CONTINUED)
(a) Foster Wheeler Ltd..................................................... United States 43,600 $ 2,776,884
(a) Huron Consulting Group Inc............................................. United States 86,700 3,629,262
(a) Jacobs Engineering Group Inc........................................... United States 33,700 2,909,321
(a) Orbital Sciences Corp.................................................. United States 139,200 3,745,872
Precision Castparts Corp............................................... United States 71,830 8,444,335
(a, c) SunPower Corp., A...................................................... United States 41,300 3,604,251
(a) Terex Corp............................................................. United States 72,900 5,079,672
------------
56,212,707
------------
INFORMATION TECHNOLOGY 33.4%
(a) Activision Inc......................................................... United States 289,200 7,822,860
(a) Adobe Systems Inc...................................................... United States 57,000 2,125,530
(a) Apple Inc.............................................................. United States 65,300 11,358,935
(a) Cisco Systems Inc...................................................... United States 113,200 2,902,448
(a) Concur Technologies Inc................................................ United States 183,950 6,096,103
(a) DealerTrack Holdings Inc............................................... United States 76,200 1,466,088
(a) Equinix Inc............................................................ United States 57,300 5,181,066
(a) F5 Networks Inc........................................................ United States 151,200 3,421,656
(a) FLIR Systems Inc....................................................... United States 255,800 8,781,614
(a) FormFactor Inc......................................................... United States 69,300 1,335,411
(a) Google Inc., A......................................................... United States 18,490 10,618,622
Harris Corp............................................................ United States 56,930 3,075,928
MasterCard Inc., A..................................................... United States 7,100 1,974,936
(a) MEMC Electronic Materials Inc.......................................... United States 18,900 1,190,133
(a) MercadoLibre Inc....................................................... Argentina 60,100 3,039,858
Nintendo Co. Ltd....................................................... Japan 4,000 2,195,626
(a) Omniture Inc........................................................... United States 193,300 4,411,106
QUALCOMM Inc........................................................... United States 178,580 7,712,870
(a) Riverbed Technology Inc................................................ United States 179,885 2,459,028
(a) Trimble Navigation Ltd................................................. United States 128,640 4,218,106
(a) Visa Inc., A........................................................... United States 99,000 8,261,550
------------
99,649,474
------------
MATERIALS 2.6%
Monsanto Co............................................................ United States 40,500 4,617,810
Potash Corp. of Saskatchewan Inc....................................... Canada 16,600 3,053,570
------------
7,671,380
------------
TELECOMMUNICATION SERVICES 7.8%
America Movil SAB de CV, L, ADR........................................ Mexico 43,500 2,521,260
(a) MetroPCS Communications Inc............................................ United States 169,200 3,323,088
(a) NII Holdings Inc....................................................... United States 185,080 8,465,559
(a) SBA Communications Corp................................................ United States 275,260 8,901,909
------------
23,211,816
------------
TOTAL COMMON STOCKS (COST $241,067,905)................................ 293,121,198
------------
60 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------ ------------- --------- ------------
LONG TERM INVESTMENTS (CONTINUED)
PREFERRED STOCK (COST $873,300) 0.4%
INFORMATION TECHNOLOGY 0.4%
(a, d) Dilithium Networks Inc., depository receipt, D, pfd., 144A, PIPES ..... United States 374,806 $ 1,293,081
------------
TOTAL LONG TERM INVESTMENTS (COST $241,941,205)........................ 294,414,279
------------
SHORT TERM INVESTMENTS 2.5%
MONEY MARKET FUND (COST $3,189,780) 1.1%
(e) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.29% .. United States 3,189,780 3,189,780
------------
(f) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES
MONEY MARKET FUND (COST $4,150,000) 1.4%
(g) Bank of New York Institutional Cash Reserve Fund, 2.71%................ United States 4,150,000 4,150,000
------------
TOTAL INVESTMENTS (COST $249,280,985) 101.0%........................... 301,754,059
OTHER ASSETS, LESS LIABILITIES (1.0)%.................................. (2,912,638)
------------
NET ASSETS 100.0%...................................................... $298,841,421
============
See Selected Portfolio Abbreviations on page 79.
(a) Non-income producing for the twelve months ended April 30, 2008.
(b) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under the
Securities Act of 1933.This security has been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At April 30, 2008,
the value of this security was $228,735, representing 0.08% of net assets.
(c) A portion or all of the security is on loan as of April 30, 2008. See Note
1(f).
(d) See Note 8 regarding restricted securities.
(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.
(f) See Note 1(f) regarding securities on loan.
(g) The rate shown is the annualized seven-day yield at period end.
Annual Report | The accompanying notes are an integral part of these
financial statements. | 61
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30,
------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------------------------------------------------ -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year.............. $ 13.05 $ 13.90 $ 10.63 $ 10.55 $ 7.46
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b).............. (0.09) (0.10) (0.08) (0.09) (0.07)
Net realized and unrealized gains (losses) .. (1.59) 0.58 3.35 0.17 3.16
-------- -------- -------- -------- --------
Total from investment operations................ (1.68) 0.48 3.27 0.08 3.09
-------- -------- -------- -------- --------
Less distributions from net realized gains...... (2.28) (1.33) -- -- --
-------- -------- -------- -------- --------
Redemption fees................................. --(d) --(d) --(d) --d --
-------- -------- -------- -------- --------
Net asset value, end of year.................... $ 9.09 $ 13.05 $ 13.90 $ 10.63 $ 10.55
======== ======== ======== ======== ========
Total return(c)................................. (14.73)% 4.02% 30.76% 0.76% 41.42%
RATIOS TO AVERAGE NET ASSETS
Expenses........................................ 1.17%(e) 1.20%(e) 1.16%(e) 1.15%(e) 1.08%
Net investment income (loss).................... (0.72)% (0.77)% (0.61)% (0.84)% (0.70)%
SUPPLEMENTAL DATA
Net assets, end of year (000's)................. $274,142 $549,733 $693,084 $765,216 $908,599
Portfolio turnover rate......................... 48.52% 51.49% 44.34% 46.35% 47.08%
(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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
62 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30,
--------------------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ---------------------------------------------------- ------- ------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 12.35 $ 13.32 $ 10.26 $ 10.27 $ 7.33
------- ------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ................. (0.16) (0.18) (0.16) (0.17) (0.15)
Net realized and unrealized gains (losses) ...... (1.48) 0.54 3.22 0.16 3.09
------- ------- -------- -------- --------
Total from investment operations ................... (1.64) 0.36 3.06 (0.01) 2.94
------- ------- -------- -------- --------
Less distributions from net realized gains ......... (2.28) (1.33) -- -- --
------- ------- -------- -------- --------
Redemption fees .................................... --(d) --(d) --(d) --(d) --
------- ------- -------- -------- --------
Net asset value, end of year ....................... $ 8.43 $ 12.35 $ 13.32 $ 10.26 $ 10.27
======= ======= ======== ======== ========
Total return(c) .................................... (15.27)% 3.27% 29.82% (0.10)% 40.11%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................... 1.92%(e) 1.96%(e) 1.91%(e) 1.91%(e) 1.92%
Net investment income (loss) ....................... (1.47)% (1.53)% (1.36)% (1.60)% (1.54)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $52,465 $85,684 $111,458 $105,070 $122,004
Portfolio turnover rate ............................ 48.52% 51.49% 44.34% 46.35% 47.08%
(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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
Annual Report | The accompanying notes are an integral part of these
financial statements. | 63
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30,
---------------------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ---------------------------------------------------- ------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 12.36 $ 13.33 $ 10.27 $ 10.27 $ 7.33
------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) .................. (0.16) (0.18) (0.16) (0.17) (0.15)
Net realized and unrealized gains (losses) ....... (1.49) 0.54 3.22 0.17 3.09
------- -------- -------- -------- --------
Total from investment operations ................... (1.65) 0.36 3.06 -- 2.94
------- -------- -------- -------- --------
Less distributions from net realized gains ......... (2.28) (1.33) -- -- --
------- -------- -------- -------- --------
Redemption fees .................................... --(d) --(d) --(d) --(d) --
------- -------- -------- -------- --------
Net asset value, end of year ....................... $ 8.43 $ 12.36 $ 13.33 $ 10.27 $ 10.27
======= ======== ======== ======== ========
Total return(c) .................................... (15.35)% 3.27% 29.80% --% 40.11%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................... 1.92%(e) 1.95%(e) 1.92%(e) 1.91%(e) 1.92%
Net investment income (loss) ....................... (1.47)% (1.52)% (1.37)% (1.60)% (1.54)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $75,846 $120,900 $170,159 $164,117 $200,037
Portfolio turnover rate ............................ 48.52% 51.49% 44.34% 46.35% 47.08%
(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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
64 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30,
-------------------------------------------------------
CLASS R 2008 2007 2006 2005 2004
- ---------------------------------------------------- ------- ------ ------ ------ ------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 12.86 $13.75 $10.54 $10.49 $ 7.45
------- ------ ------ ------ ------
Income from investment operations(a):
Net investment income (loss)(b) ................. (0.11) (0.13) (0.11) (0.12) (0.10)
Net realized and unrealized gains (losses) ...... (1.56) 0.57 3.32 0.17 3.14
------- ------ ------ ------ ------
Total from investment operations ................... (1.67) 0.44 3.21 0.05 3.04
------- ------ ------ ------ ------
Less distributions from net realized gains ......... (2.28) (1.33) -- -- --
------- ------ ------ ------ ------
Redemption fees .................................... --(d) --(d) --(d) --(d) --
------- ------ ------ ------ ------
Net asset value, end of year ....................... $ 8.91 $12.86 $13.75 $10.54 $10.49
======= ====== ====== ====== ======
Total return(c) .................................... (14.87)% 3.77% 30.46% 0.48% 40.81%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................... 1.42%(e) 1.46%(e) 1.42%(e) 1.41%(e) 1.42%
Net investment income (loss) ....................... (0.97)% (1.03)% (0.87)% (1.10)% (1.04)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 3,166 $5,759 $6,328 $4,392 $4,542
Portfolio turnover rate ............................ 48.52% 51.49% 44.34% 46.35% 47.08%
(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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
Annual Report | The accompanying notes are an integral part of these
financial statements. | 65
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------------------
ADVISOR CLASS 2008 2007 2006 2005 2004
- ---------------------------------------------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 13.34 $ 14.15 $ 10.79 $ 10.69 $ 7.55
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ................. (0.05) (0.07) (0.05) (0.07) (0.05)
Net realized and unrealized gains (losses) ...... (1.64) 0.59 3.41 0.17 3.19
-------- -------- -------- -------- --------
Total from investment operations ................... (1.69) 0.52 3.36 0.10 3.14
-------- -------- -------- -------- --------
Less distributions from net realized gains ......... (2.28) (1.33) -- -- --
-------- -------- -------- -------- --------
Redemption fees .................................... --(c) --(c) --(c) --(c) --
-------- -------- -------- -------- --------
Net asset value, end of year ....................... $ 9.37 $ 13.34 $ 14.15 $ 10.79 $ 10.69
======== ======== ======== ======== ========
Total return ....................................... (14.46)% 4.24% 31.14% 0.94% 41.59%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................... 0.92%(d) 0.96%(d) 0.92%(d) 0.91%(d) 0.92%
Net investment income (loss) ....................... (0.47)% (0.53)% (0.37)% (0.60)% (0.54)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $220,857 $325,425 $326,475 $235,101 $211,271
Portfolio turnover rate ............................ 48.52% 51.49% 44.34% 46.35% 47.08%
(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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Amount rounds to less than $0.01 per share.
(d) Benefit of expense reduction rounds to less than 0.01%.
66 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE
- -------------------------------------------------------------------------- ---------- ------------
COMMON STOCKS 96.9%
CONSUMER DISCRETIONARY 18.2%
(a) Aeropostale Inc. ................................................... 134,800 $ 4,285,293
(a) BJ's Restaurants Inc. .............................................. 378,800 5,280,472
(a) Chipotle Mexican Grill Inc., B ..................................... 130,700 11,105,579
(a) Drew Industries Inc. ............................................... 358,900 8,753,571
(a) FGX International Holdings Ltd. (Virgin Islands (British)) ......... 538,700 7,030,035
(a) Hibbett Sports Inc. ................................................ 60,300 1,101,078
(a) Lions Gate Entertainment Corp. ..................................... 903,700 9,280,999
(a,b) Lululemon Athletica Inc. (Canada) .................................. 135,300 4,190,241
The Men's Wearhouse Inc. ........................................... 151,500 4,034,445
Orient-Express Hotels Ltd., A ...................................... 168,500 7,843,675
(a,b) Panera Bread Co. ................................................... 130,700 6,830,382
(a) Shuffle Master Inc. ................................................ 980,600 4,814,746
(a) Shutterfly Inc. .................................................... 222,600 3,639,510
Strayer Education Inc. ............................................. 46,600 8,653,154
(a) Tenneco Inc. ....................................................... 303,400 7,760,972
(a) Tractor Supply Co. ................................................. 219,900 7,819,644
(a) Universal Technical Institute Inc. ................................. 441,700 5,008,878
(a) Zumiez Inc. ........................................................ 316,800 6,636,960
------------
114,069,634
------------
CONSUMER STAPLES 2.3%
(a) Hain Celestial Group Inc. .......................................... 347,700 8,581,236
(a) Hansen Natural Corp. ............................................... 167,700 5,934,903
------------
14,516,139
------------
ENERGY 8.5%
(a) Bill Barrett Corp. ................................................. 211,500 10,877,445
(a) Dril-Quip Inc. ..................................................... 145,800 8,333,928
(a) Helix Energy Solutions Group Inc. .................................. 173,700 6,001,335
(a) Mariner Energy Inc. ................................................ 447,600 12,335,856
(a) Petrohawk Energy Corp. ............................................. 163,700 3,869,868
(a) Superior Energy Services Inc. ...................................... 265,600 11,787,328
------------
53,205,760
------------
FINANCIALS 4.5%
(a) Clayton Holdings Inc. .............................................. 794,799 4,593,938
FelCor Lodging Trust Inc. .......................................... 623,600 7,851,124
iStar Financial Inc. ............................................... 345,200 6,645,100
(a) MSCI Inc. Class A .................................................. 108,100 3,353,262
(a) NewStar Financial Inc. ............................................. 332,900 1,791,002
optionsXpress Holdings Inc. ........................................ 177,100 3,802,337
------------
28,036,763
------------
HEALTH CARE 14.3%
(a) American Medical Systems Holdings Inc. ............................. 649,100 9,152,310
(a) Angiotech Pharmaceuticals Inc. ..................................... 1,666,900 5,150,721
(a) Cadence Pharmaceuticals Inc. ....................................... 438,700 2,877,872
(a) Dexcom Inc. ........................................................ 681,700 5,249,090
(a) Impax Laboratories Inc. ............................................ 257,100 2,378,175
Annual Report | 67
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE
- -------------------------------------------------------------------------- ---------- ------------
COMMON STOCKS (CONTINUED)
HEALTH CARE (CONTINUED)
(a) The Medicines Co. .................................................. 312,200 $ 6,165,950
(a) MWI Veterinary Supply Inc. ......................................... 114,100 3,933,027
(a) Myriad Genetics Inc. ............................................... 196,700 8,170,918
(a) PAREXEL International Corp. ........................................ 252,400 6,410,960
(a) Penwest Pharmaceuticals Co. ........................................ 571,600 1,709,084
(a) Psychiatric Solutions Inc. ......................................... 368,600 12,794,106
(a) Sciele Pharma Inc. ................................................. 81,800 1,576,286
(a) Sequenom Inc. ...................................................... 67,900 429,128
(a) Tomotherapy Inc. ................................................... 359,800 3,511,648
(a) TriZetto Group Inc. ................................................ 255,700 5,382,485
(a) Varian Inc. ........................................................ 130,800 6,661,644
(a) VCA Antech Inc. .................................................... 253,500 8,205,795
------------
89,759,199
------------
INDUSTRIALS 8.8%
(a) Allegiant Travel Co. ............................................... 273,400 7,450,150
(a) Force Protection Inc. .............................................. 393,300 1,175,967
(a,c) Force Protection Inc., 144A, PIPES.................................. 601,000 1,796,990
(a) Huron Consulting Group Inc. ........................................ 204,400 8,556,184
Manitowoc Co. Inc. ................................................. 123,400 4,666,988
(a) Mobile Mini Inc. ................................................... 392,200 8,334,250
(a) Orbital Sciences Corp. ............................................. 458,900 12,348,999
Pacer International Inc. ........................................... 301,800 5,601,408
(a) Stanley Inc. ....................................................... 195,800 4,940,034
------------
54,870,970
------------
INFORMATION TECHNOLOGY 37.2%
(a) ANSYS Inc. ......................................................... 160,300 6,448,869
(a) Atheros Communications.............................................. 257,500 6,854,650
(a) Bottomline Technologies Inc. ....................................... 774,100 8,244,165
(a) Coherent Inc. ...................................................... 300,900 8,966,820
(a) Compellent Technologies Inc. ....................................... 368,936 4,703,934
(a) CyberSource Corp. .................................................. 437,200 7,935,180
(a) DealerTrack Holdings Inc. .......................................... 253,700 4,881,188
(a) EPIQ Systems Inc. .................................................. 204,300 3,154,392
(a) FARO Technologies Inc. ............................................. 279,200 9,839,008
(a) FLIR Systems Inc. .................................................. 324,400 11,136,652
(a) FormFactor Inc. .................................................... 413,700 7,971,999
Heartland Payment Systems Inc. ..................................... 186,300 4,079,970
(a) Internap Network Services Corp. .................................... 645,400 3,104,374
(a) Ixia................................................................ 1,318,502 9,348,179
(a) Microsemi Corp. .................................................... 445,800 10,922,100
(a) Microtune Inc. ..................................................... 1,318,700 4,655,011
National Instruments Corp. ......................................... 166,202 4,889,663
(a) Netlogic Microsystems Inc. ......................................... 350,000 11,476,500
(a) Nuance Communications Inc. ......................................... 522,800 10,602,384
(a) Omniture Inc. ...................................................... 264,400 6,033,608
(a) Power Integrations Inc. ............................................ 433,500 13,512,195
68 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE
- -------------------------------------------------------------------------- ---------- ------------
COMMON STOCKS (CONTINUED)
INFORMATION TECHNOLOGY (CONTINUED)
(a) Quest Software Inc. ................................................ 768,700 $ 10,239,084
(a) RightNow Technologies Inc. ......................................... 131,400 1,572,858
(a) Riverbed Technology Inc. ........................................... 406,400 5,555,488
(a) Sapient Corp. ...................................................... 1,631,100 11,613,432
(a) Silicon Laboratories Inc. .......................................... 262,700 8,871,379
(a) Trimble Navigation Ltd.............................................. 312,000 10,230,480
(a) Varian Semiconductor Equipment Associates Inc. ..................... 224,475 8,222,519
(a) ViaSat Inc. ........................................................ 440,400 9,732,840
(a) Voltaire Ltd. (Israel).............................................. 206,809 1,036,113
(a) Xyratex Ltd. (Bermuda).............................................. 369,100 7,260,197
------------
233,095,231
------------
MATERIALS 1.8%
FMC Corp. .......................................................... 152,800 9,592,784
Minerals Technologies Inc. ......................................... 22,700 1,537,698
------------
11,130,482
------------
TELECOMMUNICATION SERVICES 1.3%
(a) SBA Communications Corp. ........................................... 250,000 8,085,000
------------
TOTAL COMMON STOCKS (COST $561,217,406)............................. 606,769,178
------------
SHORT TERM INVESTMENTS 5.0%
MONEY MARKET FUND (COST $20,916,527) 3.3%
(d) Franklin Institutional Fiduciary Trust Money Market Portfolio,
2.29% ........................................................... 20,916,527 20,916,527
------------
(e) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES
MONEY MARKET FUND (COST $10,444,000) 1.7%
(f) Bank of New York Institutional Cash Reserve Fund, 2.71%............. 10,444,000 10,444,000
------------
TOTAL INVESTMENTS (COST $592,577,933) 101.9%........................ 638,129,705
OTHER ASSETS, LESS LIABILITIES (1.9)%............................... (11,653,467)
------------
NET ASSETS 100.0%................................................... $626,476,238
============
See Selected Portfolio Abbreviations on page 79.
(a) Non-income producing for the twelve months ended April 30, 2008.
(b) A portion or all of the security is on loan as of April 30, 2008. See Note
1(f).
(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 April 30, 2008,
the value of this security was $1,796,990, representing 0.29% 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.
(e) See Note 1(f) regarding securities on loan.
(f) The rate shown is the annualized seven-day yield at period end.
Annual Report | The accompanying notes are an integral part of these
financial statements. | 69
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30,
----------------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- --------------------------------------------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year........... $ 41.54 $ 40.42 $ 31.31 $ 29.69 $ 23.14
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income (loss)(b)........... (0.19) (0.13) --(d) (0.08) (0.14)
Net realized and unrealized gains
(losses) .............................. (1.93) 4.09 9.15 1.70 6.69
---------- ---------- ---------- ---------- ----------
Total from investment operations............. (2.12) 3.96 9.15 1.62 6.55
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income..................... -- -- (0.04) -- --
Net realized gains........................ (6.72) (2.84) -- -- --
---------- ---------- ---------- ---------- ----------
Total distributions.......................... (6.72) (2.84) (0.04) -- --
---------- ---------- ---------- ---------- ----------
Redemption fees.............................. --(d) --(d) --(d) --(d) --(d)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year................. $ 32.70 $ 41.54 $ 40.42 $ 31.31 $ 29.69
========== ========== ========== ========== ==========
Total return(c).............................. (6.24)% 10.38% 29.21% 5.46% 28.31%
RATIOS TO AVERAGE NET ASSETS
Expenses..................................... 1.02%(e) 0.98%(e) 0.96%(e) 0.97%(e) 0.98%
Net investment income (loss)................. (0.50)% (0.33)% --%(f) (0.27)% (0.51)%
SUPPLEMENTAL DATA
Net assets, end of year (000's).............. $4,331,657 $5,619,694 $6,532,284 $6,636,792 $7,355,269
Portfolio turnover rate...................... 55.09% 52.76% 39.84% 42.96% 52.84%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
(f) Rounds to less than 0.01%.
70 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30,
-------------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ------------------------------------------------ ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year.............. $ 40.00 $ 39.31 $ 30.65 $ 29.28 $ 23.00
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b).............. (0.46) (0.40) (0.27) (0.31) (0.36)
Net realized and unrealized gains (losses)... (1.82) 3.93 8.93 1.68 6.64
------- ------- ------- ------- -------
Total from investment operations................ (2.28) 3.53 8.66 1.37 6.28
------- ------- ------- ------- -------
Less distributions from net realized gains...... (6.72) (2.84) -- -- --
------- ------- ------- ------- -------
Redemption fees................................. --(d) --(d) --(d) --(d) --(d)
------- ------- ------- ------- -------
Net asset value, end of year.................... $ 31.00 $ 40.00 $ 39.31 $ 30.65 $ 29.28
======= ======= ======= ======= =======
Total return(c)................................. (6.92)% 9.53% 28.25% 4.68% 27.30%
RATIOS TO AVERAGE NET ASSETS
Expenses........................................ 1.77%(e) 1.73%(e) 1.71%(e) 1.72%(e) 1.73%
Net investment income (loss).................... (1.25)% (1.08)% (0.75)% (1.02)% (1.26)%
SUPPLEMENTAL DATA
Net assets, end of year (000's)................. $25,457 $32,570 $36,911 $31,733 $26,161
Portfolio turnover rate......................... 55.09% 52.76% 39.84% 42.96% 52.84%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
Annual Report | The accompanying notes are an integral part of these
financial statements. | 71
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30,
----------------------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ------------------------------------------------ -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year.............. $ 38.85 $ 38.25 $ 29.82 $ 28.49 $ 22.37
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b).............. (0.45) (0.39) (0.26) (0.31) (0.34)
Net realized and unrealized gains (losses)... (1.76) 3.83 8.69 1.64 6.46
-------- -------- -------- -------- --------
Total from investment operations................ (2.21) 3.44 8.43 1.33 6.12
-------- -------- -------- -------- --------
Less distributions from net realized gains...... (6.72) (2.84) -- -- --
-------- -------- -------- -------- --------
Redemption fees................................. --(d) --(d) --(d) --(d) --(d)
-------- -------- -------- -------- --------
Net asset value, end of year.................... $ 29.92 $ 38.85 $ 38.25 $ 29.82 $ 28.49
======== ======== ======== ======== ========
Total return(c) ................................ (6.94)% 9.56% 28.27% 4.67% 27.36%
RATIOS TO AVERAGE NET ASSETS
Expenses........................................ 1.77%(e) 1.72%(e) 1.71%(e) 1.72%(e) 1.71%
Net investment income (loss).................... (1.25)% (1.07)% (0.75)% (1.02)% (1.24)%
SUPPLEMENTAL DATA
Net assets, end of year (000's)................. $523,040 $653,529 $728,710 $654,549 $762,602
Portfolio turnover rate......................... 55.09% 52.76% 39.84% 42.96% 52.84%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
72 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30,
------------------------------------------------------------
CLASS R 2008 2007 2006 2005 2004
- ----------------------------------------------- ------- -------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year............. $ 40.96 $ 39.98 $ 31.04 $ 29.50 $ 23.06
------- -------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b)............. (0.29) (0.23) (0.08) (0.15) (0.22)
Net realized and unrealized gains (losses) (1.89) 4.05 9.04 1.69 6.66
------- -------- ------- ------- -------
Total from investment operations............... (2.18) 3.82 8.96 1.54 6.44
------- -------- ------- ------- -------
Less distributions from:
Net investment income....................... -- -- (0.02) -- --
Net realized gains.......................... (6.72) (2.84) -- -- --
------- -------- ------- ------- -------
Total distributions............................ (6.72) (2.84) (0.02) -- --
------- -------- ------- ------- -------
Redemption fees................................ --(d) --(d) --(d) --(d) --(d)
------- -------- ------- ------- -------
Net asset value, end of year................... $ 32.06 $ 40.96 $ 39.98 $ 31.04 $ 29.50
======= ======== ======= ======= =======
Total return(c)................................ (6.48)% 10.11% 28.88% 5.22% 27.93%
RATIOS TO AVERAGE NET ASSETS
Expenses....................................... 1.27%(e) 1.23%(e) 1.21%(e) 1.22%(e) 1.23%
Net investment income (loss)................... (0.75)% (0.58)% (0.25)% (0.52)% (0.76)%
SUPPLEMENTAL DATA
Net assets, end of year (000's)................ $94,334 $118,387 $93,916 $54,139 $41,404
Portfolio turnover rate........................ 55.09% 52.76% 39.84% 42.96% 52.84%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
Annual Report | The accompanying notes are an integral part of these
financial statements. | 73
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30,
----------------------------------------------------------------
ADVISOR CLASS 2008 2007 2006 2005 2004
- ------------------------------------------------ -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year.............. $ 42.22 $ 40.93 $ 31.71 $ 29.99 $ 23.32
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b).............. (0.10) (0.03) 0.10 --(c) (0.07)
Net realized and unrealized gains (losses)... (1.97) 4.16 9.26 1.72 6.74
-------- -------- -------- -------- --------
Total from investment operations................ (2.07) 4.13 9.36 1.72 6.67
-------- -------- -------- -------- --------
Less distributions from:
Net investment income........................ -- -- (0.14) -- --
Net realized gains........................... (6.72) (2.84) -- -- --
-------- -------- -------- -------- --------
Total distributions............................. (6.72) (2.84) (0.14) -- --
-------- -------- -------- -------- --------
Redemption fees................................. --(c) --(c) --(c) --(c) --(c)
-------- -------- -------- -------- --------
Net asset value, end of year.................... $ 33.43 $ 42.22 $ 40.93 $ 31.71 $ 29.99
======== ======== ======== ======== ========
Total return.................................... (6.00)% 10.65% 29.55% 5.74% 28.60%
RATIOS TO AVERAGE NET ASSETS
Expenses........................................ 0.77%(d) 0.73%(d) 0.71%(d) 0.72%(d) 0.73%
Net investment income (loss).................... (0.25)% (0.08)% 0.25% (0.02)% (0.26)%
SUPPLEMENTAL DATA
Net assets, end of year (000's)................. $812,503 $803,365 $794,395 $347,518 $320,154
Portfolio turnover rate......................... 55.09% 52.76% 39.84% 42.96% 52.84%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Amount rounds to less than $0.01 per share.
(d) Benefit of expense reduction rounds to less than 0.01%.
74 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------------------- ------------ --------------
LONG TERM INVESTMENTS 93.3%
COMMON STOCKS 93.3%
CONSUMER DISCRETIONARY 11.2%
(a) Chipotle Mexican Grill Inc., B..................................................... 727,210 $ 61,791,035
(a) Dick's Sporting Goods Inc.......................................................... 2,176,400 62,245,040
Garmin Ltd. (Cayman Islands)....................................................... 554,500 22,679,050
Guess? Inc......................................................................... 2,466,100 94,402,308
International Game Technology...................................................... 939,600 32,641,704
(b) The Men's Wearhouse Inc............................................................ 3,301,000 87,905,630
Nordstrom Inc...................................................................... 1,385,300 48,845,678
PetSmart Inc....................................................................... 2,370,760 53,057,609
(a) Tractor Supply Co.................................................................. 1,432,500 50,939,700
(b) Wolverine World Wide Inc........................................................... 3,792,210 108,988,115
(a) Zumiez Inc......................................................................... 1,289,700 27,019,215
--------------
650,515,084
--------------
CONSUMER STAPLES 1.7%
(a) Hansen Natural Corp................................................................ 2,802,300 99,173,397
--------------
ENERGY 15.0%
(a) Bill Barrett Corp.................................................................. 2,103,800 108,198,434
(a) FMC Technologies Inc............................................................... 2,205,156 148,186,483
(a) Mariner Energy Inc................................................................. 4,049,600 111,606,976
(a) National-Oilwell Varco Inc......................................................... 1,318,592 90,257,623
Noble Energy Inc................................................................... 1,610,840 140,143,080
Smith International Inc............................................................ 2,502,000 191,428,020
(a) Southwestern Energy Co............................................................. 1,865,200 78,916,612
--------------
868,737,228
--------------
FINANCIALS 3.8%
(a) Affiliated Managers Group Inc...................................................... 1,153,300 114,568,822
FelCor Lodging Trust Inc........................................................... 2,072,500 26,092,775
iStar Financial Inc................................................................ 4,204,200 80,930,850
--------------
221,592,447
--------------
HEALTH CARE 13.6%
(a,b) American Medical Systems Holdings Inc.............................................. 3,689,900 52,027,590
C. R. Bard Inc..................................................................... 593,000 55,842,810
(a) Cerner Corp........................................................................ 322,912 14,941,138
(a) Community Health Systems Inc....................................................... 1,186,864 44,543,006
(a) Coventry Health Care Inc........................................................... 941,500 42,113,295
(a) Express Scripts Inc................................................................ 1,071,000 74,991,420
(a) Henry Schein Inc................................................................... 1,185,500 65,641,135
(a) Hologic Inc........................................................................ 1,832,660 53,495,345
(a) Millennium Pharmaceuticals Inc..................................................... 3,435,500 85,440,885
(a) Myriad Genetics Inc................................................................ 628,500 26,107,890
Pharmaceutical Product Development Inc............................................. 904,800 37,476,816
(a) QIAGEN NV (Netherlands)............................................................ 2,737,100 60,790,991
(a,c) Stereotaxis Inc.................................................................... 1,463,200 9,964,392
(a) Varian Medical Systems Inc......................................................... 1,384,800 64,919,424
(a) Waters Corp........................................................................ 1,569,600 96,467,616
--------------
784,763,753
--------------
Annual Report | 75
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------------------- ------------ --------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
INDUSTRIALS 15.7%
AMTEK Inc.......................................................................... 2,968,500 $ 144,031,620
C.H Robinson Worldwide Inc......................................................... 1,776,000 111,319,680
Expeditors International of Washington Inc......................................... 788,100 36,717,579
(a,b,d) Force Protection Inc., 144A, PIPES................................................. 3,734,600 11,166,454
(a) Foster Wheeler Ltd................................................................. 1,080,000 68,785,200
(a,b) Orbital Sciences Corp.............................................................. 3,420,100 92,034,891
Precision Castparts Corp........................................................... 1,183,510 139,133,436
Robert Half International Inc...................................................... 2,036,800 48,272,160
(a) Ryanair Holdings PLC, ADR (Ireland)................................................ 1,549,500 42,006,945
(a,c) SunPower Corp., A.................................................................. 1,253,100 109,358,037
(a) Terex Corp......................................................................... 1,499,000 104,450,320
--------------
907,276,322
--------------
INFORMATION TECHNOLOGY 26.5%
(a) Activision Inc..................................................................... 3,900,300 105,503,115
(a) Alliance Data Systems Corp......................................................... 284,100 16,310,181
(a) Concur Technologies Inc............................................................ 542,800 17,988,392
(a) Equinix Inc........................................................................ 644,400 58,266,648
FactSet Research Systems Inc....................................................... 1,750,400 105,076,512
(a,c) FLIR Systems Inc................................................................... 5,433,800 186,542,354
(a,b) FormFactor Inc..................................................................... 3,689,300 71,092,811
Global Payments Inc................................................................ 1,721,000 76,171,460
Harris Corp........................................................................ 2,634,600 142,347,438
(a) Lam Research Corp.................................................................. 1,088,000 44,433,920
(a) Logitech International SA (Switzerland)............................................ 1,621,540 48,921,862
Maxim Integrated Products Inc...................................................... 2,701,800 56,818,854
(a) Mettler-Toledo International Inc.(Switzerland)..................................... 699,126 66,598,743
(a,b) Microsemi Corp..................................................................... 5,007,300 122,678,850
(a) Nuance Communications Inc.......................................................... 5,804,500 117,715,260
(a) Omniture Inc....................................................................... 786,000 17,936,520
(a) Salesforce.com Inc................................................................. 497,400 33,191,502
(a,b) Silicon Laboratories Inc........................................................... 3,561,500 120,271,855
(a) Trimble Navigation Ltd............................................................. 2,862,360 93,856,784
(a,e) UbiSoft Entertainment SA (France).................................................. 293,800 29,633,610
--------------
1,531,356,671
--------------
MATERIALS 0.1%
(a) Intrepid Potash Inc................................................................ 113,800 5,404,362
--------------
TELECOMMUNICATION SERVICES 4.7%
(a,f) Anda Networks...................................................................... 91,107 172,192
(a) Crown Castle International Corp.................................................... 1,179,400 45,819,690
(a) MetroPCS Communications Inc........................................................ 4,018,200 78,917,448
(a) NII Holdings Inc................................................................... 2,239,340 102,427,412
(a) SBA Communications Corp............................................................ 1,396,800 45,172,512
(a) TeleCorp PCS Inc., Escrow Account.................................................. 4,569,500 --
--------------
272,509,254
--------------
76 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------------------- ------------ --------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
UTILITIES 1.0%
International Power PLC (United Kingdom)........................................... 6,343,700 $ 55,403,389
--------------
TOTAL COMMON STOCKS (COST $4,355,791,691) 5,396,731,907
--------------
CONVERTIBLE PREFERRED STOCKS 0.0%(g)
INDUSTRIALS 0.0%(g)
(a,f) Foveon Inc., cvt pfd., D, 144A.................................................... 1,792,573 17,926
(a,f) Foveon Inc., cvt pfd., E, 144A.................................................... 2,597,593 2,822,544
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $16,635,019) 2,840,470
--------------
TOTAL LONG TERM INVESTMENTS (COST $4,372,426,710) 5,399,572,377
--------------
SHORT TERM INVESTMENTS 9.2%
MONEY MARKET FUND (COST $210,909,624) 3.7%
(h) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.29%............... 210,909,624 210,909,624
--------------
PRINCIPAL
AMOUNT
------------
REPURCHASE AGREEMENT (COST $196,440,038) 3.4%
(i) Joint Repurchase Agreement, 1.910%, 5/01/08 (Maturity Value $196,450,462).......... $196,440,038 196,440,038
ABN AMRO BankNV, New York Branch (Maturity Value $18,012,543)
Banc of America Securities LLC (Maturity Value $16,951,710)
Barclays Capital Inc. (Maturity Value $16,951,710)
BNP Paribas Securities Corp. (Maturity Value $16,951,710)
Credit Suisse Securities (USA) LLC (Maturity Value $14,126,753)
Deutsche Bank Securities Inc. (Maturity Value $16,951,710)
Goldman, Sachs & Co. (Maturity Value $16,951,710)
Greenwich Capital Markets Inc. (Maturity Value $19,071,411)
Lehman Brothers Inc. (Maturity Value $13,507,934)
Merrill Lynch Government Securities Inc. (Maturity Value $16,951,710)
Morgan Stanley & Co. Inc. (Maturity Value $13,069,851)
UBS Securities LLC (Maturity Value $16,951,710)
Collateralized by U.S. Government Agency Securities, 1.96%-6.375%,
5/13/08-2/21/13; (j) U.S Government Agency Discount Notes, 5/05/08-6/06/08;
and U.S. Treasury Notes, 3.00%-5.00%, 7/31/08-5/41/12
SHARES
------------
(k) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES
MONEY MARKET FUND (COST $123,813,000) 2.1%
(l) Bank of New York Institutional Cash Reserve Fund, 2.71%............................ 123,813,000 123,813,000
--------------
TOTAL INVESTMENTS (COST $4,903,589,372) 102.5%..................................... 5,930,735,039
OTHER ASSETS, LESS LIABILITIES (2.5)%.............................................. (143,744,004)
--------------
NET ASSETS 100.0%.................................................................. $5,786,991,035
==============
Annual Report | 77
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
See Selected Portfolio Abbreviations on page 79.
(a) Non-income producing for the twelve months ended April 30, 2008.
(b) See Note 9 regarding holdings of 5% voting securities.
(c) A portion or all of the security is on loan as of April 30, 2008 See Note
1(f).
(d) 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 April 30, 2008, the
value of this security was $11,166,454, representing 0.19% of net assets.
(e) A portion or all of the security purchased on a when-issued or delayed
delivery basis See Note 1(d).
(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(c) regarding joint repurchase agreement.
(j) The security is traded on a discount basis with no stated coupon rate.
(k) See Note 1(f) regarding securities on loan.
(l) The rate shown is the annualized seven-day yield at period end.
78 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
PIPES - Private Investment in Public Equity Security
Annual Report | The accompanying notes are an integral part of these
financial statements. | 79
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
April 30, 2008
FRANKLIN
FRANKLIN GROWTH FRANKLIN FRANKLIN
FLEX CAP OPPORTUNITIES SMALL CAP SMALL-MID CAP
GROWTH FUND FUND GROWTH FUND GROWTH FUND
-------------- ------------- ------------ --------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ......................... $2,112,931,181 $ 246,091,205 $571,661,406 $3,782,177,147
Cost - Non-controlled affiliated issuers (Note 9) ... -- -- -- 714,062,563
Cost - Sweep Money Fund (Note 7) .................... 49,018,782 3,189,780 20,916,527 210,909,624
Cost - Repurchase agreements ........................ -- -- -- 196,440,038
-------------- ------------- ------------ --------------
Total cost of investments ........................... $2,161,949,963 $ 249,280,985 $592,577,933 $4,903,589,372
============== ============= ============ ==============
Value - Unaffiliated issuers ........................ $2,869,504,718 $ 298,564,279 $617,213,178 $4,857,219,181
Value - Non-controlled affiliated issuers (Note 9) .. -- -- -- 666,166,196
Value - Sweep Money Fund (Note 7) ................... 49,018,782 3,189,780 20,916,527 210,909,624
Value - Repurchase agreements ....................... -- -- -- 196,440,038
-------------- ------------- ------------ --------------
Total value of investments(a) ....................... 2,918,523,500 301,754,059 638,129,705 5,930,735,039
Foreign currency, at value (cost $30,082) .............. -- -- -- 46,142
Receivables:
Investment securities sold .......................... 1,733,153 1,319,327 6,341,982 29,415,336
Capital shares sold ................................. 3,397,599 846,485 263,352 3,589,973
Dividends and interest .............................. 1,358,378 92,748 143,518 1,116,227
-------------- ------------- ------------ --------------
Total assets ..................................... 2,925,012,630 304,012,619 644,878,557 5,964,902,717
-------------- ------------- ------------ --------------
Liabilities:
Payables:
Investment securities purchased ..................... -- 552,859 2,502,708 23,462,648
Capital shares redeemed ............................. 4,751,910 130,213 4,603,200 23,860,784
Affiliates .......................................... 2,154,005 274,673 607,877 4,326,495
Payable upon return of securities loaned ............... 20,200,000 4,150,000 10,444,000 123,813,000
Accrued expenses and other liabilities ................. 642,065 63,453 244,534 2,448,755
-------------- ------------- ------------ --------------
Total liabilities ................................ 27,747,980 5,171,198 18,402,319 177,911,682
-------------- ------------- ------------ --------------
Net assets, at value .......................... $2,897,264,650 $ 298,841,421 $626,476,238 $5,786,991,035
============== ============= ============ ==============
Net assets consist of:
Paid-in capital ..................................... $2,150,608,067 $ 380,543,257 $597,583,122 $4,753,978,554
Net unrealized appreciation (depreciation) .......... 756,573,537 52,470,652 45,551,772 1,027,161,727
Accumulated net realized gain (loss) ................ (9,916,954) (134,172,488) (16,658,656) 5,850,754
-------------- ------------- ------------ --------------
Net assets, at value .......................... $2,897,264,650 $ 298,841,421 $626,476,238 $5,786,991,035
============== ============= ============ ==============
(a) Includes securities loaned ............................. $ 19,626,000 $ 4,058,055 $ 10,957,911 $ 121,014,946
80 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2008
FRANKLIN
FRANKLIN GROWTH FRANKLIN FRANKLIN
FLEX CAP OPPORTUNITIES SMALL CAP SMALL-MID CAP
GROWTH FUND FUND GROWTH FUND GROWTH FUND
-------------- ------------ ------------ --------------
CLASS A:
Net assets, at value ...................................... $2,011,347,545 $137,312,693 $274,142,329 $4,331,657,423
-------------- ------------ ------------ --------------
Shares outstanding ........................................ 43,946,436 6,844,794 30,142,965 132,458,115
-------------- ------------ ------------ --------------
Net asset value per share(a) ................................. $ 45.77 $ 20.06 $ 9.09 $ 32.70
-------------- ------------ ------------ --------------
Maximum offering price per share (net asset value
per share/94.25%)....................................... $ 48.56 $ 21.28 $ 9.64 $ 34.69
-------------- ------------ ------------ --------------
CLASS B:
Net assets, at value ...................................... $ 95,600,106 $ 11,528,492 $ 52,465,362 $ 25,456,768
-------------- ------------ ------------ --------------
Shares outstanding ........................................ 2,240,763 608,303 6,226,915 821,234
-------------- ------------ ------------ --------------
Net asset value and maximum offering price per share(a) ... $ 42.66 $ 18.95 $ 8.43 $ 31.00
-------------- ------------ ------------ --------------
CLASS C:
Net assets, at value ...................................... $ 375,821,962 $ 40,252,789 $ 75,846,257 $ 523,040,081
-------------- ------------ ------------ --------------
Shares outstanding ........................................ 8,789,522 2,128,782 8,993,472 17,480,027
-------------- ------------ ------------ --------------
Net asset value and maximum offering price per share(a).... $ 42.76 $ 18.91 $ 8.43 $ 29.92
-------------- ------------ ------------ --------------
CLASS R:
Net assets, at value ...................................... $ 66,249,601 $ 7,862,691 $ 3,165,692 $ 94,334,221
-------------- ------------ ------------ --------------
Shares outstanding ......................................... 1,468,949 397,090 355,466 2,942,151
-------------- ------------ ------------ --------------
Net asset value and maximum offering price per share(a).... $ 45.10 $ 19.80 $ 8.91 $ 32.06
-------------- ------------ ------------ --------------
ADVISOR CLASS:
Net assets, at value ...................................... $ 348,245,436 $101,884,756 $220,856,598 $ 812,502,542
-------------- ------------ ------------ --------------
Shares outstanding ........................................ 7,545,671 4,945,086 23,558,580 24,301,900
-------------- ------------ ------------ --------------
Net asset value and maximum offering price per share(a).... $ 46.15 $ 20.60 $ 9.37 $ 33.43
-------------- ------------ ------------ --------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
Annual Report | The accompanying notes are an integral part of these
financial statements. | 81
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended April 30, 2008
FRANKLIN
FRANKLIN GROWTH FRANKLIN FRANKLIN
FLEX CAP OPPORTUNITIES SMALL CAP SMALL-MID CAP
GROWTH FUND FUND GROWTH FUND GROWTH FUND
----------- ------------- ------------- -------------
Investment income:
Dividends:
Unaffiliated issuers ................................... $19,922,232 $ 1,006,117 $ 2,982,885 $ 25,241,707
Non-controlled affiliated issuers (Note 9) ............. -- -- -- 1,509,261
Sweep Money Fund (Note 7) .............................. 3,905,470 262,469 451,257 5,607,814
Interest .................................................. 846 41 714 597,406
Income from securities loaned ............................. 145,950 92,697 546,321 1,202,288
----------- ------------- ------------- -------------
Total investment income ............................. 23,974,498 1,361,324 3,981,177 34,158,476
----------- ------------- ------------- -------------
Expenses:
Management fees (Note 3a) ................................. 13,020,395 1,349,639 4,473,383 29,560,759
Administrative fees (Note 3b) ............................. -- 548,621 1,788,954 --
Distribution fees: (Note 3c)
Class A ................................................ 5,059,575 347,897 1,077,395 12,509,013
Class B ................................................ 1,103,819 147,497 703,978 301,190
Class C ................................................ 3,784,109 352,581 1,006,255 6,041,470
Class R ................................................ 383,289 39,602 21,546 538,754
Transfer agent fees (Note 3e) ............................. 5,994,769 647,373 1,629,577 20,012,734
Custodian fees (Note 4) ................................... 47,661 12,983 18,880 127,492
Reports to shareholders ................................... 363,336 48,674 106,478 516,888
Registration and filing fees .............................. 146,189 66,029 105,606 222,274
Professional fees ......................................... 47,908 29,106 32,993 81,817
Trustees' fees and expenses ............................... 44,653 4,169 16,029 49,537
Other ..................................................... 356,309 11,772 27,606 142,203
----------- ------------- ------------- -------------
Total expenses ...................................... 30,352,012 3,605,943 11,008,680 70,104,131
Expense reductions (Note 4) ......................... (1,548) (1,106) (676) (3,055)
Expenses waived/paid by affiliates (Note 3f) ........ (293,647) -- -- --
----------- ------------- ------------- -------------
Net expenses ..................................... 30,056,817 3,604,837 11,008,004 70,101,076
----------- ------------- ------------- -------------
Net investment income (loss) .................. (6,082,319) (2,243,513) (7,026,827) (35,942,600)
----------- ------------ ------------- -------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ................................ 73,813,957 12,033,234 89,522,745 541,621,920
Non-controlled affiliated issuers (Note 9) .......... -- -- -- (6,157,652)
Foreign currency transactions .......................... 67,916 (30,746) -- 81,836
----------- ------------- ------------- -------------
Net realized gain (loss) ...................... 73,881,873 12,002,488 89,522,745 535,546,104
----------- ------------- ------------- -------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................ 11,048,494 7,497,884 (204,815,321) (898,497,680)
Translation of assets and liabilities denominated in
foreign currencies .................................. -- (1,865) -- 16,060
Net change in unrealized appreciation (depreciation) ... 11,048,494 7,496,019 (204,815,321) (898,481,620)
----------- ------------- ------------- -------------
Net realized and unrealized gain (loss) ...................... 84,930,367 19,498,507 (115,292,576) (362,935,516)
----------- ------------- ------------- -------------
Net increase (decrease) in net assets resulting
from operations ........................................... $78,848,048 $17,254,994 $(122,319,403) $(398,878,116)
=========== ============= ============= =============
82 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN FLEX CAP FRANKLIN GROWTH
GROWTH FUND OPPORTUNITIES FUND
YEAR ENDED APRIL 30, YEAR ENDED APRIL 30,
------------------------------- ---------------------------
2008 2007 2008 2007
-------------- -------------- ------------ ------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ...................... $ (6,082,319) $ 1,063,071 $ (2,243,513) $ (1,735,359)
Net realized gain (loss) from investments and
foreign currency transactions .................. 73,881,873 155,318,535 12,002,488 5,779,240
Net change in unrealized appreciation
(depreciation) on investments and translation
of assets and liabilities denominated in
foreign currencies ............................. 11,048,494 17,121,276 7,496,019 2,601,548
-------------- -------------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations ................ 78,848,048 173,502,882 17,254,994 6,645,429
-------------- -------------- ------------ ------------
Distributions to shareholders from:
Net investment income:
Class A ........................................ (1,062,345) (2,590,377) -- --
Class R ........................................ (43,876) (31,880) -- --
Advisor Class .................................. (161,537) (689,783) -- --
Net realized gains:
Class A ........................................ (32,084,220) -- -- --
Class B ........................................ (1,853,887) -- -- --
Class C ........................................ (6,486,834) -- -- --
Class R ........................................ (1,221,188) -- -- --
Advisor Class .................................. (5,050,987) -- -- --
-------------- -------------- ------------ ------------
Total distributions to shareholders .................. (47,964,874) (3,312,040) -- --
-------------- -------------- ------------ ------------
Capital share transactions: (Note 2)
Class A ........................................... 10,019,089 (213,191,173) 25,504,203 (9,162,668)
Class B ........................................... (23,776,783) (30,582,659) (5,044,139) (3,780,075)
Class C ........................................... 4,256,506 (36,808,204) 6,765,860 279,209
Class R ........................................... (15,994,000) (14,456,927) (69,825) 2,016,694
Advisor Class ..................................... 45,026,229 68,440,245 8,963,605 43,161,590
-------------- -------------- ------------ ------------
Total capital share transactions ..................... 19,531,041 (226,598,718) 36,119,704 32,514,750
-------------- -------------- ------------ ------------
Redemption fees ...................................... 20,391 8,359 3,208 957
-------------- -------------- ------------ ------------
Net increase (decrease) in net assets ....... 50,434,606 (56,399,517) 53,377,906 39,161,136
-------------- -------------- ------------ ------------
Net assets:
Beginning of year .................................... 2,846,830,044 2,903,229,561 245,463,515 206,302,379
-------------- -------------- ------------ ------------
End of year .......................................... $2,897,264,650 $2,846,830,044 $298,841,421 $245,463,515
============== ============== ============ ============
Undistributed net investment income included in
net assets:
End of year .......................................... $ -- $ 1,262,749 $ -- $ 6,480
============== ============== ============ ============
Annual Report | The accompanying notes are an integral part of these
financial statements. | 83
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN SMALL CAP FRANKLIN SMALL-MID CAP
GROWTH FUND GROWTH FUND
YEAR ENDED APRIL 30, YEAR ENDED APRIL 30,
------------------------------- ---------------------------------
2008 2007 2008 2007
-------------- -------------- --------------- ---------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ...................... $ (7,026,827) $ (9,577,948) $ (35,942,600) $ (27,283,400)
Net realized gain (loss) from investments and
foreign currency transactions .................. 89,522,745 140,281,066 535,546,104 699,240,769
Net change in unrealized appreciation
(depreciation) on investments and
translation of assets and liabilities
denominated in foreign currencies .............. (204,815,321) (102,034,052) (898,481,620) (23,627,634)
-------------- -------------- --------------- ---------------
Net increase (decrease) in net assets
resulting from operations ................ (122,319,403) 28,669,066 (398,878,116) 648,329,735
-------------- -------------- --------------- ---------------
Distributions to shareholders from net
realized gains:
Class A ........................................ (80,597,900) (54,986,996) (790,889,652) (396,182,023)
Class B ........................................ (13,185,309) (9,457,325) (5,111,384) (2,356,258)
Class C ........................................ (19,085,424) (13,365,094) (105,273,976) (48,066,828)
Class R ........................................ (619,705) (591,340) (16,775,519) (8,369,958)
Advisor Class .................................. (40,266,927) (29,874,687) (160,138,265) (51,154,142)
-------------- -------------- --------------- ---------------
Total distributions to shareholders .................. (153,755,265) (108,275,442) (1,078,188,796) (506,129,209)
-------------- -------------- --------------- ---------------
Capital share transactions: (Note 2)
Class A ........................................... (131,750,498) (101,711,711) (221,023,942) (1,022,578,329)
Class B ........................................... (9,331,447) (17,641,525) 132,361 (4,688,884)
Class C ........................................... (10,395,508) (36,691,357) 16,278,421 (81,677,506)
Class R ........................................... (1,529,576) (170,452) (1,881,624) 20,580,598
Advisor Class ..................................... (31,944,950) 15,813,676 242,909,931 (12,559,860)
-------------- -------------- --------------- ---------------
Total capital share transactions ..................... (184,951,979) (140,401,369) 36,415,147 (1,100,923,981)
-------------- -------------- --------------- ---------------
Redemption fees ................................... 3,008 4,293 97,409 53,592
-------------- -------------- --------------- ---------------
Net increase (decrease) in net assets ....... (461,023,639) (220,003,452) (1,440,554,356) (958,669,863)
Net assets(there is no undistributed net
investment income at beginning or end of year):
Beginning of year ................................. 1,087,499,877 1,307,503,329 7,227,545,391 8,186,215,254
-------------- -------------- --------------- ---------------
End of year ....................................... $ 626,476,238 $1,087,499,877 $ 5,786,991,035 $ 7,227,545,391
============== ============== =============== ===============
84 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS
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
eleven 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 Aggressive Growth Fund was renamed the Franklin Growth
Opportunities Fund effective November 1, 2007.
The Franklin Small Cap Growth Fund II was renamed the Franklin Small Cap Growth
Fund and reopened to new investors effective March 31, 2008.
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 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
Annual Report | 85
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
in determining if an event has occurred. If such an event occurs, the securities
may be valued using fair value procedures, which may include the use of
independent pricing services. All security valuation procedures are approved by
the Trust's Board of Trustees.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Trust's Board of Trustees.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. JOINT REPURCHASE AGREEMENT
The Funds may enter into a joint repurchase agreement whereby their uninvested
cash balance is deposited into a joint cash account with other funds managed by
the investment manager or an affiliate of the investment manager and is used to
invest in one or more repurchase agreements. The value and face amount of the
joint repurchase agreement are allocated to the funds based on their pro-rata
interest. A repurchase agreement is accounted for as a loan by the fund to the
seller, collateralized by securities which are delivered to the fund's
custodian. The market value, including accrued interest, of the initial
collateralization is required to be at least 102% of the dollar amount invested
by the funds, with the value of the underlying securities marked to market daily
to maintain coverage of at least 100%. The joint repurchase agreement held by
the Funds at year end had been entered into on April 30, 2008. The joint
repurchase agreement is valued at cost.
86 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS
The Funds may purchase securities on a when-issued or delayed delivery basis,
with payment and delivery scheduled for a future date. These transactions are
subject to market fluctuations and are subject to the risk that the value at
delivery may be more or less than the trade date purchase price. Although the
Funds will generally purchase these securities with the intention of holding the
securities, they may sell the securities before the settlement date. Sufficient
assets have been segregated for these securities.
E. FOREIGN CURRENCY CONTRACTS
When the Funds purchase or sell foreign securities they may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
F. SECURITIES LENDING
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.
G. 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.
Annual Report | 87
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. INCOME TAXES (CONTINUED)
The Funds have reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of April 30, 2008, and have
determined that no provision for income tax is required in the Funds' financial
statements.
Foreign securities held by the Funds may be subject to foreign taxation on
dividend 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.
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. 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.
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.
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.
88 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 funds 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 Funds, enters into contracts with
service providers that contain general indemnification clauses. The Trust's
maximum exposure under these arrangements is unknown as this would involve
future claims that may be made against the Trust that have not yet occurred.
Currently, the Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At April 30, 2008, there were an unlimited number of shares authorized (without
par value). Transactions in the Funds' shares were as follows:
FRANKLIN FRANKLIN
FLEX CAP GROWTH FUND GROWTH OPPORTUNITIES FUND
--------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- ------------
CLASS A SHARES:
Year ended April 30, 2008
Shares sold ................. 8,860,704 $ 412,850,677 3,288,291 $ 67,103,617
Shares issued in reinvestment
of distributions ......... 564,076 27,302,324 -- --
Shares redeemed ............. (9,275,872) (430,133,912) (2,127,947) (41,599,414)
----------- ------------- ---------- ------------
Net increase (decrease) ..... 148,908 $ 10,019,089 1,160,344 $ 25,504,203
=========== ============= ========== ============
Year ended April 30, 2007
Shares sold ................. 8,485,071 $ 352,610,680 1,439,647 $ 25,226,865
Shares issued in reinvestment
of distributions ......... 49,920 2,157,532 -- --
Shares redeemed ............. (13,503,990) (567,959,385) (1,970,580) (34,389,533)
----------- ------------- ---------- ------------
Net increase (decrease) ..... (4,968,999) $(213,191,173) (530,933) $ (9,162,668)
=========== ============= ========== ============
CLASS B SHARES:
Year ended April 30, 2008
Shares sold ................. 185,826 $ 8,281,945 82,357 $ 1,608,358
Shares issued in reinvestment
of distributions ......... 38,247 1,733,727 -- --
Shares redeemed ............. (783,309) (33,792,455) (360,405) (6,652,497)
----------- ------------- ---------- ------------
Net increase (decrease) ..... (559,236) $ (23,776,783) (278,048) $ (5,044,139)
=========== ============= ========== ============
Year ended April 30, 2007
Shares sold ................. 91,261 $ 3,584,497 73,515 $ 1,225,983
Shares redeemed ............. (865,451) (34,167,156) (300,150) (5,006,058)
----------- ------------- ---------- ------------
Net increase (decrease) ..... (774,190) $ (30,582,659) (226,635) $ (3,780,075)
=========== ============= ========== ============
Annual Report | 89
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN FRANKLIN
FLEX CAP GROWTH FUND GROWTH OPPORTUNITIES FUND
--------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- ---------------
CLASS C SHARES:
Year ended April 30, 2008
Shares sold.................. 1,643,470 $ 72,227,327 767,351 $ 14,696,919
Shares issued in reinvestment
of distributions.......... 131,515 5,973,410 -- --
Shares redeemed.............. (1,714,226) (73,944,231) (428,732) (7,931,059)
----------- ------------- ----------- ---------------
Net increase (decrease)...... 60,759 $ 4,256,506 338,619 $ 6,765,860
=========== ============= =========== ===============
Year ended April 30, 2007
Shares sold.................. 1,233,577 $ 48,625,278 556,467 $ 9,330,339
Shares redeemed.............. (2,162,839) (85,433,482) (548,163) (9,051,130)
----------- ------------- ----------- ---------------
Net increase (decrease)...... (929,262) $ (36,808,204) 8,304 $ 279,209
=========== ============= =========== ===============
CLASS R SHARES:
Year ended April 30, 2008
Shares sold.................. 357,376 $ 16,514,361 174,256 $ 3,443,236
Shares issued in reinvestment
of distributions.......... 26,436 1,261,987 -- --
Shares redeemed.............. (739,403) (33,770,348) (181,695) (3,513,061)
----------- ------------- ----------- ---------------
Net increase (decrease)...... (355,591) $ (15,994,000) (7,439) $ (69,825)
=========== ============= =========== ===============
Year ended April 30, 2007
Shares sold.................. 410,766 $ 16,932,262 234,993 $ 4,037,779
Shares issued in reinvestment
of distributions.......... 743 31,742 -- --
Shares redeemed.............. (758,468) (31,420,931) (115,853) (2,021,085)
----------- ------------- ----------- ---------------
Net increase (decrease)...... (346,959) $ (14,456,927) 119,140 $ 2,016,694
=========== ============= =========== ===============
ADVISOR CLASS SHARES:
Year ended April 30, 2008
Shares sold.................. 1,150,962 $ 52,420,394 780,151 $ 15,851,341
Shares issued in reinvestment
of distributions.......... 106,767 5,206,091 -- --
Shares redeemed.............. (270,893) (12,600,256) (335,773) (6,887,736)
----------- ------------- ----------- ---------------
Net increase (decrease)...... 986,836 $ 45,026,229 444,378 $ 8,963,605
=========== ============= =========== ===============
Year ended April 30, 2007
Shares sold.................. 2,893,712 $ 123,038,695 2,882,354 $ 49,364,281
Shares issued in reinvestment
of distributions.......... 15,840 687,926 -- --
Shares redeemed.............. (1,269,489) (55,286,376) (348,285) (6,202,691)
----------- ------------- ----------- ---------------
Net increase (decrease)...... 1,640,063 $ 68,440,245 2,534,069 $ 43,161,590
=========== ============= =========== ===============
90 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN FRANKLIN
SMALL CAP GROWTH FUND SMALL-MID CAP GROWTH FUND
--------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- ---------------
CLASS A SHARES:
Year ended April 30, 2008
Shares sold.................. 5,142,888 $ 57,782,843 27,344,993 $ 1,030,832,137
Shares issued in reinvestment
of distributions.......... 7,209,636 73,177,801 17,940,000 630,770,384
Shares redeemed.............. (24,350,461) (262,711,142) (48,105,487) (1,882,626,463)
----------- ------------- ----------- ---------------
Net increase (decrease)...... (11,997,937) $(131,750,498) (2,820,494) $ (221,023,942)
=========== ============= =========== ===============
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:
Year ended April 30, 2008
Shares sold.................. 123,014 $ 1,243,897 58,760 $ 2,259,539
Shares issued in reinvestment
of distributions.......... 1,228,476 11,584,529 142,174 4,751,473
Shares redeemed.............. (2,064,247) (22,159,873) (193,900) (6,878,651)
----------- ------------- ----------- ---------------
Net increase (decrease)...... (712,757) $ (9,331,447) 7,034 $ 132,361
=========== ============= =========== ===============
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)
=========== ============= =========== ===============
CLASS C SHARES:
Year ended April 30, 2008
Shares sold.................. 305,315 $ 3,089,377 1,327,722 $ 46,812,879
Shares issued in reinvestment
of distributions.......... 1,822,622 17,205,554 2,777,328 89,596,613
Shares redeemed.............. (2,919,162) (30,690,439) (3,447,379) (120,131,071)
----------- ------------- ----------- ---------------
Net increase (decrease)...... (791,225) $ (10,395,508) 657,671 $ 16,278,421
=========== ============= =========== ===============
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)
=========== ============= =========== ===============
Annual Report | 91
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN FRANKLIN
SMALL CAP GROWTH FUND SMALL-MID CAP GROWTH FUND
--------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- --------------
CLASS R SHARES:
Year ended April 30, 2008
Shares sold.................. 102,048 $ 1,100,387 1,064,140 $ 39,882,854
Shares issued in reinvestment
of distributions.......... 62,282 619,705 475,058 16,389,509
Shares redeemed.............. (256,839) (3,249,668) (1,487,464) (58,153,987)
----------- ------------- ----------- -------------
Net increase (decrease)...... (92,509) $ (1,529,576) 51,734 $ (1,881,624)
=========== ============= =========== =============
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:
Year ended April 30, 2008
Shares sold.................. 7,904,170 $ 87,488,790 11,838,328 $ 479,997,430
Shares issued in reinvestment
of distributions.......... 3,652,414 38,167,731 3,474,301 124,762,163
Shares redeemed.............. (12,389,907) (157,601,471) (10,036,923) (361,849,662)
----------- ------------- ----------- -------------
Net increase (decrease)...... (833,323) $ (31,944,950) 5,275,706 $ 242,909,931
=========== ============= =========== =============
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)
=========== ============= =========== =============
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
92 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES
Effective January 1, 2008, 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 $7.5 billion
0.440% Over $7.5 billion, up to and including $10 billion
0.430% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% In excess of $15 billion
Prior to January 1, 2008, the Franklin Flex Cap Growth Fund and the Franklin
Small-Mid Cap Growth Fund paid fees 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 Growth Opportunities Fund pays an investment management fee to
Advisers based on the average daily net assets 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
Annual Report | 93
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES (CONTINUED)
The Franklin Small Cap Growth Fund pays an investment management fee to Advisers
based on the average daily net assets 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 Growth Opportunities Fund and the Franklin Small Cap Growth Fund
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.
94 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (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 GROWTH FRANKLIN FRANKLIN
FLEX CAP OPPORTUNITIES SMALL CAP SMALL-MID CAP
GROWTH FUND FUND GROWTH FUND GROWTH FUND
----------- ------------- ----------- -------------
Reimbursement Plans:
Class A .............................. 0.25% 0.35% -- 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%
Distributors has agreed to limit the current rate to 0.30% per year for Class A
share for the Franklin Growth Opportunities Fund for the period of March 1, 2008
through January 1, 2009.
Prior to the Franklin Small Cap Growth Fund opening to new investors on March
31, 2008, Distributors limited the current rate to 0.25% per year for Class A
shares. Distributors has agreed to limit the current 12b-1 rate to 0.30% per
year for Class A shares for the Franklin Small Cap Growth Fund for the period of
March 31, 2008 through January 1, 2009.
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 year:
FRANKLIN
FRANKLIN GROWTH FRANKLIN FRANKLIN
FLEX CAP OPPORTUNITIES SMALL CAP SMALL-MID CAP
GROWTH FUND FUND GROWTH FUND GROWTH FUND
----------- ------------- ----------- -------------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers .. $770,390 $111,630 $12,860 $344,818
Contingent deferred sales charges
retained ............................. $109,216 $ 49,577 $23,752 $ 52,813
E. TRANSFER AGENT FEES
For the year ended April 30, 2008, 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 GROWTH FRANKLIN FRANKLIN
FLEX CAP OPPORTUNITIES SMALL CAP SMALL-MID CAP
GROWTH FUND FUND GROWTH FUND GROWTH FUND
----------- ------------- ----------- -------------
Transfer agent fees ..................... $3,717,872 $470,099 $942,537 $10,570,917
Annual Report | 95
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
F. WAIVER AND EXPENSE REIMBURSEMENTS
The Franklin Flex Cap Growth Fund incurred interest and penalties of $293,647
related to a deficiency dividend which FT Services voluntarily agreed to
reimburse.
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 year ended April 30, 2008, the
custodian fees were reduced as noted in the Statements of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At April 30, 2008, the capital loss carryforwards were as
follows:
FRANKLIN
GROWTH
OPPORTUNITIES
FUND
-------------
Capital loss carryforwards expiring in:
2010 ............................... $ 82,519,960
2011 ............................... 47,112,100
------------
$129,632,060
============
During the year ended April 30, 2008, the Franklin Flex Cap Growth Fund and the
Franklin Growth Opportunities Fund utilized $35,830,233 and $15,432,540,
respectively, of capital loss carryforwards.
For tax purposes, realized capital losses and realized currency losses occurring
subsequent to October 31, may be deferred and treated as occurring on the first
day of the following fiscal year. At April 30, 2008, the Franklin Flex Cap
Growth Fund and the Franklin Small Cap Growth Fund deferred realized capital
losses of $8,785,285and $17,763,909, respectively. At April 30, 2008, the
Franklin Growth Opportunities Fund deferred realized currency losses of $21,792.
96 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The tax character of distributions paid during the years ended April 30, 2008
and 2007, was as follows:
FRANKLIN FLEX CAP FRANKLIN SMALL CAP
GROWTH FUND GROWTH FUND
------------------------ ---------------------------
2008 2007 2008 2007
----------- ---------- ------------ ------------
Distributions paid from:
Ordinary income ......... $ 1,267,758 $3,312,040 $ 5,157,068 $ 11,202,529
Long term capital gain .. 46,697,116 -- 148,598,197 97,072,913
----------- ---------- ------------ ------------
$47,964,874 $3,312,040 $153,755,265 $108,275,442
=========== ========== ============ ============
FRANKLIN SMALL-MID CAP
GROWTH FUND
-----------------------------
2008 2007
-------------- ------------
Distributions paid from:
Ordinary income ......... $ 36,223,776 $ --
Long term capital gain .. 1,041,965,020 506,129,209
-------------- ------------
$1,078,188,796 $506,129,209
============== ============
At April 30, 2008, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:
FRANKLIN
FRANKLIN GROWTH
FLEX CAP OPPORTUNITIES
GROWTH FUND FUND
-------------- -------------
Cost of investments ........................ $2,163,081,632 $253,799,621
============== =============
Unrealized appreciation .................... $ 800,617,808 $ 59,687,611
Unrealized depreciation .................... (45,175,940) (11,733,173)
-------------- -------------
Net unrealized appreciation (depreciation).. $ 755,441,868 $ 47,954,438
============== =============
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND
------------- --------------
Cost of investments ........................ $ 595,477,753 $4,906,832,165
============= ==============
Unrealized appreciation .................... $ 144,700,087 $1,352,656,169
Unrealized depreciation .................... (102,048,135) (328,753,295)
------------- --------------
Net unrealized appreciation (depreciation).. $ 42,651,952 $1,023,902,874
============= ==============
Undistributed ordinary income .............. $ 3,622,140 $ --
Undistributed long term capital gains ...... 382,929 9,093,550
------------- --------------
Distributable earnings ..................... $ 4,005,069 $ 9,093,550
============= ==============
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions,
partnership distributions, recognition of partnership income and return of
capital.
Annual Report | 97
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (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, partnership distributions, recognition of partnership income and
return of capital.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended April 30, 2008, were as follows:
FRANKLIN
FRANKLIN GROWTH FRANKLIN FRANKLIN
FLEX CAP OPPORTUNITIES SMALL CAP SMALL-MID CAP
GROWTH FUND FUND GROWTH FUND GROWTH FUND
-------------- ------------- ------------ --------------
Purchases... $1,053,097,691 $393,335,468 $428,148,936 $3,575,117,080
Sales....... $1,042,784,996 $362,409,357 $774,760,093 $4,862,164,575
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.
98 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RESTRICTED SECURITIES (CONTINUED)
At April 30, 2008, 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 FLEX CAP GROWTH FUND
36,443 Anda Networks ........................................ 3/24/00 $ 2,000,000 $ 68,877
2,227,171 Fibrogen Inc., pfd., E ............................... 5/19/00 9,999,998 13,140,309
-----------
TOTAL RESTRICTED SECURITIES (0.46% of Net Assets).. $13,209,186
===========
FRANKLIN GROWTH OPPORTUNITIES FUND
374,806 Dilithium Networks Inc., depository receipt, D,
pfd., 144A, PIPES ................................. 7/13/06 $ 873,300 $ 1,293,081
===========
TOTAL RESTRICTED SECURITIES (0.43% of Net Assets)
FRANKLIN SMALL-MID CAP GROWTH FUND
91,107 Anda Networks ........................................ 3/24/00 $ 5,000,000 $ 172,192
1,792,573 Foveon Inc., cvt. pfd., D, 144A ...................... 4/08/02 13,999,995 17,926
2,597,593 Foveon Inc., cvt. pfd., E, 144A ...................... 5/31/05 2,635,024 2,822,544
-----------
TOTAL RESTRICTED SECURITIES (0.05% of Net Assets).. $ 3,012,662
===========
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-Mid Cap Growth
Fund for the year ended April 30, 2008, 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 YEAR ADDITIONS REDUCTIONS YEAR END OF YEAR INCOME GAIN (LOSS)
- --------------------------------------- --------- --------- ---------- --------- ------------ ---------- -----------
FRANKLIN SMALL-MID CAP GROWTH FUND
NON-CONTROLLED AFFILIATES
Allscripts Healthcare Solutions Inc.... 3,259,900 -- 3,259,900 -- $ (a) $ -- $ --
American Medical Systems Holdings Inc.. 3,689,900 -- -- 3,689,900 52,027,590 -- --
Force Protection Inc., 144A, PIPES .... 4,316,100 -- 581,500 3,734,600 11,166,454 -- (4,735,554)
FormFactor Inc......................... 1,917,400 1,771,900 -- 3,689,300 71,092,811 -- --
Microsemi Corp......................... 5,279,800 1,284,500 1,557,000 5,007,300 122,678,850 -- (5,194,558)
Orbital Sciences Corp.................. -- 3,420,100 -- 3,420,100 92,034,891 -- --
Silicon Laboratories Inc............... 1,708,600 2,269,300 416,400 3,561,500 120,271,855 -- 2,943,926
Tektronix Inc.......................... 2,214,298 -- 2,214,298 -- (a) -- --
The Men's Wearhouse Inc................ 1,295,100 2,005,900 -- 3,301,000 87,905,630 432,812 --
Wolverine World Wide Inc............... 2,824,210 1,298,900 330,900 3,792,210 108,988,115 1,076,449 828,534
------------ ---------- -----------
TOTAL AFFILIATED SECURITIES
(11.51% of Net Assets).............. $666,166,196 $1,509,261 $(6,157,652)
============ ========== ===========
(a) As of April 30, 2008, no longer an affiliate.
Annual Report | 99
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. NEW ACCOUNTING PRONOUNCEMENTS
In September 2006,the Financial Accounting Standard Board (FASB)issued FASB
Statement No. 157, "Fair Value Measurement" (SFAS 157), which defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. SFAS 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
Trust believes the adoption of SFAS 157 will have no material impact on its
financial statements.
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. The Funds are currently
evaluating the impact, if any, of applying the various provisions of SFAS 161.
100 | Annual Report
Franklin Strategic Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN STRATEGIC SERIES
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Flex Cap Growth Fund,
Franklin Growth Opportunities Fund (formerly, Franklin Aggressive Growth Fund),
Franklin Small Cap Growth Fund(formerly, Franklin Small Cap Growth Fund II)and
Franklin Small-Mid Cap Growth Fund (separate portfolios of Franklin Strategic
Series, hereafter referred to as the "Funds") at April 30, 2008, the results of
each of their operations for the year then ended, the changes in each of their
net assets for each of the two years in the period then ended and the financial
highlights for each of the periods presented, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at April 30, 2008 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
June 18, 2008
Annual Report | 101
Franklin Strategic Series
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Funds
designate the maximum amount allowable but no less than the following amounts as
long term capital gain dividends for the fiscal year ended April 30, 2008:
FRANKLIN FRANKLIN FRANKLIN
FLEX CAP SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND GROWTH FUND
- ----------- ----------- -------------
$46,687,686 $98,525,214 $507,980,760
Under Section 871(k)(2)(C) of the Code, the Franklin Small Cap Growth Fund
designate the maximum amount allowable but not less than $3,625,783as short term
capital gain dividends for purposes of the tax imposed under Section
871(a)(1)(A) of the Code for the fiscal year ended April 30, 2008.
Under Section 854(b)(2) of the Code, the Franklin Small Cap Growth Fund and
Franklin Small-Mid Cap Growth Fund designate 35.95% and 49.86%, respectively, of
the ordinary income dividends as income qualifying for the dividends received
deduction for the fiscal year ended April 30, 2008.
Under Section 854(b)(2) of the Code, the Funds designate the maximum amount
allowable but no less than the following amounts as qualified dividends for
purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal
year ended April 30, 2008.
FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN
FLEX CAP OPPORTUNITIES SMALL CAP SMALL-MID CAP
GROWTH FUND FUND GROWTH FUND GROWTH FUND
- ----------- --------------- ----------- -------------
$20,202,629 $865,654 $1,853,711 $20,123,253
Distributions, including qualified dividend income, paid during calendar year
2008 will be reported to shareholders on Form 1099-DIV in January 2009.
Shareholders are advised to check with their tax advisors for information on the
treatment of the amounts on their individual income tax returns.
102 | Annual Report
Franklin Strategic Series
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Trust, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- ------------------ --------------------- ----------------------- ---------------------------
HARRIS J. ASHTON (1932) Trustee Since 1991 143 Bar-S Foods (meat packing
One Franklin Parkway company).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief
Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
ROBERT F. CARLSON (1928) Trustee Since 2007 122 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired; and FORMERLY, Vice President, senior member and past President, Board of Administration, California Public Employees
Retirement Systems (CALPERS) (1971-January 2008); member and Chairman of the Board, Sutter Community Hospitals; member, Corporate
Board, Blue Shield of California; and Chief Counsel, California Department of Transportation.
SAM GINN (1937) Trustee Since 2007 122 Chevron Corporation (global
One Franklin Parkway energy company) and ICO
San Mateo, CA 94403-1906 Global Communications
(Holdings) Limited
(satellite company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief
Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding
company) (1988-1994).
EDITH E. HOLIDAY (1952) Trustee Since 1998 143 Hess Corporation
One Franklin Parkway (exploration and refining
San Mateo, CA 94403-1906 of oil and gas), H.J. Heinz
Company (processed foods
and allied products), RTI
International Metals, Inc.
(manufacture and
distribution of titanium),
Canadian National Railway
(railroad) and White
Mountains Insurance Group,
Ltd. (holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of
the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and
Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
Annual Report | 103
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- ------------------ --------------------- ----------------------- ---------------------------
FRANK W.T. LAHAYE (1929) Trustee Since 1991 122 Center for Creative Land
One Franklin Parkway Recycling (brownfield
San Mateo, CA 94403-1906 redevelopment).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital).
FRANK A. OLSON (1932) Trustee Since 2007 143 Hess Corporation
One Franklin Parkway (exploration and refining
San Mateo, CA 94403-1906 of oil and gas) and
Sentient Jet (private jet
service).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
LARRY D. THOMPSON (1945) Trustee Since 2007 143 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President-Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director,
Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The
Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S.
Department of Justice (2001-2003).
JOHN B. WILSON (1959) Lead Independent Trustee since 2006 122 None
One Franklin Parkway Trustee and Lead Independent
San Mateo, CA 94403-1906 Trustee since January
2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit
boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer
and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Executive Vice President -
Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting
firm) (1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- ------------------ --------------------- ----------------------- ---------------------------
**CHARLES B. JOHNSON (1933) Trustee and Trustee since 1991 143 None
One Franklin Parkway Chairman of the and Chairman of the
San Mateo, CA 94403-1906 Board Board since 1993
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member-Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.;
and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42
of the investment companies in Franklin Templeton Investments.
104 | Annual Report
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- ------------------ --------------------- ----------------------- ---------------------------
**RUPERT H. JOHNSON, JR. (1940) Trustee, President Trustee since 1991 56 None
One Franklin Parkway and Chief and President and
San Mateo, CA 94403-1906 Executive Officer Chief Executive
- Investment Officer - Investment
Management Management since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member-Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton
Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be,
of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton
Investments.
JAMES M. DAVIS (1952) Chief Compliance Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Officer and Vice Officer since 2004
San Mateo, CA 94403-1906 President - AML and Vice President -
Compliance AML Compliance since
2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
LAURA F. FERGERSON (1962) Treasurer, Chief Treasurer since 2004, Not Applicable Not Applicable
One Franklin Parkway Financial Officer Chief Financial
San Mateo, CA 94403-1906 and Chief Officer and Chief
Accounting Officer Accounting Officer
since February 2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the
investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC
(1997-2003).
JIMMY D. GAMBILL (1947) Vice President Since February 2008 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
Annual Report | 105
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- ------------------ --------------------- ----------------------- ---------------------------
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
EDWARD B. JAMIESON (1948) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton
Institutional, LLC; officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of
four of the investment companies in Franklin Templeton Investments.
CHRISTOPHER J. MOLUMPHY (1962) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director and Executive Vice President, Franklin Advisers, Inc.; and officer of some of the other subsidiaries of Franklin Resources,
Inc. and of six of the investment companies in Franklin Templeton Investments.
KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin
Templeton Investments.
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling,
LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
106 | Annual Report
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- ------------------ --------------------- ----------------------- ---------------------------
GALEN G. VETTER (1951) Senior Vice Since February Not Applicable Not Applicable
500 East Broward Blvd. President and 2008
Suite 2100 Chief Executive
Fort Lauderdale, FL 33394-3091 Officer - Finance
and Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of some of the
other subsidiaries of Franklin Resources, Inc. and of 46 of the investment
companies in Franklin Templeton Investments; and FORMERLY, Managing Director,
RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987
and 1991-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or affiliated
investment managers.
** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested
persons of the Trust under the federal securities laws due to their positions
as officers and directors and major shareholders of Franklin Resources, Inc.,
which is the parent company of the Trust's investment manager and
distributor.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS
AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED
JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT
MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS
BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF
STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF
THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL
APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES,
ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT
PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY
COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL
CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT
COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS
DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND
RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
Annual Report | 107
Franklin Strategic Series
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held April 15, 2008, the Board of Trustees (Board), including a
majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for each of the separate funds within Franklin
Strategic Series (Fund(s)). In reaching this decision, the Board took into
account information furnished throughout the year at regular Board meetings, as
well as information prepared specifically in connection with the annual renewal
review process. Information furnished and discussed throughout the year included
investment performance reports and related financial information for each Fund,
as well as periodic reports on shareholder services, legal, compliance, pricing,
brokerage commissions and execution and other services provided by the
Investment Manager (Manager) and its affiliates. Information furnished
specifically in connection with the renewal process included a report for each
Fund prepared by Lipper, Inc. (Lipper), an independent organization, as well as
a Fund profitability analysis report prepared by management. The Lipper reports
compared each Fund's investment performance and expenses with those of other
mutual funds deemed comparable to the Fund as selected by Lipper. The Fund
profitability analysis report discussed the profitability to Franklin Templeton
Investments from its overall U.S. fund operations, as well as on an individual
fund-by-fund basis. Included with such profitability analysis report was
information on a fund-by-fund basis listing portfolio managers and other
accounts they manage, as well as information on management fees charged by the
Manager and its affiliates including management's explanation of differences
where relevant and a three-year expense analysis with an explanation for any
increase in expense ratios. Additional material accompanying such report was a
memorandum prepared by management describing project initiatives and capital
investments relating to the services provided to the Funds by the Franklin
Templeton Investments organization, as well as a memorandum relating to
economies of scale and a comparative analysis concerning transfer agent fees
charged each Fund.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. While the investment
management agreements for all Funds were considered at the same Board meeting,
the Board dealt with each Fund separately. In approving continuance of the
investment management agreement for each Fund, the Board, including a majority
of independent Trustees, determined that the existing management fee structure
was fair and reasonable and that continuance of the investment management
agreement was in the best interests of each Fund and its shareholders. While
attention was given to all information furnished, the following discusses some
primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Funds and their shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished them showing that the investment policies and restrictions for
each Fund were consistently complied with as well as other reports periodically
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin Templeton fund
108 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
complex, the adherence to fair value pricing procedures established by the
Board, and the accuracy of net asset value calculations. The Board also noted
the extent of benefits provided Fund shareholders from being part of the
Franklin Templeton family of funds, including the right to exchange investments
between the same class of funds without a sales charge, the ability to reinvest
Fund dividends into other funds and the right to combine holdings in other funds
to obtain a reduced sales charge. Favorable consideration was given to
management's continuous efforts and expenditures in establishing back-up systems
and recovery procedures to function in the event of a natural disaster, it being
noted that such systems and procedures had functioned smoothly during the
Florida hurricanes and blackouts experienced in recent years. Among other
factors taken into account by the Board were the Manager's best execution
trading policies, including a favorable report by an independent portfolio
trading analytical firm. Consideration was also given to the experience of each
Fund's portfolio management team, the number of accounts managed and general
method of compensation. In this latter respect, the Board noted that a primary
factor in management's determination of a portfolio manager's bonus compensation
was the relative investment performance of the funds he or she managed and that
a portion of such bonus was required to be invested in a predesignated list of
funds within such person's fund management area so as to be aligned with the
interests of Fund shareholders. The Board also took into account the quality of
transfer agent and shareholder services provided Fund shareholders by an
affiliate of the Manager, noting continuing expenditures by management to
increase and improve the scope of such services, periodic favorable reports on
such service conducted by third parties, the high industry ranking given to the
Franklin Templeton website, and the firsthand experience of individual Board
members who deal with the shareholder services department in their capacities as
shareholders in one or more of the various Franklin Templeton funds.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Funds in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings throughout the year, particular attention in
assessing performance was given to the Lipper reports furnished for the
agreement renewals. The Lipper reports prepared for each Fund showed its
investment performance or that of its Class A shares for those having multiple
share classes in comparison to a performance universe selected by Lipper.
Comparative performance for each Fund was shown for the one-year period ended
January 31, 2008, and previous periods ended that date of up to 10 years
depending on when a particular Fund commenced operations. The following
summarizes the performance results for each of these Funds and the Board's view
of such performance.
FRANKLIN FLEX CAP GROWTH FUND - The performance universe for this Fund consisted
of the Fund and all retail and institutional multi-cap growth funds as selected
by Lipper. The Lipper report showed the Fund's total return to be in the middle
quintile of such performance universe for the one-year period. Such report also
showed the Fund's total return on an annualized basis to be in the second-lowest
quintile of the performance universe during the previous three-year period, the
Annual Report | 109
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
middle quintile of such universe during the previous five-year period and the
highest quintile of such universe during the previous 10-year period. The Board
found such performance to be acceptable.
FRANKLIN GROWTH OPPORTUNITIES FUND - The performance universe for this Fund
consisted of the Fund and all retail and institutional multi-cap growth funds as
selected by Lipper. The Lipper report comparison showed the Fund's total return
for the one-year period to be in the second-highest quintile of its performance
universe, and on an annualized basis to be in the second-highest and highest
quintiles of such universe during the previous three- and five-year periods,
respectively. The Fund has not been in operation for a full 10-year period. The
Board was satisfied with such performance.
FRANKLIN SMALL-MID CAP GROWTH FUND - The performance universe for this Fund
consisted of all retail and institutional mid-cap growth funds as selected by
Lipper. The Lipper report comparison for the Fund showed its total return during
the one-year period was in the lowest quintile of such performance universe, and
on an annualized basis was in the second-lowest quintile of such universe during
each of the previous three- and five-year periods, and the middle quintile of
such universe during the previous 10-year period. In discussing the Fund's
underperformance, management noted that it arose from the Fund's overweighting
and poor stock selection within the financial, telecom and industrial sectors,
as well as certain stock specific investments outside such sectors. The
independent Trustees met separately with the Fund's lead portfolio manager and
other management representatives to discuss the steps being taken to improve
such performance. While intending to continuously monitor this Fund, the Board
was satisfied with management's response and the efforts being made to improve
its performance. The Board also noted that the Fund's total return for the
previous three- and five-year periods were 6.95% and 13.41%, respectively, on an
annualized basis as shown in the Lipper report.
FRANKLIN SMALL CAP GROWTH FUND - The performance universe for this Fund
consisted of the Fund and all retail and institutional small cap growth funds as
selected by Lipper. The Lipper report comparison for the Fund showed its total
return to be in the lowest quintile of such performance universe during the
one-year period and to be in the second-lowest quintile of such universe for the
previous three- and five-year periods on an annualized basis. The Fund has not
been in operation for a full 10-year period. In discussing such relatively poor
performance, management pointed out that it was largely attributable to the
Fund's overweighting and poor stock selection within the financial sector, as
well as stock selection within the health care sector. The independent Trustees
met separately with the Fund's lead portfolio manager and other management
representatives to discuss such performance and steps being taken to improve it.
While intending to continuously monitor this Fund, the Board was satisfied with
management's response and the efforts being made to improve performance. The
Board also noted that the Fund's annualized total return during the previous
five-year period was 11.89% as shown in the Lipper report.
110 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
COMPARATIVE EXPENSES. Consideration was given to the management fee and total
expense ratios of each Fund compared with those of a group of other funds
selected by Lipper as its appropriate Lipper expense group. Prior to making such
comparison, the Board relied upon a survey showing that the scope of services
covered under the Fund's investment management agreement was similar to those
provided by fund managers to other mutual fund groups. In reviewing comparative
costs, emphasis was given to each Fund's contractual investment management fee
in comparison with the investment management fee that would have been charged by
other funds within its Lipper expense group assuming they were similar in size
to the Fund, as well as the actual total expenses of the Fund in comparison with
those of its Lipper expense group. The Lipper contractual investment management
fee analysis includes administrative charges as being part of the investment
management fee, and actual total expenses, for comparative consistency, are
shown by Lipper for Fund Class A shares for those Funds with multiple share
classes. The results of such expense comparisons showed the contractual
investment management fee rates and actual total expenses for each of Franklin
Flex Cap Growth Fund and Franklin Small-Mid Cap Growth Fund were in the least
expensive quintile of their respective Lipper expense groups. The contractual
investment management fee rate for Franklin Small Cap Growth Fund was below the
median of its Lipper expense group and its actual total expenses were in the
least expensive quintile of such expense group. The contractual management fee
rate for Franklin Growth Opportunities Fund was in the least expensive quintile
of its Lipper expense group and its actual total expenses were in the second
least expensive quintile of such group. The Board was satisfied with the
contractual management fees and total expenses of each Fund in comparison to its
expense group as shown in the Lipper reports.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
each Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each Fund. Specific attention was given to the methodology followed in
allocating costs to each Fund, it being recognized that allocation methodologies
are inherently subjective and various allocation methodologies may each be
reasonable while producing different results. In this respect, the Board noted
that, while being continuously refined and reflecting changes in the Manager's
own cost accounting, the allocation methodology was consistent with that
followed in profitability report presentations for the Funds made in prior years
and that the Funds' independent registered public accounting firm had been
engaged by the Manager to perform certain procedures on a biennial basis,
specified and approved by the Manager and the Funds' Board solely for their
purposes and use in reference to the profitability analysis. In reviewing and
discussing such analysis, management discussed with the Board its belief that
costs incurred in establishing the infrastructure necessary for the type of
mutual fund operations conducted by the Manager and its affiliates may not be
fully reflected in the expenses allocated to each Fund in determining its
profitability, as well as the
Annual Report | 111
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
fact that the level of profits, to a certain extent, reflected operational cost
savings and efficiencies initiated by management. The Board also took into
account management's expenditures in improving shareholder services provided the
Funds, as well as the need to meet additional regulatory and compliance
requirements resulting from the Sarbanes-Oxley Act and recent SEC and other
regulatory requirements. In addition, the Board considered a third-party study
comparing the profitability of the Manager's parent on an overall basis as
compared to other publicly held managers broken down to show profitability from
management operations exclusive of distribution expenses, as well as
profitability including distribution expenses. The Board also considered the
extent to which the Manager and its affiliates might derive ancillary benefits
from fund operations, including its interest in a joint venture entity that
financed up-front commissions paid to brokers/dealers who sold fund Class B
shares prior to February 2005, when the offering of such shares was
discontinued, as well as potential benefits resulting from allocation of fund
brokerage and the use of "soft" commission dollars to pay for research. Based
upon its consideration of all these factors, the Board determined that the level
of profits realized by the Manager and its affiliates from providing services to
each Fund was not excessive in view of the nature, quality and extent of
services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Funds grow larger and the extent to which this is
reflected in the level of management fees charged. While recognizing that any
precise determination is inherently subjective, the Board noted that based upon
the Fund profitability analysis, it appears that as some funds get larger, at
some point economies of scale do result in the Manager realizing a larger profit
margin on management services provided such a fund. The Board noted that
economies of scale were shared with each Fund and its shareholders through
management fee breakpoints so that as a Fund grows in size, its effective
management fee rate declines. The fee structure under the investment management
agreements for all of the Funds contains breakpoints that continued to asset
levels that exceeded their asset size at December 31, 2007. It was noted that
new or reduced breakpoints in the fee structure for Franklin Flex Cap Growth
Fund and Franklin Small Mid-Cap Growth Fund at the $7.5 billion and $10 billion
asset levels had been authorized by the Trustees at a meeting held December 3,
2007, and had become effective January 1, 2008. In view of such structure and
the favorable fee and expense comparisons of these Funds within their respective
expense groups, the Board believed that to the extent economies of scale may be
realized by the manager of these Funds and its affiliates, that there was a
sharing of benefits with each of these Funds and their shareholders.
112 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
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.
Annual Report | 113
(FRANKLIN TEMPLETON INVESTMENTS LOGO)
FRANKLIN TEMPLETON INVESTMENTS
One Franklin Parkway
San Mateo, CA 94403-1906
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Eligible shareholders can sign up for eDelivery at franklintempleton.com. See
inside for details.
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.
(GRAPHIC)
APRIL 30, 2008
A series of Franklin Strategic Series
ANNUAL REPORT AND SHAREHOLDER LETTER
BLEND
FRANKLIN
FOCUSED CORE EQUITY FUND
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inside for details.
(FRANKLIN TEMPLETON INVESTMENTS LOGO)
FRANKLIN TEMPLETON INVESTMENTS
FRANKLIN - Templeton - Mutual Series
Annual Report
Franklin Focused Core Equity Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Focused Core Equity Fund seeks
capital appreciation by investing at least 80% of its net assets in equity
securities. The Fund will invest primarily in equity securities of large
capitalization companies, which are similar in size to those in the Standard &
Poor's 500 Index (S&P 500).(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 inaugural annual report for Franklin Focused Core Equity Fund covers the
period from inception on December 13, 2007, through April 30, 2008.
PERFORMANCE OVERVIEW
Franklin Focused Core Equity Fund - Class A had a -13.10% cumulative total
return from inception on December 13, 2007, through April 30, 2008. The Fund
underperformed its benchmark, the S&P 500, which had a -5.42% total return for
the same period.(2) You can find more of the Fund's performance data in the
Performance Summary beginning on page 8.
ECONOMIC AND MARKET OVERVIEW
During the five months ended April 30, 2008, the U.S. economy slowed. The
housing downturn negatively affected the overall economy by fourth quarter 2007
as credit conditions worsened and the pace of consumer spending declined. Gross
domestic product (GDP) growth decelerated sharply from 4.9% in the third quarter
of 2007 and registered annualized rates of 0.6% in the fourth quarter of 2007
and an estimated 0.9% in the first quarter of 2008. A weaker U.S. dollar
compared with many foreign currencies contributed to increased exports, which
along with inventory buildup, helped the fragile economy in the first quarter.
(1.) The S&P 500 consists of 500 stocks chosen for market size, liquidity and
industry group representation. Each stock's weight in the index is
proportionate to its market value. The S&P 500 is one of the most widely
used benchmarks of U.S. equity performance.
(2.) Source: Standard & Poor's Micropal. See footnote 1 for a description of the
S&P 500. The index is unmanaged and includes reinvested dividends. One
cannot invest directly in an index, nor is an index representative of the
Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 17.
Annual Report | 3
PORTFOLIO BREAKDOWN
Based on Total Net Assets as of 4/30/08
(BAR CHART)
Consumer Discretionary 18.5%
Health Care 16.9%
Financials 12.0%
Information Technology 12.0%
Telecommunication Services 7.4%
Energy 6.7%
Industrials 5.0%
Consumer Staples 4.5%
Materials 0.9%
Short-Term Investments & Other Net Assets 16.1%
The unemployment rate was 5.0% in April 2008.(3) Continued deterioration in
consumer confidence, home prices and the job market, as well as rising mortgage
and fuel costs, plagued the economy. Volatile oil prices reached a historical
high in April, topping $119 per barrel, before retreating to $113 by period-end.
For the 12 months ended April 30, 2008, the core Consumer Price Index (CPI),
which excludes food and energy costs, rose 2.3%, which was higher than its
10-year average rate.(3)
Faced with a deepening housing contraction and stressed financial markets, the
Federal Reserve Board made several cuts to the federal funds target rate during
the period, including 225 basis points (100 basis points equal one percentage
point) so far in 2008. As investors fled riskier, poorer-performing assets, U.S.
Treasuries rallied, and the 10-year Treasury note yield fell from 4.18% at the
beginning of the period to 3.77% on April 30, 2008.
Stock markets were volatile during the reporting period partly due to investor
concerns about slowing economic growth. Overall, the blue chip stocks of the Dow
Jones Industrial Average had a total return of -3.01%, while the broader S&P 500
had a -5.42% return, and the technology-heavy NASDAQ Composite Index had a
- -8.96% return.(4) The energy and materials sectors performed relatively well.
INVESTMENT STRATEGY
We are research-driven, fundamental investors pursuing a growth strategy. As
bottom-up investors focusing primarily on individual securities, we seek to
invest in financially strong companies with favorable growth potential and
sustainable competitive advantages and that present, in our opinion, the most
compelling trade-off between growth potential, valuation and risk. We rely on a
team of analysts to help provide in-depth industry expertise and use both
qualitative and quantitative analysis to evaluate companies. We will generally
seek to maintain a portfolio of securities representing approximately 30-40
companies, and we will apply a long-term perspective through market and business
cycles.
(3.) Source: Bureau of Labor Statistics.
(4.) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.
4 | Annual Report
MANAGER'S DISCUSSION
During the period under review, the Fund had some significant contributors to
absolute performance including Visa in the information technology sector and
Comcast and Lowe's in the consumer discretionary sector. Visa operates the
world's largest consumer payment system, Comcast is the largest cable television
provider in the U.S., and Lowe's is a nationwide chain of home improvement
superstores.
From a sector perspective, telecommunication services contributed to absolute
results due to mobile carrier NII Holdings, our only position in the sector.
The Fund had several disappointments during the reporting period. Major
detractors included directory publisher R.H. Donnelley and high-end stereo and
audio equipment maker Harman International Industries in the consumer
discretionary sector, and pharmaceutical company Schering-Plough in the health
care sector.
By sector, our holdings in consumer discretionary, health care and financials
weighed on the Fund's absolute performance. Motorcycle manufacturer
Harley-Davidson and specialty coffee retailer Starbucks in the consumer
discretionary sector declined in value. In the health care sector, biotechnology
developer PDL BioPharma and pharmaceutical and diagnostic manufacturer Roche
Holding detracted from Fund performance. Other major detractors included wealth
and mutual fund manager Legg Mason and real estate investment trust iStar
Financial in the financials sector.
It should be noted that the Fund's holdings in the consumer discretionary sector
were a mix of stocks that both significantly contributed to and detracted from
return. We consider such results a reflection of our bottom-up strategy, which
focuses primarily on individual securities regardless of sector.
TOP 10 EQUITY HOLDINGS
4/30/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
NII Holdings Inc. 7.4%
TELECOMMUNICATION SERVICES
Schering-Plough Corp. 5.1%
HEALTH CARE
Comcast Corp. 4.2%
CONSUMER DISCRETIONARY
Harley-Davidson Inc. 3.9%
CONSUMER DISCRETIONARY
Maxim Integrated Products Inc. 3.7%
INFORMATION TECHNOLOGY
Avery Dennison Corp. 3.5%
INDUSTRIALS
Legg Mason Inc. 3.2%
FINANCIALS
Lam Research Corp. 3.1%
INFORMATION TECHNOLOGY
Roche Holding AG 3.1%
HEALTH CARE
Hansen Natural Corp. 3.1%
CONSUMER STAPLES
Annual Report | 5
Thank you for your participation in Franklin Focused Core Equity Fund. We look
forward to serving your future investment needs.
(PHOTO OF STEVEN KORNFELD)
/s/ Steven Kornfeld
Steven Kornfeld, CFA
(PHOTO OF EDWARD PERKS)
/s/ Edward Perks
Edward Perks, CFA
Portfolio Management Team
Franklin Focused Core Equity Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
6 | Annual Report
STEVEN KORNFELD specializes in research analysis of the pharmaceutical industry.
Mr. Kornfeld is a member of the Franklin core equity management team and manages
several portfolios. Prior to joining Franklin Templeton Investments in January
2001, Mr. Kornfeld previously worked as a sell-side research analyst where he
specialized in covering emerging growth companies.
Mr. Kornfeld holds an M.B.A. from Northwestern University's Kellogg Graduate
School of Management and a bachelor's degree from the Wharton School of Business
at the University of Pennsylvania. He is a Charted Financial Analyst (CFA)
Charterholder.
EDWARD PERKS manages several portfolios for retail, institutional and off-shore
accounts. Prior industry research responsibilities include computer hardware,
specialty finance, major integrated oils, oil and gas exploration and
production, oil field services and equipment, chemicals and the food and
beverage industries. Mr. Perks joined Franklin Templeton Investments in 1992.
Mr. Perks earned his B.A. in economics and political science from Yale
University. A CFA Charterholder, Mr. Perks is a member of the CFA Institute and
the Security Analysts of San Francisco (SASF).
Annual Report | 7
Performance Summary as of 4/30/08
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: N/A) CHANGE 4/30/08 12/13/07
Net Asset Value (NAV) -$1.31 $8.69 $10.00
CLASS C (SYMBOL: N/A) CHANGE 4/30/08 12/13/07
Net Asset Value (NAV) -$1.33 $8.67 $10.00
CLASS R (SYMBOL: N/A) CHANGE 4/30/08 12/13/07
Net Asset Value (NAV) -$1.32 $8.68 $10.00
ADVISOR CLASS (SYMBOL: N/A) CHANGE 4/30/08 12/13/07
Net Asset Value (NAV) -$1.30 $8.70 $10.00
8 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE(1)
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AGGREGATE 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; CLASS R/ADVISOR CLASS: NO SALES CHARGES. UNTIL AUGUST 31, 2008,
THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
CLASS A INCEPTION (12/13/07)
- ------- --------------------
Cumulative Total Return(2) -13.10%
Aggregate Total Return(3) -18.19%
Value of $10,000 Investment(4) $ 8,181
Aggregate Total Return (3/31/08)(5) -23.47%
Total Annual Operating Expenses(6)
Without Waiver 1.54%
With Waiver 1.24%
CLASS C INCEPTION (12/13/07)
- ------- --------------------
Cumulative Total Return(2) -13.30%
Aggregate Total Return(3) -14.17%
Value of $10,000 Investment(4) $ 8,583
Aggregate Total Return (3/31/08)(5) -19.81%
Total Annual Operating Expenses(6)
Without Waiver 2.19%
With Waiver 1.89%
CLASS R INCEPTION (12/13/07)
- ------- --------------------
Cumulative Total Return(2) -13.20%
Aggregate Total Return(3) -13.20%
Value of $10,000 Investment(4) $ 8,680
Aggregate Total Return (3/31/08)(5) -18.80%
Total Annual Operating Expenses(6)
Without Waiver 1.69%
With Waiver 1.39%
ADVISOR CLASS INCEPTION (12/13/07)
- ------------- --------------------
Cumulative Total Return(2) -13.00%
Aggregate Total Return(3) -13.00%
Value of $10,000 Investment(4) $ 8,700
Aggregate Total Return (3/31/08)(5) -18.70%
Total Annual Operating Expenses(6)
Without Waiver 1.19%
With Waiver 0.89%
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.
THE MANAGER AND ADMINISTRATOR HAVE CONTRACTUALLY AGREED TO LIMIT FUND EXPENSES
SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES DO NOT EXCEED THE AMOUNT SHOWN WITH
WAIVER (OTHER THAN CERTAIN NON-ROUTINE EXPENSES) FOR EACH SHARE CLASS UNTIL
8/31/09.
Annual Report | 9
Performance Summary (CONTINUED)
ENDNOTES
WHILE STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG
TERM, THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORT TERM. 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, WHICH MAY RESULT IN INCREASED VOLATILITY.
THE FUND ALSO HAS THE POTENTIAL TO INVEST IN FOREIGN COMPANY STOCKS, WHICH
INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL UNCERTAINTY. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
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. If the manager and administrator had not waived fees, the Fund's total
return would have been lower.
2. Cumulative total return represents the change in value of an investment
over the period indicated.
3. Aggregate total return represents the change in value of an investment over
the period indicated. Because the Fund has existed for less than one year,
average annual total returns are not available.
4. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the period indicated.
5. In accordance with SEC rules, we provide standardized 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.
10 | Annual Report
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual 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.
BEGINNING ACCOUNT VALUE EXPENSES PAID DURING PERIOD*
ACTUAL 12/13/07 ENDING ACCOUNT ACTUAL 12/13/07-4/30/08
CLASS A HYPOTHETICAL 11/1/07 VALUE 4/30/08 HYPOTHETICAL 11/1/07-4/30/08
- ------- ----------------------- -------------- ----------------------------
Actual $1,000 $ 868.00 $4.33
Hypothetical (5% return
before expenses) $1,000 $1,018.80 $6.12
CLASS C
Actual $1,000 $ 867.00 $6.56
Hypothetical (5% return
before expenses) $1,000 $1,015.66 $9.27
CLASS R
Actual $1,000 $ 868.00 $4.93
Hypothetical (5% return
before expenses) $1,000 $1,017.95 $6.97
ADVISOR CLASS
Actual $1,000 $ 870.00 $3.16
Hypothetical (5% return
before expenses) $1,000 $1,020.44 $4.47
* Expenses are calculated using the expense ratio, net of expense waivers,
annualized for each class (A: 1.22%; C: 1.85%; R: 1.39% and Advisor:
0.89%), multiplied by the average account value over the period, multiplied
by 182/366 (Hypothetical) to reflect the one-half year period. For actual
expenses, the multiplier is 139/366 to reflect the number of days since
inception.
12 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN FOCUSED CORE EQUITY FUND
PERIOD ENDED
APRIL 30,
CLASS A 2008(e)
- ------- ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 10.00
-------
Income from investment operations(a):
Net investment income(b) ......................... 0.03
Net realized and unrealized gains (losses) ....... (1.34)
-------
Total from investment operations .................... (1.31)
-------
Net asset value, end of year ........................ $ 8.69
=======
Total return(c) ..................................... (13.10)%
RATIOS TO AVERAGE NET ASSETS(d)
Expenses before waiver and payments by affiliates ... 5.48%
Expenses net of waiver and payments by affiliates ... 1.22%
Net investment income ............................... 0.91%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $ 4,652
Portfolio turnover rate ............................. 35.64%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(d) Ratios are annualized for periods less than one year.
(e) For the period December 13, 2007 (commencement of operations) to April 30,
2008.
Annual Report | The accompanying notes are an integral part of these financial
statements. | 13
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
PERIOD ENDED
APRIL 30,
CLASS C 2008(e)
- ------- ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $10.00
------
Income from investment operations(a):
Net investment income(b) ......................... 0.01
Net realized and unrealized gains (losses) ....... (1.34)
------
Total from investment operations .................... (1.33)
------
Net asset value, end of year ........................ $ 8.67
======
Total return(c) ..................................... (13.30)%
RATIOS TO AVERAGE NET ASSETS(d)
Expenses before waiver and payments by affiliates ... 6.11%
Expenses net of waiver and payments by affiliates ... 1.85%
Net investment income ............................... 0.28%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $ 41
Portfolio turnover rate ............................. 35.64%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(d) Ratios are annualized for periods less than one year.
(e) For the period December 13, 2007 (commencement of operations) to April 30,
2008.
14 | The accompanying notes are an integral part of these financial
statements. | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
PERIOD ENDED
APRIL 30,
CLASS R 2008(e)
- ------- ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $10.00
------
Income from investment operations(a):
Net investment income(b) ......................... 0.03
Net realized and unrealized gains (losses) ....... (1.35)
------
Total from investment operations .................... (1.32)
------
Net asset value, end of year ........................ $ 8.68
======
Total return(c) ..................................... (13.20)%
RATIOS TO AVERAGE NET ASSETS(d)
Expenses before waiver and payments by affiliates ... 5.65%
Expenses net of waiver and payments by affiliates ... 1.39%
Net investment income ............................... 0.74%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $ 9
Portfolio turn over rate ............................ 35.64%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(d) Ratios are annualized for periods less than one year.
(e) For the period December 13, 2007 (commencement of operations) to April 30,
2008.
Annual Report | The accompanying notes are an integral part of these financial
statements. | 15
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
PERIOD ENDED
APRIL 30,
ADVISOR CLASS 2008(e)
- ------------- ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 10.00
-------
Income from investment operations(a):
Net investment income(b) ......................... 0.04
Net realized and unrealized gains (losses) ....... (1.34)
-------
Total from investment operations .................... (1.30)
-------
Net asset value, end of year ........................ $ 8.70
=======
Total return(c) ..................................... (13.00)%
RATIOS TO AVERAGE NET ASSETS(d)
Expenses before waiver and payments by affiliates ... 5.15%
Expenses net of waiver and payments by affiliates ... 0.89%
Net investment income ............................... 1.24%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $ 171
Portfolio turnover rate ............................. 35.64%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return is not annualized for periods less than one year.
(d) Ratios are annualized for periods less than one year.
(e) For the period December 13, 2007 (commencement of operations) to April 30,
2008.
16 | The accompanying notes are an integral part of these financial
statements. | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008
FRANKLIN FOCUSED CORE EQUITY FUND COUNTRY SHARES VALUE
- --------------------------------- ------------- ------- ----------
COMMON STOCKS 83.9%
CONSUMER DISCRETIONARY 18.5%
Comcast Corp .......................................................... United States 9,980 $205,089
Harley-Davidson Inc. .................................................. United States 4,960 189,720
Harman International Industries Inc. .................................. United States 3,130 127,923
Lowe's Cos. Inc. ...................................................... United States 4,870 122,675
(a) R.H. Donnelley Corp. .................................................. United States 13,440 64,378
(a) Starbucks Corp ........................................................ United States 4,960 80,501
Target Corp. .......................................................... United States 2,080 110,510
----------
900,796
----------
CONSUMER STAPLES 4.5%
(a) Hansen Natural Corp. .................................................. United States 4,270 151,115
Walgreen Co ........................................................... United States 2,010 70,049
----------
221,164
----------
ENERGY 6.7%
Chesapeake Energy Corp. ............................................... United States 480 24,816
Marathon Oil Corp. .................................................... United States 2,230 101,621
(a) Petroplus Holdings AG ................................................. Switzerland 2,240 140,189
(a) SEACOR Holdings Inc ................................................... United States 700 59,577
----------
326,203
----------
FINANCIALS 12.0%
American Express Co. .................................................. United States 2,560 122,931
CapitalSource Inc. .................................................... United States 7,700 108,185
Discover Financial Services ........................................... United States 5,930 107,985
iStar Financial Inc. .................................................. United States 4,600 88,550
Legg Mason Inc. ....................................................... United States 2,620 157,934
----------
585,585
----------
HEALTH CARE 16.9%
(a) Advanced Medical Optics Inc ........................................... United States 4,010 84,210
(a) Genentech Inc. ........................................................ United States 1,000 68,200
Merck & Co. Inc. ...................................................... United States 2,770 105,371
(a) PDL BioPharma Inc. .................................................... United States 3,670 48,664
Roche Holding AG ...................................................... Switzerland 910 151,754
Schering-Plough Corp. ................................................. United States 13,470 247,983
Wyeth ................................................................. United States 2,600 115,622
----------
821,804
----------
INDUSTRIALS 5.0%
Avery Dennison Corp ................................................... United States 3,520 169,629
Precision Castparts Corp. ............................................. United States 640 75,238
----------
244,867
----------
INFORMATION TECHNOLOGY 12.0%
(a) Autodesk Inc. ......................................................... United States 3,620 137,560
(a) Lam Research Corp. .................................................... United States 3,720 151,925
Maxim Integrated Products Inc. ........................................ United States 8,500 178,755
Annual Report | 17
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND COUNTRY SHARES VALUE
- --------------------------------- ------------- ------- ----------
COMMON STOCKS (CONTINUED)
INFORMATION TECHNOLOGY (CONTINUED)
(a) VeriFone Holdings Inc. ................................................ United States 7,280 $ 81,463
(a) Visa Inc., A .......................................................... United States 400 33,380
----------
583,083
----------
MATERIALS 0.9%
Alcoa Inc. ............................................................ United States 1,180 41,041
(a) Intrepid Potash Inc. .................................................. United States 90 4,274
----------
45,315
----------
TELECOMMUNICATION SERVICES 7.4%
(a) NII Holdings Inc. ..................................................... United States 7,840 358,602
----------
TOTAL COMMON STOCKS (COST $4,799,065) ................................. 4,087,419
----------
SHORT TERM INVESTMENT (COST $316,894) 6.5%
MONEY MARKET FUND 6.5%
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.29% .. United States 316,894 316,894
----------
TOTAL INVESTMENTS (COST $5,115,959) 90.4% ............................. 4,404,313
OTHER ASSETS, LESS LIABILITIES 9.6% ................................... 467,989
----------
NET ASSETS 100.0% ..................................................... $4,872,302
----------
(a) Non-income producing for the twelve months ended April 30, 2008.
(b) See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
18 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
April 30, 2008
FRANKLIN
FOCUSED CORE
EQUITY FUND
------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers................ $4,799,065
Cost - Sweep Money Fund (Note 7)........... 316,894
----------
Total cost of investments.................. $5,115,959
==========
Value - Unaffiliated issuers............... $4,087,419
Value - Sweep Money Fund (Note 7).......... 316,894
----------
Total value of investments................. 4,404,313
Receivables:
Investment securities sold................. 453,502
Capital shares sold........................ 200
Dividends.................................. 3,691
Affiliates................................. 58,499
Offering costs................................ 43,664
----------
Total assets............................ 4,963,869
----------
Liabilities:
Payables:
Investment securities purchased............ 80,607
Reports to shareholders.................... 8,626
Accrued expenses and other liabilities........ 2,334
----------
Total liabilities....................... 91,567
----------
Net assets, at value................. $4,872,302
==========
Net assets consist of:
Paid-in capital............................... $5,544,727
Undistributed net investment income........... 28,566
Net unrealized appreciation (depreciation).... (710,813)
Accumulated net realized gain (loss).......... 9,822
----------
Net assets, at value................. $4,872,302
==========
Annual Report | The accompanying notes are an integral part of these financial
statements. | 19
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2008
FRANKLIN
FOCUSED CORE
EQUITY FUND
------------
CLASS A:
Net assets, at value..................................................... $4,651,834
----------
Shares outstanding....................................................... 535,588
----------
Net asset value per share(a)............................................. $ 8.69
----------
Maximum offering price per share (net asset value per share / 94.25%).... $ 9.22
----------
CLASS C:
Net assets, at value..................................................... $ 40,718
----------
Shares outstanding....................................................... 4,695
----------
Net asset value and maximum offering price per share(a).................. $ 8.67
----------
CLASS R:
Net assets, at value..................................................... $ 8,678
----------
Shares outstanding....................................................... 1,000
----------
Net asset value and maximum offering price per share(a).................. $ 8.68
----------
ADVISOR CLASS:
Net assets, at value..................................................... $ 171,072
----------
Shares outstanding....................................................... 19,667
----------
Net asset value and maximum offering price per share(a).................. $ 8.70
----------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fee retained by the Fund.
20 | The accompanying notes are an integral part of these financial
statements. | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the period December 13, 2007 (commencement of operations) to April 30, 2008
FRANKLIN
FOCUSED CORE
EQUITY FUND
------------
Investment income:
Dividends:
Unaffiliated issuers....................................................... $ 34,535
Sweep Money Fund (Note 7).................................................. 2,576
Interest...................................................................... 1,729
---------
Total investment income................................................. 38,840
---------
Expenses:
Management fees (Note 3a)..................................................... 13,224
Administrative fees (Note 3b)................................................. 3,640
Distribution fees: (Note 3c)
Class A.................................................................... 5,814
Class C.................................................................... 74
Class R.................................................................... 17
Transfer agent fees (Note 3e)................................................. 1,799
Custodian fees (Note 4)....................................................... 313
Reports to shareholders....................................................... 9,571
Registration and filing fees.................................................. 4,014
Professional fees............................................................. 21,006
Trustees' fees and expenses................................................... 3
Amortization of offering costs................................................ 38,891
Other......................................................................... 1,286
---------
Total expenses.......................................................... 99,652
Expenses waived/paid by affiliates (Note 3f)............................ (77,549)
---------
Net expenses......................................................... 22,103
---------
Net investment income............................................. 16,737
---------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments................................................................ 9,822
Foreign currency transactions.............................................. (831)
---------
Net realized gain (loss).......................................... 8,991
---------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................ (711,645)
Translation of assets and liabilities denominated in foreign currencies.... 832
---------
Net change in unrealized appreciation (depreciation).............. (710,813)
---------
Net realized and unrealized gain (loss).......................................... (701,822)
---------
Net increase (decrease) in net assets resulting from operations.................. $(685,085)
=========
Annual Report | The accompanying notes are an integral part of these financial
statements. | 21
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CHANGES IN NET ASSETS
FRANKLIN FOCUSED
CORE EQUITY FUND
-----------------
PERIOD ENDED
APRIL 30, 2008(a)
-----------------
Increase (decrease) in net assets:
Operations:
Net investment income.......................................................... $ 16,737
Net realized gain (loss) from investments and foreign currency transactions.... 8,991
Net change in unrealized appreciation (depreciation) on investments and
translation of assets and liabilities denominated in foreign currencies..... (710,813)
----------
Net increase (decrease) in net assets resulting from operations.......... (685,085)
----------
Capital share transactions: (Note 2)
Class A........................................................................ 5,311,800
Class C........................................................................ 41,349
Class R........................................................................ 10,000
Advisor Class.................................................................. 194,238
----------
Total capital share transactions.................................................. 5,557,387
----------
Net increase (decrease) in net assets.................................... 4,872,302
Net assets:
Beginning of year................................................................. --
----------
End of year....................................................................... $4,872,302
==========
Undistributed net investment income included in net assets:
End of year....................................................................... $ 28,566
==========
(a) For the period December 13, 2007 (commencement of operations) to April 30,
2008.
22 | The accompanying notes are an integral part of these financial
statements. | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS
FRANKLIN FOCUSED CORE EQUITY FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNT 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
eleven separate funds. The Franklin Focused Core Equity Fund (Fund) included in
this report is diversified. The financial statements of the remaining funds in
the Trust are presented separately. Effective December 13, 2007, the Fund
commenced operations offering four classes of shares: Class A, 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.
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.
Annual Report | 23
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNT POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the 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.
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. 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 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.
D. 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.
The Fund has reviewed the tax position as of April 30, 2008, and has determined
that no provision for income tax is required in the Fund's financial statements.
24 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNT POLICIES (CONTINUED)
E. 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.
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 Fund is 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.
F. OFFERING COSTS
Offering costs are amortized on a straight line basis over twelve months.
G. 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.
H. 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. There were no redemption fees for the year.
Annual Report | 25
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNT POLICIES (CONTINUED)
I. 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.
2. SHARES OF BENEFICIAL INTEREST
At April 30, 2008, there were an unlimited number of shares authorized (without
par value). Transactions in the Fund's shares were as follows:
PERIOD ENDED
APRIL 30, 2008(A)
--------------------
SHARES AMOUNT
------- ----------
CLASS A SHARES:
Shares sold ............... 539,141 $5,341,810
Shares redeemed ........... (3,553) (30,010)
------- ----------
Net increase (decrease) ... 535,588 $5,311,800
======= ==========
CLASS C SHARES:
Shares sold ............... 4,695 $ 41,349
------- ----------
Net increase (decrease) ... 4,695 $ 41,349
======= ==========
CLASS R SHARES:
Shares sold ............... 1,000 $ 10,000
------- ----------
Net increase (decrease) ... 1,000 $ 10,000
======= ==========
ADVISOR CLASS SHARES:
Shares sold ............... 19,731 $ 194,788
Shares redeemed ........... (64) (550)
------- ----------
Net increase (decrease) ... 19,667 $ 194,238
======= ==========
(a) For the period December 13, 2007 (commencement of operations) to April 30,
2008.
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
26 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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
- ------------------- ----------
0.750% Up to and including $500 million
0.650% Over $500 million, up to and including $1 billion
0.600% Over $1 billion, up to and including $1.5 billion
0.550% Over $1.5 billion, up to and including $6.5 billion
0.525% Over $6.5 billion, up to and including $11.5 billion
0.500% Over $11.5 billion, up to and including $16.5 billion
0.490% Over $16.5 billion, up to and including $19 billion
0.480% Over $19 billion, up to and including $21.5 billion
0.470% In excess of $ 21.5 billion
B. ADMINISTRATIVE FEES
The Fund pays an administrative fee to FT Services of 0.20% per year of the
average daily net assets 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 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 a certain percentage per year of its
average daily net assets of each class as follows:
Class A ... 0.35%
Class C ... 1.00%
Class R ... 0.50%
Distributors has agreed to limit the current rate to 0.30% per year for Class A
shares for the period of March 1, 2008 through January 1, 2009.
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 ..................... $1,138
Annual Report | 27
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
E. TRANSFER AGENT FEES
For the period ended April 30, 2008, the Fund paid transfer agent fees of
$1,799, of which $418 was retained by Investor Services.
F. WAIVER AND EXPENSE REIMBURSEMENTS
FT Services and Advisers have agreed in advance to waive all or a portion of
their respective fees and to assume payment of other expenses through August 31,
2009. Total expenses waived or paid are not subject to reimbursement by the Fund
subsequent to the Fund's fiscal year end. After August 31, 2009, FT Services and
Advisers may discontinue this waiver at any time upon notice to the Fund's Board
of Trustees.
G. OTHER AFFILIATED TRANSACTIONS
At April 30, 2008, Advisers owned 89.13% of the Fund's outstanding shares.
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 April 30, 2008, there
were no credits earned.
5. INCOME TAXES
At April 30, 2008, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:
Cost of investments .......................... $5,121,620
----------
Unrealized appreciation ...................... $ 136,174
Unrealized depreciation ...................... (853,481)
----------
Net unrealized appreciation (depreciation) ... $ (717,307)
----------
Undistributed ordinary income ................ $ 44,069
Undistributed long term capital gains ........ 110
----------
Distributable earnings ....................... $ 44,179
----------
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions and offering costs.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
28 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended April 30, 2008, aggregated $6,384,015 and $1,594,773, 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.
8. NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 157, "Fair Value Measurement" (SFAS 157), which defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. SFAS 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
Trust believes the adoption of SFAS 157 will have no material impact on its
financial statements.
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. The Fund is currently
evaluating the impact, if any, of applying the various provisions of SFAS 161.
Annual Report | 29
Franklin Strategic Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FRANKLIN FOCUSED CORE EQUITY FUND
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN FOCUSED CORE EQUITY FUND
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Focused Core Equity Fund
(a separate portfolio of Franklin Strategic Series, hereafter referred to as the
"Fund") at April 30, 2008, and the results of its operations, the changes in its
net assets and its financial highlights for the period from December 13, 2007
(commencement of operations) through April 30, 2008, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at April 30, 2008 by
correspondence with the custodian and brokers, provides a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
June 18, 2008
30 | Annual Report
Franklin Strategic Series
TAX DESIGNATION (UNAUDITED)
FRANKLIN FOCUSED CORE EQUITY FUND
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $110 as a long term
capital gain dividend for the fiscal year ended April 30, 2008.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $17,123 as a short term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended April 30, 2008.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $24,528 as qualified dividends for purposes of the
maximum rate under Section 1(h)(11) of the Code for the fiscal year ended April
30, 2008. Distributions, including qualified dividend income, paid during
calendar year 2008 will be reported to shareholders on Form 1099-DIV in January
2009. Shareholders are advised to check with their tax advisors for information
on the treatment of these amounts on their individual income tax returns.
Annual Report | 31
Franklin Strategic Series
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Trust, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------ -------------- ------------------ ----------------------- -----------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1991 143 Bar-S Foods (meat packing
One Franklin Parkway company).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President,
Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
ROBERT F. CARLSON (1928) Trustee Since 2007 122 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired; and FORMERLY, Vice President, senior member and past President, Board of Administration, California Public Employees
Retirement Systems (CALPERS) (1971-January 2008); member and Chairman of the Board, Sutter Community Hospitals; member, Corporate
Board, Blue Shield of California; and Chief Counsel, California Department of Transportation.
SAM GINN (1937) Trustee Since 2007 122 Chevron Corporation (global
One Franklin Parkway energy company) and ICO Global
San Mateo, CA 94403-1906 Communications (Holdings) Limited
(satellite company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief
Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding
company) (1988-1994).
EDITH E. HOLIDAY (1952) Trustee Since 1998 143 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas), H.J.
San Mateo, CA 94403-1906 Heinz Company (processed foods
and allied products), RTI
International Metals, Inc.
(manufacture and distribution of
titanium), Canadian National
Railway (railroad) and White
Mountains Insurance Group, Ltd.
(holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary
of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
32 | Annual Report
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------ -------------- ------------------ ----------------------- -----------------------------------
FRANK W.T. LAHAYE (1929) Trustee Since 1991 122 Center for Creative Land Recycling
One Franklin Parkway (brownfield redevelopment).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital).
FRANK A. OLSON (1932) Trustee Since 2007 143 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas) and
San Mateo, CA 94403-1906 Sentient Jet (private jet
service).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
LARRY D. THOMPSON (1945) Trustee Since 2007 143 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of
The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney
General, U.S. Department of Justice (2001-2003).
JOHN B. WILSON (1959) Lead Trustee since 122 None
One Franklin Parkway Independent 2006 and Lead
San Mateo, CA 94403-1906 Trustee Independent
Trustee since
January 2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit
boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial
Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Executive Vice President
- - Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting
firm) (1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------ -------------- ------------------ ----------------------- -----------------------------------
**CHARLES B. JOHNSON (1933) Trustee and Trustee since 143 None
One Franklin Parkway Chairman of 1991 and
San Mateo, CA 94403-1906 the Board Chairman of the
Board since 1993
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide,
Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc.
and of 42 of the investment companies in Franklin Templeton Investments.
Annual Report | 33
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------ -------------- ------------------ ----------------------- -----------------------------------
**RUPERT H. JOHNSON, JR. (1940) Trustee, Trustee since 56 None
One Franklin Parkway President and 1991 and
San Mateo, CA 94403-1906 Chief President and
Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and
Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the
case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin
Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and and Vice
Vice President President - AML
- AML Compliance since
Compliance 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and
of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources,
Inc. (1994-2001).
LAURA F. FERGERSON (1962) Treasurer, Treasurer since Not Applicable Not Applicable
One Franklin Parkway Chief 2004, Chief
San Mateo, CA 94403-1906 Financial Financial Officer
Officer and and Chief
Chief Accounting Officer
Accounting since February
Officer 2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of
the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC
(1997-2003).
JIMMY D. GAMBILL (1947) Vice President Since February Not Applicable Not Applicable
500 East Broward Blvd. 2008
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
34 | Annual Report
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------ -------------- ------------------ ----------------------- -----------------------------------
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
EDWARD B. JAMIESON (1948) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton
Institutional, LLC; officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and
of four of the investment companies in Franklin Templeton Investments.
CHRISTOPHER J. MOLUMPHY (1962) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director and Executive Vice President, Franklin Advisers, Inc.; and officer of some of the other subsidiaries of Franklin
Resources, Inc. and of six of the investment companies in Franklin Templeton Investments.
KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin
Templeton Investments.
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman &
Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
Annual Report | 35
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------ -------------- ------------------ ----------------------- -----------------------------------
GALEN G. VETTER (1951) Senior Vice Since February Not Applicable Not Applicable
500 East Broward Blvd. President and 2008
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of some of the other subsidiaries of Franklin Resources, Inc. and
of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc.
(1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be
interested persons of the Trust under the federal securities laws due to
their positions as officers and directors and major shareholders of
Franklin Resources, Inc., which is the parent company of the Trust's
investment manager and distributor.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS
AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED
JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT
MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS
BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF
STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF
THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL
APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES,
ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT
PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY
COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL
CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT
COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS
DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND
RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
36 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION
FRANKLIN FOCUSED CORE EQUITY 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.
Annual Report | 37
(FRANKLIN TEMPLETON INVESTMENTS LOGO)
One Franklin Parkway
San Mateo, CA 94403-1906
WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at franklintempleton.com. See
inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN FOCUSED CORE EQUITY 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.
(GRAPHIC)
APRIL 30, 2008
A series of Franklin Strategic Series
ANNUAL REPORT AND SHAREHOLDER LETTER
INCOME
FRANKLIN
STRATEGIC INCOME FUND
WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at franklintempleton.com. See
inside for details.
(FRANKLIN TEMPLETON INVESTMENTS LOGO)
FRANKLIN TEMPLETON INVESTMENTS
FRANKLIN - Templeton - Mutual Series
Annual Report
Franklin Strategic Income Fund
YOUR FUND'S GOALS 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.
This annual report for Franklin Strategic Income Fund covers the fiscal year
ended April 30, 2008.
PERFORMANCE OVERVIEW
Franklin Strategic Income Fund - Class A posted a +4.80% cumulative total return
for the 12 months under review. The Fund underperformed its benchmark, the
Lehman Brothers (LB) U.S. Aggregate Index, which had a +6.87% 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 +2.02%
total return.(2) You can find the Fund's long-term performance data in the
Performance Summary beginning on page 10.
(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 12-month period ended
4/30/08, 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 23.
Annual Report | 3
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended April 30, 2008, the U.S. economy slowed as gross
domestic product (GDP) growth decelerated sharply to an annualized 0.6% in the
fourth quarter of 2007 from a fairly robust growth rate of 4.9% in the preceding
quarter. As the financial, labor and housing markets continued to deteriorate,
investor and consumer confidence waned, which led to a pullback in consumer
spending. These factors as well as upward inflationary pressures from a
weakening U.S. dollar and increasing food, energy and commodity prices weighed
on the overall economy. The retrenchment continued in the first quarter of 2008
as the economy grew at a 0.9% estimated annualized rate, which was largely
credited to external demand and an inventory buildup.
Volatile oil prices reached a historical high in April, topping $119 per barrel,
before retreating to $113 by period-end. Despite inflation risks from higher
food and energy costs, core inflation, which excludes such costs, remained
relatively subdued at an annual 2.3% rate in April 2008.(3) This level was above
the Federal Reserve Board's (Fed's) informal target range of 1%-2%. The core
personal consumption expenditures price index reported a 12-month increase of
2.1%.(4)
The Fed acted aggressively to restore liquidity and confidence to unsettled
financial markets and cut interest rates seven times over the 12-month period,
bringing the federal funds target rate to 2.00% by period-end. The Fed also
implemented a series of unconventional measures aimed at easing strained credit
conditions. It created a $200 billion loan program intended to provide liquidity
to a wider range of financial institutions that could also use riskier assets
for collateral, such as illiquid mortgage-backed securities. After a run on Bear
Stearns nearly resulted in the investment bank's collapse, the Fed orchestrated
its acquisition by JPMorgan Chase. In addition, federal regulators eased capital
requirements on government-sponsored Fannie Mae and Freddie Mac.
Despite the Fed's actions, U.S. Treasuries rallied and financial stocks
continued to sell off for most of the reporting period. Fixed income spreads
generally widened relative to Treasury yields over the period due to heightened
market turbulence. Investors continued to seek the relative safety of short- and
intermediate-term U.S. Treasury securities as Treasury yields declined and the
yield curve steepened. Short-term, two- and five-year yields declined
significantly,
(3.) Source: Bureau of Labor Statistics.
(4.) Source: Bureau of Economic Analysis.
4 | Annual Report
with the two-year bill yielding 2.29% at the end of April, down from 4.60% 12
months prior. The 10-year U.S. Treasury note ended April yielding 3.77%,
compared with 4.63% at the beginning of the period. However, by period-end, it
appeared that the Fed's aggressive campaigns were beginning to take effect as
non-Treasury investment grade sectors showed signs of improvement.
Outside the U.S., eurozone fourth quarter 2007 GDP growth registered 2.2%
year-over-year; however, business and consumer confidence indicators showed
signs of a slowing economy.(5) Economic growth in non-euro European countries
largely continued to outpace the eurozone's. For example, strong investment and
consumer spending supported robust economic growth in Poland, Norway and Sweden.
The European Central Bank increased interest rates from 3.75% to 4.00% early in
the period, and remained focused on preventing high food and energy costs from
filtering into underlying prices.
In Asia, economic growth remained resilient but moderated due to slower external
demand. China was an important contributor to regional growth as its GDP
registered 10.6% year-over-year growth in first quarter 2008, somewhat lower
than last year's peak growth.(6) Economic growth also remained reasonably strong
in other Asian countries such as Malaysia and Singapore. Chinese monetary
authorities continued to tighten credit conditions; however, inflation pressures
increased, primarily reflecting higher global commodity prices. Asian countries
continued to generate large current account surpluses and accumulate foreign
exchange reserves. In addition to Asia, other commodity producing countries
accumulated surpluses as oil prices rose. With increased risk aversion and
volatile equity performance, Asian sovereign wealth funds helped provide
stability to U.S. and European financial systems through bank recapitalization.
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.
(5.) Source: Eurostat.
(6.) Source: National Bureau of Statistics, China.
Annual Report | 5
DIVIDEND DISTRIBUTIONS*
5/1/07-4/30/08
DIVIDEND PER SHARE
-------------------------------------------------------------------
ADVISOR
MONTH CLASS A CLASS B CLASS C CLASS R 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
November 5.00 cents 4.66 cents 4.67 cents 4.78 cents 5.21 cents
December** 14.00 cents 13.64 cents 13.65 cents 13.79 cents 14.21 cents
January 5.00 cents 4.64 cents 4.65 cents 4.79 cents 5.21 cents
February 5.00 cents 4.64 cents 4.65 cents 4.79 cents 5.21 cents
March 5.00 cents 4.66 cents 4.68 cents 4.79 cents 5.21 cents
April 5.00 cents 4.66 cents 4.68 cents 4.79 cents 5.21 cents
----------- ----------- ----------- ----------- -----------
TOTAL 69.00 CENTS 64.78 CENTS 64.96 CENTS 66.48 CENTS 71.52 CENTS
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
** Includes an additional 9 cent distribution to meet excise tax requirements.
MANAGER'S DISCUSSION
For the fiscal year under review, Franklin Strategic Income Fund underperformed
the LB U.S. Aggregate Index and outperformed the Lipper Multi-Sector Income
Funds Classification Average. The Fund's lower exposure to more interest-rate
sensitive fixed income sectors (i.e., Treasury securities, agency bonds and
mortgage-backed securities) constrained performance compared with the index
given the decline in interest rates during the period. The Fund's positioning in
non-U.S. dollar government bonds helped performance relative to the Fund's peers
largely due to broad weakness in the U.S. dollar over the past year.
During the period, the declining U.S housing market and related deterioration in
securities and structured financial vehicles tied to the subprime mortgage
market took center stage. Rising delinquencies in this sector contributed to
severe price declines, which then flowed through global financial markets in the
form of considerable asset write-downs for many global financial institutions.
At the same time, increasing investor risk aversion began to affect financial
markets, which made many banks and brokerage firms unwilling to lend. By the end
of 2007, the prospect for a significant U.S. economic slowdown emerged, adding
concerns about consumer and corporate domestic spending.
6 | Annual Report
PORTFOLIO BREAKDOWN
Based on Total Net Assets
4/30/08 4/30/07
------- -------
High Yield Corporate Bonds & Preferred Stocks 22.8% 28.8%
Mortgages & Other Asset-Backed Bonds 16.7% 13.5%
Floating Rate Bank Loans 16.1% 13.3%
Other International Bonds (non-$US) 11.8% 14.6%
International Developed Country Bonds (non-$US) 9.6% 9.8%
Investment Grade Corporate Bonds 9.4% 2.7%
U.S. Government & Agency Bonds* 4.9% 9.3%
Convertible Securities 2.7% 3.0%
Municipal Bonds 1.9% 0.0%
Emerging Market Bonds ($US) 1.5% 2.7%
Common Stocks & Warrants 0.0%** 0.0%**
Short-Term Investments & Other Net Assets 2.6% 2.3%
* Includes 0.2% denominated in non-U.S. dollars and 0.6% Treasury Inflation
Protected Securities. Also includes agency preferred stock.
** Rounds to less than 0.1% of net assets.
In this environment, one of the strongest performing asset categories was U.S.
Treasury securities, largely due to a flight to quality in financial markets and
expectations that slowing domestic growth could temper inflationary pressures.
Non-U.S. dollar denominated securities also performed well, given low relative
short-term U.S. interest rates. Although the economic environment remained
challenging, we sought to take advantage of dislocations across fixed income
markets, which pushed valuations for many sectors toward, and in some cases
past, their historically cheapest valuation levels. We invested in securities
that we considered had attractive yields and total return potential in light of
our longer-term assessment of fundamental risks.
In addition to lower short-term interest rates due to the Fed's action during
the Fund's fiscal year, intermediate- and long-term interest rates also fell,
leading U.S. Treasury securities to record some of the strongest gains in the
fixed income market during the period. Given our view that the decline in
interest rates was at least partly due to risk aversion rather than longer-term
inflation expectations, we reduced the Fund's exposure to Treasury securities
and agency debentures as we found what we considered were more attractive
investment opportunities in other sectors. We did, however, increase exposure to
the mortgage- and other asset-backed securities sector. Yield spreads for many
asset-backed securities (ABS) increased significantly during the fiscal year as
concerns about structured securities in general negatively affected the ABS
market. Although fundamentals
Annual Report | 7
had just begun to weaken for certain ABS issuers, such as commercial
mortgage-backed securities and credit card-related ABS, we believed valuations
more than compensated for these softening fundamental trends.
Within the investment grade portion of the corporate bond market, financial
issuers came under pressure due to write-offs to cover price declines for
sub-prime mortgage-backed securities. Toward the period's latter half,
non-financial issuers also experienced widening yield spreads as concerns
regarding the economy and future corporate earnings emerged. Although corporate
earnings may experience some weakness, from a fundamental credit perspective,
our analysis led us to believe major banks and brokerage firms should survive
this cycle, particularly considering the amount of equity and preferred stock
issued over the past year. Therefore, we increased exposure to the investment
grade corporate bond sector, particularly among financial companies.
As would be expected in such a market environment, the high yield corporate bond
sector also faced pressure from the flight to quality amid domestic economic
concerns. Although many analysts expected default rates to rise given the amount
of lower quality issues over the past few years, the weaker economy and
difficult credit environment for refinancing, actual defaults remained
historically low. Similarly, the leveraged bank loan sector came under
significant pressure and had a negative return over the past year as measured by
the CS Leveraged Loan Index's -3.34% return.(7) For bank loans, the largest
buyer of these instruments, collateralized loan obligations (CLOs), were largely
unable to launch new products given the market's structured nature. In addition,
a large loan supply calendar to finance pending leveraged buyouts weighed on
bank loan prices as underwriters attempted to clear these loans from their books
at discounts to par value. However, in our view the lower valuations were
overdone due to these technical supply and demand factors; therefore, we added
to our leveraged bank loan exposure and reduced our high yield corporate bond
exposure during the Fund's fiscal year.
The weak U.S. dollar, largely due to declining short-term interest rates and
continued structural imbalances caused by the U.S. current account deficit,
contributed to strong returns for the foreign fixed income sovereign bond
sector. Throughout the Fund's fiscal year, we held a significant weighting in
non-U.S. dollar bonds, based on the prospect that the U.S. dollar could weaken
further given current trends. The Fund benefited from positive results from bond
holdings in Norway, Switzerland, Poland, Brazil, Singapore and Japan. However,
(7.) Source: Credit Suisse. The CS Leveraged Loan Index is designed to mirror
the investible universe of the $US-denominated leveraged loan market.
8 | Annual Report
we believed the euro had exceeded its fundamental longer-term value relative to
the U.S. dollar; therefore, using forward currency contracts we began to hedge
the Fund's effective euro exposure from some of our holdings with currencies
correlated with the euro. In the U.S. dollar-denominated emerging market bond
sector, yield spreads widened during the period; however, the market experienced
less volatility compared with historical trends largely due to the higher
quality of many developing market issuers relative to the late 1990s' currency
crisis. Based on what we considered full valuations, we held a relatively small
weighting in this sector throughout the reporting period.
We added some convertible securities to the Fund's portfolio, with a focus on
financial sector issuers. However, overall exposure to this asset class remained
relatively low compared with other asset classes, at less than 3% of total net
assets at period-end.
Thank you for your continued participation in Franklin Strategic Income Fund. We
look forward to serving your future investment needs.
(PHOTO OF CHRISTOPHER J. MOLUMPHY)
/s/ Christopher J. Molumphy
Christopher J. Molumphy, CFA
(PHOTO OF ERIC G. TAKAHA)
/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 APRIL 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Annual Report | 9
Performance Summary as of 4/30/08
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
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 4/30/08 4/30/07
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) -$0.20 $10.28 $10.48
DISTRIBUTIONS (5/1/07-4/30/08)
Dividend Income $0.6900
CLASS B (SYMBOL: FKSBX) CHANGE 4/30/08 4/30/07
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) -$0.20 $10.32 $10.52
DISTRIBUTIONS (5/1/07-4/30/08)
Dividend Income $0.6478
CLASS C (SYMBOL: FSGCX) CHANGE 4/30/08 4/30/07
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) -$0.21 $10.27 $10.48
DISTRIBUTIONS (5/1/07-4/30/08)
Dividend Income $0.6496
CLASS R (SYMBOL: FKSRX) CHANGE 4/30/08 4/30/07
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) -$0.21 $10.25 $10.46
DISTRIBUTIONS (5/1/07- 4/30/08)
Dividend Income $0.6648
ADVISOR CLASS (SYMBOL: FKSAX) CHANGE 4/30/08 4/30/07
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) -$0.21 $10.28 $10.49
DISTRIBUTIONS (5/1/07- 4/30/08)
Dividend Income $0.7152
10 | Annual Report
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. UNTIL AUGUST 31, 2008, THE FUND MAY CHARGE A
2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- ------ ------ ---------
Cumulative Total Return(2) +4.80% +45.89% +86.57%
Average Annual Total Return(3) +0.30% +6.91% +5.97%
Avg. Ann. Total Return (3/31/08)(4) -0.07% +7.41% +5.82%
Distribution Rate(5) 5.59%
30-Day Standardized Yield(6) 5.44%
Total Annual Operating Expenses(7) 0.93%
INCEPTION
CLASS B 1-YEAR 5-YEAR (1/1/99)
- ------------------------------------- ------ ------ ---------
Cumulative Total Return(2) +4.35% +43.10% +79.47%
Average Annual Total Return(3) +0.43% +7.13% +6.47%
Avg. Ann. Total Return (3/31/08)(4) 0.00% +7.61% +6.31%
Distribution Rate(5) 5.42%
30-Day Standardized Yield(6) 5.31%
Total Annual Operating Expenses(7) 1.33%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- ------ ------ ---------
Cumulative Total Return(2) +4.28% +43.03% +78.77%
Average Annual Total Return(3) +3.30% +7.42% +5.98%
Avg. Ann. Total Return (3/31/08)(4) +2.86% +7.89% +5.84%
Distribution Rate(5) 5.47%
30-Day Standardized Yield(6) 5.28%
Total Annual Operating Expenses(7) 1.33%
INCEPTION
CLASS R 1-YEAR 5-YEAR (1/1/02)
- ------------------------------------- ------ ------ ---------
Cumulative Total Return(2) +4.55% +44.09% +63.77%
Average Annual Total Return(3) +4.55% +7.58% +8.11%
Avg. Ann. Total Return (3/31/08)(4) +4.00% +8.05% +7.90%
Distribution Rate(5) 5.61%
30-Day Standardized Yield(6) 5.43%
Total Annual Operating Expenses(7) 1.18%
ADVISOR CLASS(8) 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- ------ ------ ---------
Cumulative Total Return(2) +5.05% +47.67% +90.58%
Average Annual Total Return(3) +5.05% +8.11% +6.66%
Avg. Ann. Total Return (3/31/08)(4) +4.50% +8.61% +6.50%
Distribution Rate(5) 6.08%
30-Day Standardized Yield(6) 5.96%
Total Annual Operating Expenses(7) 0.68%
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.
Annual Report | 11
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT(1)
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/08
- ------- -------
1-Year +0.30%
5-Year +6.91%
10-Year +5.97%
CLASS A (5/1/98-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN STRATEGIC INCOME LEHMAN BROTHERS U.S. LIPPER MULTI-SECTOR INCOME
DATE FUND - CLASS A AGGREGATE INDEX CLASSIFICATION AVERAGE
- ---------- ------------------------- -------------------- --------------------------
5/1/1998 $ 9,574 $10,000 $10,000
5/31/1998 $ 9,518 $10,095 $ 9,981
6/30/1998 $ 9,488 $10,180 $ 9,959
7/31/1998 $ 9,556 $10,202 $10,005
8/31/1998 $ 8,663 $10,368 $ 9,392
9/30/1998 $ 9,092 $10,611 $ 9,563
10/31/1998 $ 9,276 $10,555 $ 9,532
11/30/1998 $ 9,648 $10,615 $ 9,864
12/31/1998 $ 9,656 $10,647 $ 9,852
1/31/1999 $ 9,698 $10,723 $ 9,916
2/28/1999 $ 9,569 $10,535 $ 9,817
3/31/1999 $ 9,714 $10,594 $ 9,972
4/30/1999 $ 9,979 $10,627 $10,186
5/31/1999 $ 9,745 $10,534 $ 9,982
6/30/1999 $ 9,762 $10,501 $ 9,994
7/31/1999 $ 9,695 $10,456 $ 9,966
8/31/1999 $ 9,608 $10,451 $ 9,898
9/30/1999 $ 9,616 $10,572 $ 9,944
10/31/1999 $ 9,662 $10,611 $ 9,974
11/30/1999 $ 9,746 $10,610 $10,072
12/31/1999 $ 9,880 $10,559 $10,178
1/31/2000 $ 9,719 $10,525 $10,094
2/29/2000 $ 9,841 $10,652 $10,257
3/31/2000 $ 9,864 $10,792 $10,267
4/30/2000 $ 9,799 $10,761 $10,151
5/31/2000 $ 9,672 $10,756 $10,025
6/30/2000 $ 9,958 $10,980 $10,282
7/31/2000 $10,023 $11,080 $10,321
8/31/2000 $10,180 $11,240 $10,407
9/30/2000 $10,114 $11,311 $10,302
10/31/2000 $ 9,913 $11,386 $10,102
11/30/2000 $ 9,711 $11,572 $ 9,954
12/31/2000 $10,137 $11,787 $10,239
1/31/2001 $10,545 $11,979 $10,613
2/28/2001 $10,509 $12,084 $10,626
3/31/2001 $10,344 $12,145 $10,428
4/30/2001 $10,350 $12,094 $10,350
5/31/2001 $10,411 $12,167 $10,426
6/30/2001 $10,330 $12,213 $10,339
7/31/2001 $10,458 $12,486 $10,422
8/31/2001 $10,586 $12,629 $10,564
9/30/2001 $10,157 $12,776 $10,231
10/31/2001 $10,468 $13,044 $10,479
11/30/2001 $10,736 $12,864 $10,608
12/31/2001 $10,685 $12,782 $10,575
1/31/2002 $10,703 $12,886 $10,634
2/28/2002 $10,726 $13,010 $10,660
3/31/2002 $10,831 $12,794 $10,684
4/30/2002 $10,971 $13,042 $10,849
5/31/2002 $10,924 $13,153 $10,877
6/30/2002 $10,461 $13,267 $10,656
7/31/2002 $10,234 $13,427 $10,487
8/31/2002 $10,499 $13,653 $10,706
9/30/2002 $10,474 $13,874 $10,684
10/31/2002 $10,535 $13,811 $10,729
11/30/2002 $10,978 $13,808 $11,016
12/31/2002 $11,188 $14,093 $11,233
1/31/2003 $11,387 $14,105 $11,395
2/28/2003 $11,588 $14,300 $11,574
3/31/2003 $11,744 $14,289 $11,694
4/30/2003 $12,244 $14,407 $12,093
5/31/2003 $12,606 $14,676 $12,387
6/30/2003 $12,765 $14,646 $12,501
7/31/2003 $12,422 $14,154 $12,232
8/31/2003 $12,544 $14,248 $12,358
9/30/2003 $13,006 $14,625 $12,708
10/31/2003 $13,090 $14,489 $12,801
11/30/2003 $13,280 $14,523 $12,945
12/31/2003 $13,658 $14,671 $13,244
1/31/2004 $13,837 $14,789 $13,373
2/29/2004 $13,909 $14,949 $13,406
3/31/2004 $14,009 $15,061 $13,511
4/30/2004 $13,675 $14,669 $13,218
5/31/2004 $13,558 $14,611 $13,097
6/30/2004 $13,674 $14,693 $13,218
7/31/2004 $13,830 $14,839 $13,343
8/31/2004 $14,140 $15,122 $13,605
9/30/2004 $14,313 $15,163 $13,774
10/31/2004 $14,599 $15,290 $14,011
11/30/2004 $14,787 $15,168 $14,191
12/31/2004 $15,005 $15,308 $14,398
1/31/2005 $14,968 $15,404 $14,388
2/28/2005 $15,160 $15,313 $14,485
3/31/2005 $14,807 $15,234 $14,244
4/30/2005 $14,783 $15,440 $14,274
5/31/2005 $14,905 $15,608 $14,408
6/30/2005 $15,022 $15,693 $14,555
7/31/2005 $15,095 $15,550 $14,606
8/31/2005 $15,198 $15,749 $14,744
9/30/2005 $15,094 $15,587 $14,692
10/31/2005 $14,990 $15,464 $14,541
11/30/2005 $15,095 $15,532 $14,621
12/31/2005 $15,230 $15,680 $14,760
1/31/2006 $15,456 $15,680 $14,903
2/28/2006 $15,547 $15,733 $15,006
3/31/2006 $15,486 $15,578 $14,920
4/30/2006 $15,624 $15,550 $15,004
5/31/2006 $15,593 $15,533 $14,935
6/30/2006 $15,516 $15,566 $14,894
7/31/2006 $15,687 $15,777 $15,076
8/31/2006 $15,874 $16,018 $15,281
9/30/2006 $16,000 $16,159 $15,379
10/31/2006 $16,205 $16,266 $15,546
11/30/2006 $16,427 $16,455 $15,749
12/31/2006 $16,479 $16,359 $15,786
1/31/2007 $16,511 $16,352 $15,853
2/28/2007 $16,704 $16,604 $16,054
3/31/2007 $16,801 $16,605 $16,107
4/30/2007 $17,045 $16,695 $16,281
5/31/2007 $17,110 $16,568 $16,296
6/30/2007 $16,979 $16,519 $16,162
7/31/2007 $16,830 $16,657 $16,004
8/31/2007 $16,897 $16,861 $16,077
9/30/2007 $17,346 $16,989 $16,384
10/31/2007 $17,547 $17,141 $16,538
11/30/2007 $17,396 $17,450 $16,480
12/31/2007 $17,446 $17,499 $16,513
1/31/2008 $17,515 $17,793 $16,545
2/29/2008 $17,515 $17,817 $16,477
3/31/2008 $17,532 $17,878 $16,396
4/30/2008 $17,862 $17,841 $16,621
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/08
- ------------------------ -------
1-Year +0.43%
5-Year +7.13%
Since Inception (1/1/99) +6.47%
CLASS B (1/1/99-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN STRATEGIC INCOME LEHMAN BROTHERS U.S. LIPPER MULTI-SECTOR INCOME
DATE FUND - CLASS B AGGREGATE INDEX CLASSIFICATION AVERAGE
- ---------- ------------------------- -------------------- --------------------------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $10,054 $10,071 $10,065
2/28/1999 $ 9,914 $ 9,896 $ 9,964
3/31/1999 $10,069 $ 9,950 $10,122
4/30/1999 $10,340 $ 9,982 $10,339
5/31/1999 $10,104 $ 9,894 $10,133
6/30/1999 $10,119 $ 9,863 $10,145
7/31/1999 $10,036 $ 9,821 $10,116
8/31/1999 $ 9,943 $ 9,816 $10,047
9/30/1999 $ 9,958 $ 9,930 $10,094
10/31/1999 $ 9,993 $ 9,967 $10,124
11/30/1999 $10,077 $ 9,966 $10,223
12/31/1999 $10,213 $ 9,918 $10,332
1/31/2000 $10,053 $ 9,885 $10,246
2/29/2000 $10,165 $10,005 $10,411
3/31/2000 $10,186 $10,137 $10,421
4/30/2000 $10,115 $10,108 $10,304
5/31/2000 $ 9,981 $10,103 $10,176
6/30/2000 $10,271 $10,313 $10,436
7/31/2000 $10,334 $10,407 $10,476
8/31/2000 $10,493 $10,558 $10,564
9/30/2000 $10,432 $10,624 $10,457
10/31/2000 $10,222 $10,694 $10,254
11/30/2000 $10,010 $10,869 $10,104
12/31/2000 $10,445 $11,071 $10,394
1/31/2001 $10,850 $11,252 $10,773
2/28/2001 $10,820 $11,350 $10,786
3/31/2001 $10,647 $11,407 $10,585
4/30/2001 $10,639 $11,360 $10,506
5/31/2001 $10,708 $11,428 $10,583
6/30/2001 $10,611 $11,471 $10,495
7/31/2001 $10,738 $11,728 $10,579
8/31/2001 $10,866 $11,862 $10,723
9/30/2001 $10,424 $12,000 $10,385
10/31/2001 $10,738 $12,251 $10,637
11/30/2001 $11,008 $12,082 $10,768
12/31/2001 $10,965 $12,006 $10,735
1/31/2002 $10,968 $12,103 $10,794
2/28/2002 $10,999 $12,220 $10,821
3/31/2002 $11,103 $12,017 $10,844
4/30/2002 $11,231 $12,250 $11,013
5/31/2002 $11,192 $12,354 $11,041
6/30/2002 $10,703 $12,461 $10,816
7/31/2002 $10,468 $12,611 $10,645
8/31/2002 $10,734 $12,824 $10,867
9/30/2002 $10,718 $13,032 $10,845
10/31/2002 $10,764 $12,972 $10,890
11/30/2002 $11,224 $12,969 $11,182
12/31/2002 $11,423 $13,237 $11,402
1/31/2003 $11,622 $13,248 $11,567
2/28/2003 $11,823 $13,431 $11,748
3/31/2003 $11,990 $13,421 $11,870
4/30/2003 $12,482 $13,532 $12,275
5/31/2003 $12,859 $13,784 $12,573
6/30/2003 $13,017 $13,757 $12,689
7/31/2003 $12,651 $13,294 $12,416
8/31/2003 $12,784 $13,383 $12,544
9/30/2003 $13,249 $13,737 $12,899
10/31/2003 $13,329 $13,609 $12,993
11/30/2003 $13,504 $13,641 $13,140
12/31/2003 $13,897 $13,780 $13,444
1/31/2004 $14,074 $13,891 $13,574
2/29/2004 $14,143 $14,041 $13,608
3/31/2004 $14,239 $14,147 $13,714
4/30/2004 $13,897 $13,778 $13,417
5/31/2004 $13,773 $13,723 $13,294
6/30/2004 $13,885 $13,801 $13,417
7/31/2004 $14,039 $13,938 $13,544
8/31/2004 $14,349 $14,203 $13,810
9/30/2004 $14,518 $14,242 $13,981
10/31/2004 $14,802 $14,361 $14,221
11/30/2004 $15,002 $14,247 $14,405
12/31/2004 $15,217 $14,378 $14,615
1/31/2005 $15,176 $14,468 $14,605
2/28/2005 $15,350 $14,383 $14,703
3/31/2005 $14,988 $14,309 $14,459
4/30/2005 $14,959 $14,503 $14,489
5/31/2005 $15,092 $14,660 $14,625
6/30/2005 $15,204 $14,739 $14,774
7/31/2005 $15,273 $14,605 $14,826
8/31/2005 $15,357 $14,793 $14,966
9/30/2005 $15,262 $14,640 $14,913
10/31/2005 $15,137 $14,524 $14,760
11/30/2005 $15,237 $14,589 $14,841
12/31/2005 $15,383 $14,727 $14,982
1/31/2006 $15,605 $14,728 $15,127
2/28/2006 $15,677 $14,777 $15,231
3/31/2006 $15,610 $14,632 $15,145
4/30/2006 $15,758 $14,605 $15,229
5/31/2006 $15,707 $14,590 $15,159
6/30/2006 $15,639 $14,621 $15,118
7/31/2006 $15,806 $14,818 $15,303
8/31/2006 $15,988 $15,045 $15,511
9/30/2006 $16,109 $15,177 $15,610
10/31/2006 $16,294 $15,278 $15,780
11/30/2006 $16,527 $15,455 $15,986
12/31/2006 $16,558 $15,365 $16,024
1/31/2007 $16,589 $15,359 $16,091
2/28/2007 $16,784 $15,596 $16,296
3/31/2007 $16,881 $15,596 $16,349
4/30/2007 $17,126 $15,681 $16,526
5/31/2007 $17,191 $15,562 $16,541
6/30/2007 $17,058 $15,516 $16,405
7/31/2007 $16,908 $15,645 $16,244
8/31/2007 $16,976 $15,837 $16,319
9/30/2007 $17,427 $15,957 $16,631
10/31/2007 $17,630 $16,100 $16,787
11/30/2007 $17,478 $16,390 $16,728
12/31/2007 $17,529 $16,436 $16,762
1/31/2008 $17,597 $16,712 $16,794
2/29/2008 $17,597 $16,735 $16,725
3/31/2008 $17,615 $16,792 $16,643
4/30/2008 $17,947 $16,757 $16,871
12 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/08
- ------- -------
1-Year +3.30%
5-Year +7.42%
10-Year +5.98%
CLASS C (5/1/98-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN STRATEGIC INCOME LEHMAN BROTHERS U.S. LIPPER MULTI-SECTOR INCOME
DATE FUND - CLASS C AGGREGATE INDEX CLASSIFICATION AVERAGE
- ---------- ------------------------- ------------------- --------------------------
5/1/1998 $10,000 $10,000 $10,000
5/31/1998 $ 9,920 $10,095 $ 9,981
6/30/1998 $ 9,885 $10,180 $ 9,959
7/31/1998 $ 9,952 $10,202 $10,005
8/31/1998 $ 9,028 $10,368 $ 9,392
9/30/1998 $ 9,461 $10,611 $ 9,563
10/31/1998 $ 9,650 $10,555 $ 9,532
11/30/1998 $10,034 $10,615 $ 9,864
12/31/1998 $10,038 $10,647 $ 9,852
1/31/1999 $10,079 $10,723 $ 9,916
2/28/1999 $ 9,941 $10,535 $ 9,817
3/31/1999 $10,087 $10,594 $ 9,972
4/30/1999 $10,359 $10,627 $10,186
5/31/1999 $10,113 $10,534 $ 9,982
6/30/1999 $10,127 $10,501 $ 9,994
7/31/1999 $10,053 $10,456 $ 9,966
8/31/1999 $ 9,950 $10,451 $ 9,898
9/30/1999 $ 9,965 $10,572 $ 9,944
10/31/1999 $10,009 $10,611 $ 9,974
11/30/1999 $10,094 $10,610 $10,072
12/31/1999 $10,229 $10,559 $10,178
1/31/2000 $10,058 $10,525 $10,094
2/29/2000 $10,181 $10,652 $10,257
3/31/2000 $10,202 $10,792 $10,267
4/30/2000 $10,131 $10,761 $10,151
5/31/2000 $ 9,997 $10,756 $10,025
6/30/2000 $10,289 $10,980 $10,282
7/31/2000 $10,352 $11,080 $10,321
8/31/2000 $10,511 $11,240 $10,407
9/30/2000 $10,439 $11,311 $10,302
10/31/2000 $10,229 $11,386 $10,102
11/30/2000 $10,027 $11,572 $ 9,954
12/31/2000 $10,452 $11,787 $10,239
1/31/2001 $10,870 $11,979 $10,613
2/28/2001 $10,840 $12,084 $10,626
3/31/2001 $10,655 $12,145 $10,428
4/30/2001 $10,658 $12,094 $10,350
5/31/2001 $10,717 $12,167 $10,426
6/30/2001 $10,631 $12,213 $10,339
7/31/2001 $10,759 $12,486 $10,422
8/31/2001 $10,888 $12,629 $10,564
9/30/2001 $10,443 $12,776 $10,231
10/31/2001 $10,759 $13,044 $10,479
11/30/2001 $11,029 $12,864 $10,608
12/31/2001 $10,974 $12,782 $10,575
1/31/2002 $10,989 $12,886 $10,634
2/28/2002 $11,009 $13,010 $10,660
3/31/2002 $11,113 $12,794 $10,684
4/30/2002 $11,242 $13,042 $10,849
5/31/2002 $11,202 $13,153 $10,877
6/30/2002 $10,723 $13,267 $10,656
7/31/2002 $10,487 $13,427 $10,487
8/31/2002 $10,754 $13,653 $10,706
9/30/2002 $10,726 $13,874 $10,684
10/31/2002 $10,785 $13,811 $10,729
11/30/2002 $11,235 $13,808 $11,016
12/31/2002 $11,446 $14,093 $11,233
1/31/2003 $11,647 $14,105 $11,395
2/28/2003 $11,848 $14,300 $11,574
3/31/2003 $12,004 $14,289 $11,694
4/30/2003 $12,498 $14,407 $12,093
5/31/2003 $12,877 $14,676 $12,387
6/30/2003 $13,035 $14,646 $12,501
7/31/2003 $12,667 $14,154 $12,232
8/31/2003 $12,800 $14,248 $12,358
9/30/2003 $13,267 $14,625 $12,708
10/31/2003 $13,347 $14,489 $12,801
11/30/2003 $13,536 $14,523 $12,945
12/31/2003 $13,918 $14,671 $13,244
1/31/2004 $14,095 $14,789 $13,373
2/29/2004 $14,165 $14,949 $13,406
3/31/2004 $14,262 $15,061 $13,511
4/30/2004 $13,918 $14,669 $13,218
5/31/2004 $13,794 $14,611 $13,097
6/30/2004 $13,906 $14,693 $13,218
7/31/2004 $14,061 $14,839 $13,343
8/31/2004 $14,358 $15,122 $13,605
9/30/2004 $14,543 $15,163 $13,774
10/31/2004 $14,828 $15,290 $14,011
11/30/2004 $15,015 $15,168 $14,191
12/31/2004 $15,231 $15,308 $14,398
1/31/2005 $15,189 $15,404 $14,388
2/28/2005 $15,378 $15,313 $14,485
3/31/2005 $15,014 $15,234 $14,244
4/30/2005 $14,986 $15,440 $14,274
5/31/2005 $15,104 $15,608 $14,408
6/30/2005 $15,217 $15,693 $14,555
7/31/2005 $15,287 $15,550 $14,606
8/31/2005 $15,371 $15,749 $14,744
9/30/2005 $15,276 $15,587 $14,692
10/31/2005 $15,166 $15,464 $14,541
11/30/2005 $15,251 $15,532 $14,621
12/31/2005 $15,398 $15,680 $14,760
1/31/2006 $15,621 $15,680 $14,903
2/28/2006 $15,708 $15,733 $15,006
3/31/2006 $15,626 $15,578 $14,920
4/30/2006 $15,775 $15,550 $15,004
5/31/2006 $15,739 $15,533 $14,935
6/30/2006 $15,656 $15,566 $14,894
7/31/2006 $15,823 $15,777 $15,076
8/31/2006 $16,007 $16,018 $15,281
9/30/2006 $16,128 $16,159 $15,379
10/31/2006 $16,330 $16,266 $15,546
11/30/2006 $16,548 $16,455 $15,749
12/31/2006 $16,596 $16,359 $15,786
1/31/2007 $16,622 $16,352 $15,853
2/28/2007 $16,811 $16,604 $16,054
3/31/2007 $16,903 $16,605 $16,107
4/30/2007 $17,142 $16,695 $16,281
5/31/2007 $17,202 $16,568 $16,296
6/30/2007 $17,065 $16,519 $16,162
7/31/2007 $16,910 $16,657 $16,004
8/31/2007 $16,971 $16,861 $16,077
9/30/2007 $17,417 $16,989 $16,384
10/31/2007 $17,613 $17,141 $16,538
11/30/2007 $17,456 $17,450 $16,480
12/31/2007 $17,483 $17,499 $16,513
1/31/2008 $17,546 $17,793 $16,545
2/29/2008 $17,557 $17,817 $16,477
3/31/2008 $17,551 $17,878 $16,396
4/30/2008 $17,877 $17,841 $16,621
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/08
- ------------------------ -------
1-Year +4.55%
5-Year +7.58%
Since Inception (1/1/02) +8.11%
CLASS R (1/1/02-4/30/08)
(PERFORMANCE GRAPH)
FRANKLIN STRATEGIC LEHMAN BROTHERS U.S. LIPPER MULTI-SECTOR INCOME
DATE INCOME FUND - CLASS R AGGREGATE INDEX CLASSIFICATION AVERAGE
- ---------- --------------------- -------------------- --------------------------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $ 9,974 $10,081 $10,055
2/28/2002 $ 9,982 $10,179 $10,080
3/31/2002 $10,078 $10,009 $10,102
4/30/2002 $10,207 $10,203 $10,259
5/31/2002 $10,172 $10,290 $10,286
6/30/2002 $ 9,739 $10,379 $10,076
7/31/2002 $ 9,513 $10,504 $ 9,917
8/31/2002 $ 9,758 $10,682 $10,124
9/30/2002 $ 9,745 $10,855 $10,103
10/31/2002 $ 9,788 $10,805 $10,145
11/30/2002 $10,209 $10,802 $10,417
12/31/2002 $10,403 $11,025 $10,622
1/31/2003 $10,575 $11,035 $10,775
2/28/2003 $10,759 $11,188 $10,944
3/31/2003 $10,915 $11,179 $11,058
4/30/2003 $11,366 $11,271 $11,435
5/31/2003 $11,711 $11,481 $11,713
6/30/2003 $11,857 $11,459 $11,821
7/31/2003 $11,524 $11,073 $11,567
8/31/2003 $11,647 $11,147 $11,686
9/30/2003 $12,061 $11,442 $12,016
10/31/2003 $12,149 $11,335 $12,104
11/30/2003 $12,312 $11,362 $12,241
12/31/2003 $12,660 $11,478 $12,524
1/31/2004 $12,836 $11,570 $12,645
2/29/2004 $12,901 $11,696 $12,677
3/31/2004 $12,978 $11,783 $12,776
4/30/2004 $12,666 $11,477 $12,498
5/31/2004 $12,568 $11,431 $12,385
6/30/2004 $12,659 $11,495 $12,499
7/31/2004 $12,803 $11,609 $12,617
8/31/2004 $13,088 $11,831 $12,865
9/30/2004 $13,246 $11,863 $13,024
10/31/2004 $13,508 $11,962 $13,248
11/30/2004 $13,680 $11,867 $13,419
12/31/2004 $13,878 $11,976 $13,615
1/31/2005 $13,842 $12,051 $13,605
2/28/2005 $14,016 $11,980 $13,697
3/31/2005 $13,686 $11,919 $13,469
4/30/2005 $13,662 $12,080 $13,498
5/31/2005 $13,772 $12,211 $13,624
6/30/2005 $13,876 $12,277 $13,763
7/31/2005 $13,942 $12,165 $13,812
8/31/2005 $14,034 $12,321 $13,941
9/30/2005 $13,935 $12,194 $13,893
10/31/2005 $13,837 $12,098 $13,750
11/30/2005 $13,930 $12,151 $13,825
12/31/2005 $14,052 $12,267 $13,956
1/31/2006 $14,258 $12,268 $14,092
2/28/2006 $14,340 $12,308 $14,189
3/31/2006 $14,280 $12,188 $14,108
4/30/2006 $14,405 $12,165 $14,187
5/31/2006 $14,373 $12,152 $14,122
6/30/2006 $14,299 $12,178 $14,084
7/31/2006 $14,454 $12,343 $14,256
8/31/2006 $14,624 $12,532 $14,450
9/30/2006 $14,737 $12,642 $14,542
10/31/2006 $14,923 $12,726 $14,701
11/30/2006 $15,124 $12,873 $14,892
12/31/2006 $15,155 $12,798 $14,927
1/31/2007 $15,196 $12,793 $14,990
2/28/2007 $15,371 $12,990 $15,180
3/31/2007 $15,457 $12,991 $15,231
4/30/2007 $15,664 $13,061 $15,395
5/31/2007 $15,736 $12,962 $15,409
6/30/2007 $15,612 $12,924 $15,283
7/31/2007 $15,457 $13,031 $15,133
8/31/2007 $15,530 $13,191 $15,202
9/30/2007 $15,941 $13,291 $15,493
10/31/2007 $16,122 $13,411 $15,638
11/30/2007 $15,980 $13,652 $15,584
12/31/2007 $16,008 $13,690 $15,615
1/31/2008 $16,066 $13,920 $15,644
2/29/2008 $16,063 $13,939 $15,580
3/31/2008 $16,076 $13,987 $15,504
4/30/2008 $16,377 $13,958 $15,716
Annual Report | 13
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 4/30/08
- ---------------- -------
1-Year +5.05%
5-Year +8.11%
10-Year +6.66%
ADVISOR CLASS (5/1/98-4/30/08)(8)
(PERFORMANCE GRAPH)
FRANKLIN STRATEGIC INCOME LEHMAN BROTHERS U.S. LIPPER MULTI-SECTOR INCOME
DATE FUND - ADVISOR CLASS AGGREGATE INDEX CLASSIFICATION AVERAGE
- ---------- ------------------------- -------------------- --------------------------
5/1/1998 $10,000 $10,000 $10,000
5/31/1998 $ 9,942 $10,095 $ 9,981
6/30/1998 $ 9,910 $10,180 $ 9,959
7/31/1998 $ 9,981 $10,202 $10,005
8/31/1998 $ 9,048 $10,368 $ 9,392
9/30/1998 $ 9,496 $10,611 $ 9,563
10/31/1998 $ 9,689 $10,555 $ 9,532
11/30/1998 $10,078 $10,615 $ 9,864
12/31/1998 $10,085 $10,647 $ 9,852
1/31/1999 $10,130 $10,723 $ 9,916
2/28/1999 $ 9,995 $10,535 $ 9,817
3/31/1999 $10,146 $10,594 $ 9,972
4/30/1999 $10,423 $10,627 $10,186
5/31/1999 $10,179 $10,534 $ 9,982
6/30/1999 $10,197 $10,501 $ 9,994
7/31/1999 $10,126 $10,456 $ 9,966
8/31/1999 $10,035 $10,451 $ 9,898
9/30/1999 $10,055 $10,572 $ 9,944
10/31/1999 $10,096 $10,611 $ 9,974
11/30/1999 $10,186 $10,610 $10,072
12/31/1999 $10,328 $10,559 $10,178
1/31/2000 $10,172 $10,525 $10,094
2/29/2000 $10,291 $10,652 $10,257
3/31/2000 $10,318 $10,792 $10,267
4/30/2000 $10,252 $10,761 $10,151
5/31/2000 $10,121 $10,756 $10,025
6/30/2000 $10,423 $10,980 $10,282
7/31/2000 $10,493 $11,080 $10,321
8/31/2000 $10,660 $11,240 $10,407
9/30/2000 $10,604 $11,311 $10,302
10/31/2000 $10,395 $11,386 $10,102
11/30/2000 $10,186 $11,572 $ 9,954
12/31/2000 $10,635 $11,787 $10,239
1/31/2001 $11,053 $11,979 $10,613
2/28/2001 $11,029 $12,084 $10,626
3/31/2001 $10,858 $12,145 $10,428
4/30/2001 $10,856 $12,094 $10,350
5/31/2001 $10,922 $12,167 $10,426
6/30/2001 $10,839 $12,213 $10,339
7/31/2001 $10,975 $12,486 $10,422
8/31/2001 $11,112 $12,629 $10,564
9/30/2001 $10,664 $12,776 $10,231
10/31/2001 $10,993 $13,044 $10,479
11/30/2001 $11,276 $12,864 $10,608
12/31/2001 $11,238 $12,782 $10,575
1/31/2002 $11,247 $12,886 $10,634
2/28/2002 $11,273 $13,010 $10,660
3/31/2002 $11,398 $12,794 $10,684
4/30/2002 $11,536 $13,042 $10,849
5/31/2002 $11,489 $13,153 $10,877
6/30/2002 $11,004 $13,267 $10,656
7/31/2002 $10,768 $13,427 $10,487
8/31/2002 $11,048 $13,653 $10,706
9/30/2002 $11,038 $13,874 $10,684
10/31/2002 $11,091 $13,811 $10,729
11/30/2002 $11,559 $13,808 $11,016
12/31/2002 $11,783 $14,093 $11,233
1/31/2003 $11,996 $14,105 $11,395
2/28/2003 $12,210 $14,300 $11,574
3/31/2003 $12,376 $14,289 $11,694
4/30/2003 $12,906 $14,407 $12,093
5/31/2003 $13,303 $14,676 $12,387
6/30/2003 $13,460 $14,646 $12,501
7/31/2003 $13,101 $14,154 $12,232
8/31/2003 $13,233 $14,248 $12,358
9/30/2003 $13,723 $14,625 $12,708
10/31/2003 $13,814 $14,489 $12,801
11/30/2003 $14,018 $14,523 $12,945
12/31/2003 $14,420 $14,671 $13,244
1/31/2004 $14,611 $14,789 $13,373
2/29/2004 $14,705 $14,949 $13,406
3/31/2004 $14,799 $15,061 $13,511
4/30/2004 $14,450 $14,669 $13,218
5/31/2004 $14,343 $14,611 $13,097
6/30/2004 $14,468 $14,693 $13,218
7/31/2004 $14,623 $14,839 $13,343
8/31/2004 $14,954 $15,122 $13,605
9/30/2004 $15,154 $15,163 $13,774
10/31/2004 $15,444 $15,290 $14,011
11/30/2004 $15,662 $15,168 $14,191
12/31/2004 $15,896 $15,308 $14,398
1/31/2005 $15,860 $15,404 $14,388
2/28/2005 $16,051 $15,313 $14,485
3/31/2005 $15,695 $15,234 $14,244
4/30/2005 $15,659 $15,440 $14,274
5/31/2005 $15,807 $15,608 $14,408
6/30/2005 $15,933 $15,693 $14,555
7/31/2005 $16,014 $15,550 $14,606
8/31/2005 $16,111 $15,749 $14,744
9/30/2005 $16,020 $15,587 $14,692
10/31/2005 $15,898 $15,464 $14,541
11/30/2005 $16,012 $15,532 $14,621
12/31/2005 $16,175 $15,680 $14,760
1/31/2006 $16,418 $15,680 $14,903
2/28/2006 $16,502 $15,733 $15,006
3/31/2006 $16,440 $15,578 $14,920
4/30/2006 $16,606 $15,550 $15,004
5/31/2006 $16,560 $15,533 $14,935
6/30/2006 $16,498 $15,566 $14,894
7/31/2006 $16,683 $15,777 $15,076
8/31/2006 $16,886 $16,018 $15,281
9/30/2006 $17,023 $16,159 $15,379
10/31/2006 $17,228 $16,266 $15,546
11/30/2006 $17,484 $16,455 $15,749
12/31/2006 $17,526 $16,359 $15,786
1/31/2007 $17,581 $16,352 $15,853
2/28/2007 $17,790 $16,604 $16,054
3/31/2007 $17,897 $16,605 $16,107
4/30/2007 $18,142 $16,695 $16,281
5/31/2007 $18,233 $16,568 $16,296
6/30/2007 $18,097 $16,519 $16,162
7/31/2007 $17,925 $16,657 $16,004
8/31/2007 $18,017 $16,861 $16,077
9/30/2007 $18,500 $16,989 $16,384
10/31/2007 $18,717 $17,141 $16,538
11/30/2007 $18,560 $17,450 $16,480
12/31/2007 $18,600 $17,499 $16,513
1/31/2008 $18,676 $17,793 $16,545
2/29/2008 $18,680 $17,817 $16,477
3/31/2008 $18,702 $17,878 $16,396
4/30/2008 $19,058 $17,841 $16,621
14 | Annual 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.
(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
April dividend and the maximum offering price (NAV for Classes B, C, R and
Advisor) per share on 4/30/08.
(6.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 4/30/08.
(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 +91.04% and +7.71%.
(9.) Sources: Lehman Brothers Inc.; Lipper 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
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 12-month period ended 4/30/08, there were
134 funds in this category. Lipper calculations do not include sales
charges, but include reinvestment of any income or distributions. Fund
performance relative to the average may have differed if these and other
factors had been considered.
Annual Report | 15
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600/$1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
16 | Annual 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 11/1/07 VALUE 4/30/08 PERIOD* 1/1/07- 4/30/08
- ---------------------------------------- ----------------- -------------- -----------------------
Actual $1,000 $1,018.00 $4.57
Hypothetical (5% return before expenses) $1,000 $1,020.34 $4.57
CLASS B
Actual $1,000 $1,015.80 $6.57
Hypothetical (5% return before expenses) $1,000 $1,018.35 $6.57
CLASS C
Actual $1,000 $1,015.00 $6.56
Hypothetical (5% return before expenses) $1,000 $1,018.35 $6.57
CLASS R
Actual $1,000 $1,015.80 $5.81
Hypothetical (5% return before expenses) $1,000 $1,019.10 $5.82
ADVISOR CLASS
Actual $1,000 $1,018.20 $3.26
Hypothetical (5% return before expenses) $1,000 $1,021.63 $3.27
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.91%; B: 1.31%; C: 1.31%; R: 1.16%; and
Advisor: 0.65%), multiplied by the average account value over the period,
multiplied by 182/366 to reflect the one-half year period.
Annual Report | 17
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
----------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------------------------------------------------------------- ---------- ---------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year........................... $ 10.48 $ 10.20 $ 10.24 $ 10.09 $ 9.65
---------- ---------- -------- -------- --------
Income from investment operations(a):
Net investment income(b).................................. 0.56 0.53 0.51 0.53 0.56
Net realized and unrealized gains (losses)................ (0.07) 0.35 0.05 0.27 0.54
---------- ---------- -------- -------- --------
Total from investment operations............................. 0.49 0.88 0.56 0.80 1.10
---------- ---------- -------- -------- --------
Less distributions from net investment income................ (0.69) (0.60) (0.60) (0.65) (0.66)
---------- ---------- -------- -------- --------
Redemption fees.............................................. --(e) --(e) --(e) --(e) --
---------- ---------- -------- -------- --------
Net asset value, end of year................................. $ 10.28 $ 10.48 $ 10.20 $ 10.24 $ 10.09
========== ========== ======== ======== ========
Total return(c).............................................. 4.80% 9.09% 5.69% 8.10% 11.69%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates............ 0.89% 0.92% 0.91% 0.92% 0.92%
Expenses net of waiver and payments by affiliates............ 0.89%(f) 0.92%(f) 0.91%(f) 0.91%(f) 0.92%(f)
Net investment income........................................ 5.44% 5.22% 5.05% 5.18% 5.53%
SUPPLEMENTAL DATA
Net assets, end of year (000's).............................. $2,123,947 $1,521,459 $998,182 $696,198 $446,282
Portfolio turnover rate...................................... 31.71% 42.24% 34.10% 48.57% 66.57%
Portfolio turnover rate excluding mortgage dollar rolls(d)... 31.71% 41.50% 33.59% 39.91% 52.35%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) See Note 1(e) regarding mortgage dollar rolls.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
18 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
----------------------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ------------------------------------------------------------- ---------- ---------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year........................... $ 10.52 $ 10.24 $ 10.27 $ 10.12 $ 9.67
---------- ---------- -------- -------- --------
Income from investment operations(a):
Net investment income(b).................................. 0.52 0.49 0.47 0.49 0.52
Net realized and unrealized gains (losses)................ (0.07) 0.35 0.06 0.27 0.55
---------- ---------- -------- -------- --------
Total from investment operations............................. 0.45 0.84 0.53 0.76 1.07
---------- ---------- -------- -------- --------
Less distributions from net investment income................ (0.65) (0.56) (0.56) (0.61) (0.62)
---------- ---------- -------- -------- --------
Redemption fees.............................................. --(e) --(e) --(e) --(e) --
---------- ---------- -------- -------- --------
Net asset value, end of year................................. $ 10.32 $ 10.52 $ 10.24 $ 10.27 $ 10.12
========== ========== ======== ======== ========
Total return(c).............................................. 4.35% 8.62% 5.34% 7.65% 11.33%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates............ 1.29% 1.32% 1.31% 1.32% 1.32%
Expenses net of waiver and payments by affiliates............ 1.29%(f) 1.32%(f) 1.31%(f) 1.31%(f) 1.32%(f)
Net investment income........................................ 5.04% 4.82% 4.65% 4.78% 5.13%
SUPPLEMENTAL DATA
Net assets, end of year (000's).............................. $ 105,620 $ 104,523 $104,477 $110,502 $ 91,974
Portfolio turnover rate...................................... 31.71% 42.24% 34.10% 48.57% 66.57%
Portfolio turnover rate excluding mortgage dollar rolls(d)... 31.71% 41.50% 33.59% 39.91% 52.35%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) See Note 1(e) regarding mortgage dollar rolls.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
Annual Report | The accompanying notes are an integral part of these
financial statements. | 19
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
----------------------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ------------------------------------------------------------- ---------- ---------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year........................... $ 10.48 $ 10.20 $ 10.24 $ 10.09 $ 9.64
---------- ---------- -------- -------- --------
Income from investment operations(a):
Net investment income(b).................................. 0.52 0.49 0.47 0.49 0.52
Net realized and unrealized gains (losses)................ (0.08) 0.35 0.05 0.27 0.55
---------- ---------- -------- -------- --------
Total from investment operations............................. 0.44 0.84 0.52 0.76 1.07
---------- ---------- -------- -------- --------
Less distributions from net investment income................ (0.65) (0.56) (0.56) 0.61) (0.62)
---------- ---------- -------- -------- --------
Redemption fees.............................................. --(e) --(e) --(e) --(e) --
---------- ---------- -------- -------- --------
Net asset value, end of year................................. $ 10.27 $ 10.48 $ 10.20 $ 10.24 $ 10.09
========== ========== ======== ======== ========
Total return(c).............................................. 4.28% 8.67% 5.27% 7.67% 11.36%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates............ 1.29% 1.32% 1.31% 1.32% 1.32%
Expenses net of waiver and payments by affiliates............ 1.29%(f) 1.32%(f) 1.31%(f) 1.31%(f) 1.32%(f)
Net investment income........................................ 5.04% 4.82% 4.65% 4.78% 5.13%
SUPPLEMENTAL DATA
Net assets, end of year (000's).............................. $ 733,071 $ 437,026 $294,412 $213,741 $151,823
Portfolio turnover rate...................................... 31.71% 42.24% 34.10% 48.57% 66.57%
Portfolio turnover rate excluding mortgage dollar rolls(d)... 31.71% 41.50% 33.59% 39.91% 52.35%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) See Note 1(e) regarding mortgage dollar rolls.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
20 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
----------------------------------------------------------------
CLASS R 2008 2007 2006 2005 2004
- ------------------------------------------------------------- ---------- ---------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......................... $ 10.46 $ 10.18 $ 10.22 $ 10.07 $ 9.63
---------- ---------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ................................. 0.53 0.51 0.49 0.51 0.53
Net realized and unrealized gains (losses) ............... (0.08) 0.35 0.05 0.26 0.55
---------- ---------- -------- -------- --------
Total from investment operations ............................ 0.45 0.86 0.54 0.77 1.08
---------- ---------- -------- -------- --------
Less distributions from net investment income ............... (0.66) (0.58) (0.58) (0.62) (0.64)
---------- ---------- -------- -------- --------
Redemption fees ............................................. --(e) --(e) --(e) --(e) --
---------- ---------- -------- -------- --------
Net asset value, end of year ................................ $ 10.25 $ 10.46 $ 10.18 $ 10.22 $ 10.07
========== ========== ======== ======== ========
Total return(c) ............................................. 4.55% 8.74% 5.44% 7.86% 11.45%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates ........... 1.14% 1.17% 1.16% 1.17% 1.17%
Expenses net of waiver and payments by affiliates ........... 1.14%(f) 1.17%(f) 1.16%(f) 1.16%(f) 1.17%(f)
Net investment income ....................................... 5.19% 4.97% 4.80% 4.93% 5.28%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................. $ 108,020 $ 65,527 $ 32,971 $ 17,859 $ 7,324
Portfolio turnover rate ..................................... 31.71% 42.24% 34.10% 48.57% 66.57%
Portfolio turnover rate excluding mortgage dollar rolls(d) .. 31.71% 41.50% 33.59% 39.91% 52.35%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(d) See Note 1(e) regarding mortgage dollar rolls.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
Annual Report | The accompanying notes are an integral part of these
financial statements. | 21
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
----------------------------------------------------------------
ADVISOR CLASS 2008 2007 2006 2005 2004
- ------------------------------------------------------------- ---------- ---------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......................... $ 10.49 $ 10.21 $ 10.24 $ 10.09 $ 9.65
---------- ---------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ................................. 0.58 0.56 0.54 0.56 0.58
Net realized and unrealized gains (losses) ............... (0.07) 0.35 0.06 0.26 0.54
---------- ---------- -------- -------- --------
Total from investment operations ............................ 0.51 0.91 0.60 0.82 1.12
---------- ---------- -------- -------- --------
Less distributions from net investment income ............... (0.72) (0.63) (0.63) (0.67) (0.68)
---------- ---------- -------- -------- --------
Redemption fees ............................................. --(d) --(d) --(d) --(d) --
---------- ---------- -------- -------- --------
Net asset value, end of year ................................ $ 10.28 $ 10.49 $ 10.21 $ 10.24 $ 10.09
========== ========== ======== ======== ========
Total return ................................................ 5.05% 9.25% 6.05% 8.37% 11.97%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates ........... 0.64% 0.67% 0.66% 0.67% 0.67%
Expenses net of waiver and payments by affiliates ........... 0.64%(e) 0.67%(e) 0.66%(e) 0.66%(e) 0.67%(e)
Net investment income ....................................... 5.69% 5.47% 5.30% 5.43% 5.78%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................. $ 111,346 $ 66,745 $ 57,367 $ 60,489 $ 39,784
Portfolio turnover rate ..................................... 31.71% 42.24% 34.10% 48.57% 66.57%
Portfolio turnover rate excluding mortgage dollar rolls(c) .. 31.71% 41.50% 33.59% 39.91% 52.35%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) See Note 1(e) regarding mortgage dollar rolls.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
22 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION SHARES VALUE
- ------------------------------------------------------------------------- -------------------- --------------------- --------------
LONG TERM INVESTMENTS 95.8%
COMMON STOCKS 0.0%(a)
AUTOMOBILES & COMPONENTS 0.0%(a)
(b,c,d) Cambridge Industries Liquidating Trust Interest ................. United States 516,372 $ 3,873
--------------
COMMERCIAL SERVICES & SUPPLIES 0.0%
(b,c,d) VS Holdings Inc ................................................. United States 64,666 --
--------------
TOTAL COMMON STOCKS (COST $64,666) .............................. 3,873
--------------
CONVERTIBLE PREFERRED STOCKS 1.6%
BANKS 0.4%
Wachovia Corp., 7.50%, cvt. pfd., L ............................. United States 5,800 6,780,490
Washington Mutual Inc., 7.75%, cvt. pfd., R ..................... United States 7,500 6,450,825
--------------
13,231,315
--------------
DIVERSIFIED FINANCIALS 0.7%
Affiliated Managers Group Inc., 5.10%, cvt. pfd. ................ United States 161,000 7,013,563
CIT Group Inc., 7.75%, cvt. pfd., Z ............................. United States 380,000 4,446,000
E*TRADE Financial Corp., 6.125%, cvt. pfd. ...................... United States 400,000 2,300,000
Lehman Brothers Holdings Inc., 7.25%, cvt. pfd., P .............. United States 6,370 7,796,880
--------------
21,556,443
--------------
MATERIALS 0.3%
Freeport-McMoRan Copper & Gold Inc., 6.75%, cvt. pfd. ........... United States 50,000 8,147,000
--------------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.2%
Schering-Plough Corp., 6.00%, cvt. pfd. ......................... United States 39,000 7,024,430
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $60,053,670)............ 49,959,188
--------------
PREFERRED STOCKS0.3%
FINANCIALS 0.3%
FHLMC, 8.375%, pfd. ............................................. United States 276,000 7,065,600
JPMorgan Chase & Co., pfd., junior sub. note, 1, 7.90%........... United States 3,900,000 3,985,773
--------------
TOTAL PREFERRED STOCKS (COST $10,806,500) ....................... 11,051,373
--------------
PRINCIPAL AMOUNT(e)
---------------------
(f,g) SENIOR FLOATING RATE INTERESTS 16.1%
AUTOMOBILES & COMPONENTS 0.3%
Allison Transmission, Term Loan B, 5.48% - 5.74%, 8/07/14 ....... United States 6,467,500 6,078,874
Key Safety Systems Inc., Term Loan B, 4.92% - 5.15%, 3/10/14 .... United States 579,150 477,799
TRW Automotive Inc., Tranche B-1 Term Loan, 4.25% -
4.688%, 2/09/14 .............................................. United States 4,418,869 4,289,984
--------------
10,846,657
--------------
CAPITAL GOODS 0.7%
Amsted Industries Inc.,
Delayed Draw, 5.085% - 6.84%, 4/05/13 ........................ United States 2,116,243 2,084,499
Term Loan B, 4.67% - 5.014%, 4/05/13 ......................... United States 628,365 618,940
Bucyrus International Inc., Tranche B Dollar Term Loan,
4.195% - 6.413%, 5/04/14 ..................................... United States 580,613 571,903
EnerSys Capital Inc., New 2007 Term Loans, 4.349% - 4.878%,
3/17/11 ...................................................... United States 3,707,215 3,480,148
Annual Report | 23
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
- ------------------------------------------------------------------------- -------------------- --------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
(f,g) SENIOR FLOATING RATE INTERESTS (CONTINUED)
CAPITAL GOODS (CONTINUED)
Hawker Beechcraft Inc.,
Synthetic L/C, 4.696%, 3/26/14 ............................... United States 241,060 $ 230,439
Term Loan B, 4.696%, 3/26/14 ................................. United States 4,136,592 3,954,326
Oshkosh Truck Corp., Term Loan B, 4.76%, 12/06/13 ............... United States 9,940,481 9,545,625
RBS Global Inc. (Rexnord Corp.), Term Loan, 5.099% - 5.318%,
7/22/13 ...................................................... United States 2,700,000 2,531,250
--------------
23,017,130
--------------
COMMERCIAL SERVICES & SUPPLIES 1.3%
Affinion Group Inc., Term Loan B, 5.395% - 5.57%, 10/17/12 ...... United States 4,538,544 4,288,924
(h) Allied Waste North America Inc.,
Credit Link, 4.50%, 3/28/14 .................................. United States 2,378,341 2,301,584
Term Loan B, 4.08% - 4.59%, 3/28/14 .......................... United States 3,955,776 3,828,112
(h) ARAMARK Corp.,
Synthetic L/C, 5.198%, 1/26/14 ............................... United States 574,664 551,893
Term Loan B, 4.571%, 1/26/14 ................................. United States 8,910,330 8,557,258
Nielsen Finance LLC (VNU Inc.), Dollar Term Loan, 5.346%,
8/09/13 ...................................................... United States 14,268,666 13,531,446
West Corp., Term Loan B-2, 5.238% - 5.465%, 10/24/13 ............ United States 9,596,725 8,796,330
--------------
41,855,547
--------------
CONSUMER DURABLES & APPAREL 0.5%
Jarden Corp.,
Term Loan B1, 4.446%, 1/24/12 ................................ United States 2,883,110 2,748,766
Term Loan B2, 4.446%, 1/24/12 ................................ United States 5,294,695 5,047,978
Jostens IH Corp. (Visant Holding Corp.), Term Loan C, 6.717%,
12/21/11 ..................................................... United States 3,158,727 3,042,906
The William Carter Co., Term Loan B, 4.384% - 4.399%,
7/14/12 ...................................................... United States 6,317,184 6,032,911
--------------
16,872,561
--------------
CONSUMER SERVICES 1.6%
Avis Budget Car Rental LLC, Term Loan, 4.15%, 4/19/12 ........... United States 5,611,921 5,134,908
Education Management LLC, Term Loan C, 4.50%, 6/01/13 ........... United States 7,068,749 6,322,113
Green Valley Ranch Gaming LLC, Term Loan B, 4.671% - 5.085%,
2/16/14 ...................................................... United States 615,095 495,152
Hertz Corp.,
Credit Link, 2.599%, 12/21/12 ................................ United States 484,444 465,342
Term Loan B, 4.22% - 4.23%, 12/21/12 ......................... United States 2,679,147 2,573,503
Laureate Education Inc., Closing Date Term Loan, 5.966%,
8/17/14 ...................................................... United States 3,772,335 3,493,182
OSI Restaurant Partners LLC (Outback),
Pre-Funded Revolving Credit, 2.67%, 6/14/13 .................. United States 714,727 623,897
Term Loan B, 5.00%, 6/14/14 .................................. United States 8,982,150 7,840,671
Penn National Gaming Inc., Term Loan B, 4.61% - 6.60%,
10/03/12 ..................................................... United States 7,129,539 6,911,689
24 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (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)
(h) VML U.S. Finance LLC (Venetian Macau),
Delayed Draw, 4.95%, 5/25/12 ................................. Macau 6,137,883 $ 5,865,901
New Project Term Loans, 4.95%, 5/25/13 ....................... Macau 2,537,661 2,425,212
Term Loan B, 4.95%, 5/24/13 .................................. Macau 10,559,456 10,091,545
--------------
52,243,115
--------------
DIVERSIFIED FINANCIALS 0.6%
Nuveen Investments Inc., Term Loan B, 5.863% - 5.886%,
11/13/14 ..................................................... United States 12,977,264 12,395,311
TD Ameritrade Holding Corp., Term Loan B, 4.37%, 12/31/12 ....... United States 6,831,733 6,685,951
--------------
19,081,262
--------------
ENERGY 0.6%
Citgo Petroleum Corp., Term Loan B, 4.114%, 11/15/12 ............ United States 6,494,110 6,104,463
Dresser Inc., Term Loan B, 5.113% - 5.315%, 5/04/14 ............. United States 7,896,208 7,633,003
Niska Gas Storage Canada ULC (C/R Gas),
Asset Sale Term Loan, 4.55%, 5/13/11 ......................... Canada 203,418 195,281
Canadian Term Loan, 4.534%, 5/12/13 .......................... Canada 2,781,516 2,674,892
Niska Gas Storage U.S. LLC (C/R Gas),
Delayed Draw, 4.60%, 5/12/13 ................................. United States 304,825 292,632
U.S. Term Loan, 4.589%, 5/12/13 .............................. United States 450,000 432,750
--------------
17,333,021
--------------
FOOD, BEVERAGE & TOBACCO 0.7%
CBRL Group (Cracker Barrel),
Term Loan B1, 4.62%, 4/27/13 ................................. United States 6,012,416 5,696,764
Term Loan B2 (Delayed Draw), 4.62%, 4/27/13 .................. United States 199,287 188,824
Constellation Brands Inc., Term Loan B, 4.188% - 6.438%,
6/05/13 ...................................................... United States 6,775,200 6,623,971
Dean Foods Co., Term Loan B, 4.45% - 4.62%, 4/02/14 ............. United States 8,520,451 8,145,313
--------------
20,654,872
--------------
HEALTH CARE EQUIPMENT & SERVICES 1.6%
Bausch and Lomb Inc.,
(i) Delayed Draw Term Loan, 5.946%, 4/28/15 .................. United States 230,000 227,472
Parent Term Loan B, 5.946%, 4/28/15 ...................... United States 1,835,400 1,815,229
(h) Community Health Systems Inc., Term Loan, 5.335%, 7/25/14 ....... United States 14,963,394 14,356,225
(h) DaVita Inc., Term Loan B-1, 4.20% - 4.60%, 10/05/12 ............. United States 6,325,000 6,068,407
DJO Finance LLC, Term Loan B, 5.696%, 5/20/14 ................... United States 4,568,550 4,460,047
Fresenius Medical Care Holdings Inc., Term Loan B,
3.954% - 6.205%, 3/31/13 ..................................... United States 6,978,232 6,761,251
HCA Inc.,
(h) Term Loan A-1, 4.196%, 11/16/12 .......................... United States 5,568,543 5,268,075
Term Loan B-1, 4.946%, 11/18/13 .......................... United States 8,437,791 8,026,853
LifePoint Hospitals Inc., Term Loan B, 4.71%, 4/15/12 ........... United States 2,812,042 2,706,590
--------------
49,690,149
--------------
Annual Report | 25
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
- ------------------------------------------------------------------------- -------------------- --------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
(f,g) SENIOR FLOATING RATE INTERESTS (CONTINUED)
MATERIALS 1.5%
Celanese U.S. Holdings LLC, Dollar Term Loan, 4.188%, 4/02/14 ... United States 7,301,250 $ 7,068,523
Domtar Corp., Term Loan, 4.175%, 3/07/14 ........................ United States 6,917,289 6,657,275
Georgia-Pacific Corp.,
Additional Term Loan, 4.446% - 4.74%, 12/20/12 ........... United States 2,036,455 1,956,587
(h) Term Loan B, 4.446% - 4.835%, 12/20/12 ................... United States 9,724,690 9,343,298
Hexion Specialty Chemicals BV, Term Loan C-2, 5.00%, 5/03/13 .... Netherlands 1,203,417 1,137,605
Hexion Specialty Chemicals Inc., Term Loan C-1, 4.938%,
5/03/13 ...................................................... United States 5,539,867 5,236,908
Ineos U.S. Finance LLC,
Term Loan B2, 4.885%, 12/16/13 ............................... United States 1,939,616 1,814,148
Term Loan C2, 5.385%, 12/23/14 ............................... United States 1,939,616 1,814,148
Nalco Co., Term Loan B, 4.477% - 6.48%, 11/04/10 ................ United States 4,318,089 4,262,766
(h) Rockwood Specialties Group Inc., Term Loan E, 4.399%, 7/30/12 ... United States 7,567,284 7,219,401
--------------
46,510,659
--------------
MEDIA 2.6%
Citadel Broadcasting Corp., Term Loan B, 4.305% - 4.495%,
6/12/14 ...................................................... United States 6,191,032 5,339,765
CSC Holdings Inc. (Cablevision), Incremental Term Loan,
4.477%, 3/29/13 .............................................. United States 8,254,846 7,971,085
Dex Media West LLC, Term Loan B2, 4.20% - 4.59%, 3/09/10 ........ United States 3,360,536 3,283,244
DIRECTV Holdings LLC, Term Loan B, 4.381%, 4/13/13 .............. United States 4,165,144 4,109,610
Idearc Inc.,
Term Loan A, 4.20% - 4.36%, 11/17/13 ......................... United States 2,100,000 1,816,876
Term Loan B, 4.70% - 4.86%, 11/17/14 ......................... United States 6,118,580 5,063,125
Insight Midwest Holdings, Term Loan B, 4.69%, 4/02/14 ........... United States 4,549,500 4,337,461
MCC Iowa,
Term Loan D-1, 4.46% - 4.65%, 1/31/15 ........................ United States 3,548,123 3,237,662
Term Loan D-2 (Delayed Draw), 4.46% - 4.65%, 1/31/15 ......... United States 1,731,334 1,579,843
Mediacom LLC, Term Loan C, 4.46% - 4.65%, 1/31/15 ............... United States 3,052,624 2,785,519
National CineMedia LLC, Term Loan, 4.62%, 2/13/15 ............... United States 2,939,453 2,739,991
R.H. Donnelley Inc., Term Loan D-2, 4.10% - 4.60%, 6/30/11 ...... United States 4,924,305 4,678,858
(h) Regal Cinemas Corp., Term Loan, 4.196%, 10/27/13 ................ United States 10,264,998 9,770,995
Tribune Co., Term Loan B, 5.542%, 5/16/14 ....................... United States 8,585,125 6,385,187
Univision Communications Inc., Initial Term Loan B,
5.113% - 5.149%, 9/29/14 ..................................... United States 13,100,000 11,065,413
UPC Financing Partnership, Term Loan N, 4.459%, 12/31/14 ........ Netherlands 9,230,000 8,702,164
--------------
82,866,798
--------------
REAL ESTATE 0.4%
(h) Capital Automotive, Term Loan B, 4.46%, 12/15/10 ................ United States 8,215,918 7,968,159
Macerich Co., Term Loan B, 4.25%, 4/25/10 ....................... United States 3,363,000 3,087,739
--------------
11,055,898
--------------
26 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
- ------------------------------------------------------------------------- -------------------- --------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
(f,g) SENIOR FLOATING RATE INTERESTS (CONTINUED)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.1%
Fairchild Semiconductor Corp., Initial Term Loan, 4.196%,
6/26/13 ....................................................... United States 2,969,195 $ 2,813,312
--------------
SOFTWARE & SERVICES 1.2%
Affiliated Computer Services Inc.,
Additional Term Loan, 4.727% - 4.863%, 3/20/13 ............... United States 6,439,543 6,223,715
Term Loan B, 4.886%, 3/20/13 ................................. United States 598,230 578,180
Dealer Computer Services Inc. (Reynolds & Reynolds), First Lien
Term Loan, 4.886%, 10/26/12 .................................. United States 6,687,281 6,403,072
(h) First Data Corp., Term Loan B-2, 5.349% - 5.446%, 9/24/14 ....... United States 18,081,328 17,036,517
(h) SunGard Data Systems Inc., New U.S. Term Loan, 4.878%, 2/28/14 .. United States 9,126,729 8,667,280
--------------
38,908,764
--------------
TECHNOLOGY HARDWARE & EQUIPMENT 0.2%
Flextronics International USA Inc.,
Term Loan A, 4.934% - 4.963%, 10/01/14 ....................... United States 5,961,810 5,549,450
Term Loan A-1, 4.963%, 10/01/14 .............................. United States 1,713,164 1,594,669
--------------
7,144,119
--------------
TELECOMMUNICATION SERVICES 1.3%
(h) Alltel Communications Inc.,
Term Loan B-1, 6.75%, 6/30/15 ................................ United States 350,000 321,271
Term Loan B-3, 5.466%, 5/18/15 ............................... United States 20,239,561 18,638,673
(h) Intelsat Subsidiary Holding Co. Ltd., Unfunded Bridge Loan,
5.00%, 1/15/13 ............................................... Bermuda 8,000,000 7,372,000
(h) Wind Telecomunicazioni SpA,
Term Loan B-2, 6.875%, 9/30/13 ............................... Italy 2,750,000 2,682,188
Term Loan C-2, 7.375%, 9/30/14 ............................... Italy 2,750,000 2,704,927
Windstream Corp., Tranche B-1, 4.22% - 5.50%, 7/17/13 ........... United States 10,726,877 10,491,272
--------------
42,210,331
--------------
UTILITIES 0.9%
Dynegy Holdings Inc.,
Term L/C Facility, 4.363%, 4/02/13 ........................... United States 5,816,489 5,491,737
Term Loan B, 4.363%, 4/02/13 ................................. United States 207,468 195,885
(h) NRG Energy Inc.,
Credit Link, 2.596%, 2/01/13 ................................. United States 2,110,136 2,029,160
Term Loan, 4.196%, 2/01/13 ................................... United States 4,320,550 4,154,749
Texas Competitive Electric Holdings Co. LLC,
Term Loan B-2, 6.478% - 6.596%, 10/10/14 ..................... United States 9,950,000 9,545,781
Term Loan B-3, 6.478% - 6.596%, 10/10/14 ..................... United States 7,780,451 7,459,025
--------------
28,876,337
--------------
TOTAL SENIOR FLOATING RATE INTERESTS (COST $528,497,385) 511,980,532
--------------
Annual Report | 27
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
- ------------------------------------------------------------------------- -------------------- --------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS 32.1%
AUTOMOBILES & COMPONENTS 0.8%
(j) Allison Transmission Inc., senior note, 144A, 11.00%, 11/01/15 .. United States 3,800,000 $ 3,752,500
Ford Motor Credit Co. LLC, senior note,
5.80%, 1/12/09 ............................................... United States 6,000,000 5,867,808
9.875%, 8/10/11 .............................................. United States 9,500,000 9,196,390
(j) TRW Automotive Inc., senior note, 144A, 7.25%, 3/15/17 .......... United States 7,500,000 7,340,625
--------------
26,157,323
--------------
BANKS 1.4%
(k) Bank of America Corp., pfd., sub. bond, M, 8.125%, Perpetual .... United States 14,000,000 14,325,220
(f) Citigroup Capital XXI, pfd., junior sub. bond, FRN, 8.30%,
12/21/77 ..................................................... United States 12,000,000 12,293,592
(j) ICICI Bank Ltd., 144A, 6.625%, 10/03/12 ......................... India 7,000,000 6,977,838
UBS AG Stamford, senior note, 5.875%, 12/20/17 .................. United States 10,000,000 10,222,470
--------------
43,819,120
--------------
CAPITAL GOODS 1.9%
Commercial Vehicle Group Inc., senior note, 8.00%, 7/01/13 ...... United States 2,600,000 2,242,500
DRS Technologies Inc., senior sub. note,
6.875%, 11/01/13 ............................................. United States 2,500,000 2,493,750
7.625%, 2/01/18 .............................................. United States 5,000,000 5,125,000
Greenbrier Cos. Inc., senior note, 8.375%, 5/15/15 .............. United States 6,000,000 5,760,000
L-3 Communications Corp., senior sub. note,
5.875%, 1/15/15 .............................................. United States 4,500,000 4,387,500
6.375%, 10/15/15 ............................................. United States 2,000,000 1,987,500
Nortek Inc., senior sub. note, 8.50%, 9/01/14 ................... United States 7,100,000 5,236,250
RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 ......... United States 8,000,000 8,040,000
RSC Equipment Rental Inc., senior note, 9.50%, 12/01/14 ......... United States 7,600,000 6,840,000
Terex Corp., senior sub. note, 8.00%, 11/15/17 .................. United States 7,500,000 7,706,250
TransDigm Inc., senior sub. note, 7.75%, 7/15/14 ................ United States 7,000,000 7,192,500
United Rentals North America Inc., senior sub. note, 7.75%,
11/15/13 ..................................................... United States 2,800,000 2,415,000
--------------
59,426,250
--------------
COMMERCIAL SERVICES & SUPPLIES 0.9%
Allied Waste North America Inc., senior secured note, 6.875%,
6/01/17 ...................................................... United States 6,500,000 6,532,500
ARAMARK Corp., senior note, 8.50%, 2/01/15 ...................... United States 7,500,000 7,856,250
(j) Ceva Group PLC, senior note, 144A, 10.00%, 9/01/14 .............. United Kingdom 7,000,000 7,245,000
JohnsonDiversey Holdings Inc., senior disc. note, 10.67%,
5/15/13 ...................................................... United States 2,000,000 2,000,000
JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 ...... United States 4,000,000 4,060,000
--------------
27,693,750
--------------
CONSUMER DURABLES & APPAREL 0.9%
D.R. Horton Inc., senior note, 6.50%, 4/15/16 ................... United States 7,500,000 6,900,000
Jarden Corp., senior sub. note, 7.50%, 5/01/17 .................. United States 8,000,000 7,400,000
Jostens IH Corp., senior sub. note, 7.625%, 10/01/12 ............ United States 7,500,000 7,500,000
28 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
- ------------------------------------------------------------------------- -------------------- --------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
CONSUMER DURABLES & APPAREL (CONTINUED)
KB Home, senior note,
6.25%, 6/15/15 ............................................... United States 3,900,000 $ 3,529,500
7.25%, 6/15/18 ............................................... United States 3,100,000 2,883,000
--------------
28,212,500
--------------
CONSUMER SERVICES 1.2%
(j) Fontainebleau Las Vegas, 144A, 10.25%, 6/15/15 .................. United States 6,500,000 4,696,250
Harrah's Operating Co. Inc., senior note, 6.50%, 6/01/16 ........ United States 3,300,000 1,930,500
MGM MIRAGE, senior note,
6.625%, 7/15/15 .............................................. United States 10,000,000 8,775,000
7.50%, 6/01/16 ............................................... United States 1,000,000 910,000
(j) Outback Steakhouse Inc., senior note, 144A, 10.00%, 6/15/15 ..... United States 5,000,000 3,800,000
Pinnacle Entertainment Inc., senior sub. note,
8.25%, 3/15/12 ............................................... United States 600,000 600,000
8.75%, 10/01/13 .............................................. United States 4,200,000 4,284,000
Royal Caribbean Cruises Ltd., senior deb., 7.25%, 3/15/18 ....... United States 8,000,000 7,280,000
Station Casinos Inc.,
senior note, 6.00%, 4/01/12 .................................. United States 1,200,000 1,018,500
senior sub. note, 6.50%, 2/01/14 ............................. United States 1,000,000 660,000
senior sub. note, 6.875%, 3/01/16 ............................ United States 6,800,000 4,403,000
--------------
38,357,250
--------------
DIVERSIFIED FINANCIALS 3.7%
American Express Co., senior note, 7.00%, 3/19/18 ............... United States 8,000,000 8,627,040
(j) Capmark Financial Group Inc., senior note, 144A, 6.30%,
5/10/17 ...................................................... United States 5,000,000 3,645,860
CIT Group Funding Co. of Canada, senior note, 4.65%,
7/01/10 ...................................................... United States 3,400,000 2,940,194
CIT Group Inc., senior note, 7.625%, 11/30/12 ................... United States 4,500,000 4,203,077
General Electric Capital Corp., senior note, A, 8.50%, 4/06/18 .. United States 170,000,000 MXN 16,062,619
GMAC LLC,
7.25%, 3/02/11 ............................................... United States 4,500,000 3,817,827
6.875%, 9/15/11 .............................................. United States 7,000,000 5,836,579
6.875%, 8/28/12 .............................................. United States 4,000,000 3,177,252
The Goldman Sachs Group Inc., sub. note, 6.75%, 10/01/37 ........ United States 12,500,000 12,302,775
JPMorgan Chase Capital XXII, sub. bond, 6.45%, 2/02/37 .......... United States 14,000,000 12,591,628
Lehman Brothers Holdings Inc., sub. note, 6.50%, 7/19/17 ........ United States 14,000,000 13,785,758
Merrill Lynch & Co. Inc.,
5.45%, 2/05/13 ............................................... United States 2,000,000 1,948,692
6.875%, 4/25/18 .............................................. United States 1,000,000 1,010,688
senior note, 6.40%, 8/28/17 .................................. United States 12,000,000 12,016,500
Morgan Stanley,
senior note, 6.625%, 4/01/18 ................................. United States 2,000,000 2,078,906
sub. note, 4.75%, 4/01/14 .................................... United States 12,000,000 11,280,552
Residential Capital LLC, senior note, 6.50%, 6/01/12 ............ United States 6,500,000 3,347,500
--------------
118,673,447
--------------
Annual Report | 29
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
- ------------------------------------------------------------------------- -------------------- --------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
ENERGY 3.0%
Canadian Natural Resources Ltd., 5.90%, 2/01/18.................. Canada 7,500,000 $ 7,641,577
Chesapeake Energy Corp., senior note,
7.625%, 7/15/13............................................... United States 1,500,000 1,578,750
6.625%, 1/15/16............................................... United States 3,500,000 3,517,500
6.25%, 1/15/18................................................ United States 6,000,000 5,880,000
Compagnie Generale de Geophysique-Veritas, senior note,
7.50%, 5/15/15................................................ France 5,700,000 5,913,750
7.75%, 5/15/17................................................ France 1,800,000 1,867,500
Copano Energy LLC, senior note, 8.125%, 3/01/16.................. United States 7,000,000 7,315,000
El Paso Corp., senior note, 6.875%, 6/15/14...................... United States 7,500,000 7,817,310
Mariner Energy Inc., senior note, 7.50%, 4/15/13................. United States 7,500,000 7,443,750
Markwest Energy Partners LP, senior note,
6.875%, 11/01/14.......................................... United States 7,000,000 6,790,000
(j) 144A, 8.75%, 4/15/18...................................... United States 800,000 834,000
Peabody Energy Corp., senior note,
7.375%, 11/01/16.............................................. United States 3,500,000 3,692,500
B, 6.875%, 3/15/13............................................ United States 3,600,000 3,690,000
(j) Petroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14........ Switzerland 7,500,000 7,106,250
Tesoro Corp., senior note,
6.25%, 11/01/12............................................... United States 500,000 480,000
6.50%, 6/01/17................................................ United States 8,000,000 7,380,000
Weatherford International Ltd., senior note, 6.00%, 3/15/18...... United States 8,000,000 8,236,512
The Williams Cos. Inc., senior note,
7.625%, 7/15/19............................................... United States 3,000,000 3,255,000
7.875%, 9/01/21............................................... United States 3,400,000 3,731,500
8.75%, 3/15/32................................................ United States 1,300,000 1,543,750
--------------
95,714,649
--------------
FOOD & STAPLES RETAILING 0.3%
The Kroger Co., 6.15%, 1/15/20................................... United States 7,500,000 7,833,360
--------------
FOOD, BEVERAGE & TOBACCO 0.9%
(j) Cargill Inc., 144A,
5.20%, 1/22/13................................................ United States 500,000 499,856
6.00%, 11/27/17............................................... United States 7,000,000 6,987,085
Dean Foods Inc., senior note, 7.00%, 6/01/16..................... United States 5,100,000 4,794,000
Dole Food Co. Inc., senior note,
8.625%, 5/01/09............................................... United States 200,000 194,500
7.25%, 6/15/10................................................ United States 200,000 180,000
Reynolds American Inc., senior secured note, 7.625%, 6/01/16..... United States 8,500,000 9,053,665
Smithfield Foods Inc., senior note, 7.75%,
5/15/13....................................................... United States 4,200,000 4,231,500
7/01/17....................................................... United States 3,800,000 3,790,500
--------------
29,731,106
--------------
30 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
- ------------------------------------------------------------------------- -------------------- --------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
HEALTH CARE EQUIPMENT & SERVICES 2.4%
Coventry Health Care Inc., senior note,
6.30%, 8/15/14 ............................................... United States 4,700,000 $ 4,595,533
5.95%, 3/15/17 ............................................... United States 2,800,000 2,569,033
DaVita Inc., senior sub. note, 7.25%, 3/15/15 United States 8,000,000 8,060,000
FMC Finance III SA, senior note, 6.875%, 7/15/17 ................ Germany 7,500,000 7,593,750
HCA Inc.,
senior note, 6.50%, 2/15/16 .................................. United States 3,000,000 2,700,000
senior secured note, 9.125%, 11/15/14 ........................ United States 10,000,000 10,625,000
Medco Health Solutions Inc., 7.125%, 3/15/18 .................... United States 6,000,000 6,311,664
Quest Diagnostics Inc., 6.40%, 7/01/17 .......................... United States 6,900,000 7,006,626
Tenet Healthcare Corp., senior note,
6.375%, 12/01/11 ............................................. United States 5,000,000 4,725,000
9.875%, 7/01/14 .............................................. United States 2,500,000 2,568,750
(f,l) U.S. Oncology Holdings Inc., senior note, FRN, PIK, 7.949%,
3/15/12 ...................................................... United States 7,902,000 6,400,620
(l) United Surgical Partners International Inc., senior sub.
note, PIK, 9.25%, 5/01/17 .................................... United States 6,650,000 6,467,125
Vanguard Health Holding Co. II LLC, senior sub. note, 9.00%,
10/01/14 ..................................................... United States 7,000,000 7,157,500
--------------
76,780,601
--------------
INSURANCE 0.3%
(f,j) MetLife Capital Trust X, secured bond, 144A, FRN, 9.25%,
4/08/68 ...................................................... United States 1,900,000 2,149,195
(f) MetLife Inc., junior sub. note, FRN, 6.40%, 12/15/66 ............ United States 8,000,000 7,227,800
--------------
9,376,995
--------------
MATERIALS 2.5%
Crown Americas Inc., senior note, 7.75%, 11/15/15 ............... United States 7,500,000 7,950,000
Freeport-McMoRan Copper & Gold Inc., senior note, 8.375%,
4/01/17 ...................................................... United States 7,500,000 8,306,250
Huntsman International LLC, senior sub. note, 7.875%, 11/15/14 .. United States 6,000,000 6,360,000
(j) Ineos Group Holdings PLC, 144A, 8.50%, 2/15/16 .................. United Kingdom 8,000,000 6,520,000
(j) MacDermid Inc., senior sub. note, 144A, 9.50%, 4/15/17 .......... United States 7,000,000 6,720,000
Nalco Co., senior sub. note, 8.875%, 11/15/13 ................... United States 7,500,000 7,931,250
(j) NewPage Corp., senior secured note, 144A, 10.00%, 5/01/12 ....... United States 7,500,000 8,043,750
Novelis Inc., senior note, 7.25%, 2/15/15 ....................... Canada 8,000,000 7,360,000
Owens-Brockway Glass Container Inc., senior note, 6.75%,
12/01/14 ..................................................... United States 7,000,000 7,140,000
RPM International Inc., 6.50%, 2/15/18 .......................... United States 7,500,000 7,485,757
Smurfit Kappa Funding PLC, senior sub. note, 7.75%, 4/01/15 ..... Ireland 7,500,000 6,843,750
--------------
80,660,757
--------------
Annual Report | 31
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
- ------------------------------------------------------------------------- -------------------- --------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
MEDIA 3.9%
(j) British Sky Broadcasting Group PLC, senior note, 144A, 6.10%,
2/15/18 ...................................................... United Kingdom 8,000,000 $ 8,161,984
Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 ....... United States 400,000 400,000
CanWest Media Inc., senior sub. note, 8.00%, 9/15/12 ............ Canada 7,500,000 7,218,750
CCH I LLC, senior secured note, 11.00%, 10/01/15 ................ United States 4,000,000 3,130,000
CCH II LLC, senior note, 10.25%, 9/15/10 ........................ United States 9,000,000 8,707,500
Comcast Corp., senior note, 6.30%, 11/15/17 ..................... United States 7,500,000 7,813,725
CSC Holdings Inc.,
senior deb., 7.625%, 7/15/18 ................................. United States 6,500,000 6,353,750
senior note, 6.75%, 4/15/12 .................................. United States 600,000 591,000
Dex Media Finance/West, senior sub. note, 9.875%, 8/15/13 ....... United States 4,000,000 3,780,000
Dish Network Corp., senior note,
6.375%, 10/01/11 ............................................. United States 5,500,000 5,486,250
7.125%, 2/01/16 .............................................. United States 500,000 493,750
Idearc Inc., senior note, 8.00%, 11/15/16 ....................... United States 9,000,000 5,895,000
Lamar Media Corp., senior sub. note,
7.25%, 1/01/13 ............................................... United States 6,500,000 6,467,500
6.625%, 8/15/15 .............................................. United States 1,500,000 1,421,250
Liberty Media Corp., senior note, 5.70%, 5/15/13 ................ United States 8,000,000 7,204,168
LIN Television Corp., senior sub. note, 6.50%, 5/15/13 .......... United States 6,000,000 5,805,000
Quebecor Media Inc.,
7.75%, 3/15/16 ............................................... Canada 1,000,000 967,500
senior note, 7.75%, 3/15/16 .................................. Canada 7,000,000 6,772,500
R.H. Donnelley Corp.,
senior discount note, A-1, 6.875%, 1/15/13 ............... United States 100,000 64,500
senior discount note, A-2, 6.875%, 1/15/13 ............... United States 200,000 129,000
senior note, A-3, 8.875%, 1/15/16 ........................ United States 7,500,000 4,809,375
(j) senior note, 144A, 8.875%, 10/15/17 ...................... United States 200,000 130,000
Radio One Inc., senior sub. note, 6.375%, 2/15/13 ............... United States 6,500,000 4,956,250
(j) Rainbow National Services LLC, senior sub. deb., 144A,
10.375%, 9/01/14 ............................................. United States 3,000,000 3,240,000
Time Warner Inc., 5.875%, 11/15/16 .............................. United States 9,000,000 8,794,359
(j,l) Univision Communications Inc., senior note, 144A, PIK, 9.75%,
3/15/15 ...................................................... United States 8,500,000 6,162,500
Viacom Inc., senior note, 6.875%, 4/30/36 ....................... United States 8,000,000 8,044,536
--------------
123,000,147
--------------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.2%
Schering-Plough Corp., senior note, 6.00%, 9/15/17 .............. United States 6,000,000 6,074,862
--------------
REAL ESTATE 0.6%
Forest City Enterprises Inc., senior note, 7.625%, 6/01/15 ...... United States 5,000,000 4,675,000
Host Hotels & Resorts LP, senior note, 6.875%, 11/01/14 ......... United States 1,000,000 990,000
Host Marriott LP, senior note,
K, 7.125%, 11/01/13 .......................................... United States 6,000,000 6,007,500
M, 7.00%, 8/15/12 ............................................ United States 2,000,000 2,007,500
(i) Star Financial Inc., senior note, 5.65%, 9/15/11 ................ United States 7,500,000 6,529,793
--------------
20,209,793
--------------
32 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
- ------------------------------------------------------------------------- -------------------- --------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
RETAILING 0.5%
Dollar General Corp., senior note, 10.625%, 7/15/15 ............. United States 7,500,000 $ 7,500,000
Michaels Stores Inc., senior note, 10.00%, 11/01/14 ............. United States 8,000,000 7,800,000
--------------
15,300,000
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.2%
Freescale Semiconductor Inc., senior note, 8.875%,
12/15/14 ..................................................... United States 7,000,000 6,195,000
SOFTWARE & SERVICES 0.7%
Iron Mountain Inc., senior sub. note, 8.75%, 7/15/18 ............ United States 7,300,000 7,811,000
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13 ................................. United States 5,000,000 5,250,000
senior sub. note, 10.25%, 8/15/15 ............................ United States 7,000,000 7,472,500
--------------
20,533,500
--------------
TECHNOLOGY HARDWARE & EQUIPMENT 0.3%
Celestica Inc., senior sub. note, 7.625%, 7/01/13 ............... Canada 1,400,000 1,379,000
Sanmina-SCI Corp.,
(f,j) senior note, 144A, FRN, 5.55%, 6/15/14 ................. United States 2,000,000 1,855,000
senior sub. note, 6.75%, 3/01/13 ....................... United States 4,300,000 3,913,000
senior sub. note, 8.125%, 3/01/16 ...................... United States 1,700,000 1,572,500
--------------
8,719,500
--------------
TELECOMMUNICATION SERVICES 2.9%
(j) American Tower Corp., senior note, 144A, 7.00%, 10/15/17 ........ United States 7,500,000 7,612,500
(j) Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 .......... Jamaica 8,000,000 6,880,000
Embarq Corp., senior note, 7.082%, 6/01/16 ...................... United States 7,500,000 7,457,700
Inmarsat Finance II PLC, senior note, zero cpn. to 11/15/08,
10.375% thereafter, 11/15/12 ................................. United Kingdom 7,500,000 7,434,375
Intelsat Intermediate, senior note, zero cpn. to 2/01/10,
9.25% thereafter, 2/01/15 .................................... Bermuda 2,000,000 1,720,000
Intelsat Subsidiary Holding Co. Ltd., senior note, 8.25%,
1/15/13 ...................................................... Bermuda 7,000,000 7,096,250
MetroPCS Wireless Inc., senior note, 9.25%, 11/01/14 ............ United States 8,000,000 7,900,000
Millicom International Cellular SA, senior note, 10.00%,
12/01/13 ..................................................... Luxembourg 6,500,000 6,971,250
Qwest Communications International Inc., senior note, 7.50%,
2/15/14 ...................................................... United States 7,500,000 7,406,250
Telecom Italia Capital, senior note, 4.95%, 9/30/14 ............. Italy 8,000,000 7,439,440
Verizon Communications Inc., 6.10%, 4/15/18 ..................... United States 4,000,000 4,205,576
Verizon New York Inc., senior deb.,
A, 6.875%, 4/01/12 ........................................... United States 5,000,000 5,272,955
B, 7.375%, 4/01/32 ........................................... United States 1,500,000 1,601,052
(j) Wind Acquisition Finance SA, senior note, 144A, 10.75%,
12/01/15 ..................................................... Italy 7,500,000 8,118,750
Windstream Corp., senior note, 8.625%, 8/01/16 .................. United States 6,000,000 6,315,000
--------------
93,431,098
--------------
Annual Report | 33
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
- ------------------------------------------------------------------------- -------------------- --------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
UTILITIES 2.6%
AES Corp., senior note, 8.00%, 10/15/17 ......................... United States 8,000,000 $ 8,380,000
Aquila Inc., senior note, 9.95%, 2/01/11 ........................ United States 7,000,000 7,292,460
CenterPoint Energy Inc., senior note, 6.125%, 11/01/17 .......... United States 7,500,000 7,570,252
Dynegy Holdings Inc., senior note, 8.375%, 5/01/16 .............. United States 7,500,000 7,856,250
(j) E.ON International Finance BV, 144A, 5.80%, 4/30/18 ............. Germany 8,000,000 8,057,880
Edison Mission Energy, senior note, 7.00%, 5/15/17 .............. United States 7,500,000 7,612,500
(j) Intergen NV, senior secured note, 144A, 9.00%, 6/30/17 .......... Netherlands 6,500,000 6,825,000
Mirant North America LLC, senior note, 7.375%, 12/31/13 ......... United States 8,000,000 8,340,000
NRG Energy Inc., senior note,
7.25%, 2/01/14 ............................................... United States 1,500,000 1,545,000
7.375%, 2/01/16 .............................................. United States 6,000,000 6,195,000
7.375%, 1/15/17 .............................................. United States 2,500,000 2,581,250
(j) Texas Competitive Electric Holdings Co. LLC, senior note, 144A,
10.25%, 11/01/15 ............................................. United States 11,000,000 11,522,500
--------------
83,778,092
--------------
TOTAL CORPORATE BONDS(COST $1,041,937,282) ...................... 1,019,679,100
--------------
CONVERTIBLE BONDS 1.1%
DIVERSIFIED FINANCIALS 0.2%
Merrill Lynch & Co. Inc., cvt., senior note, zero cpn., 3/13/32.. United States 7,000,000 7,968,940
--------------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.3%
Amgen Inc., cvt., senior note, 0.375%, 2/01/13 .................. United States 9,500,000 8,100,517
--------------
REAL ESTATE 0.4%
CapitalSource Inc., cvt., senior sub. note, 4.00%, 7/15/34 ...... United States 8,000,000 6,908,800
(f) iStar Financial Inc., cvt., senior note, FRN, 3.198%,
10/01/12 ..................................................... United States 7,000,000 5,621,000
--------------
12,529,800
--------------
RETAILING 0.2%
Best Buy Co. Inc., cvt., sub. deb., 2.25%, 1/15/22 .............. United States 6,500,000 7,125,625
--------------
TOTAL CONVERTIBLE BONDS (COST $39,901,382) ...................... 35,724,882
--------------
ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED
SECURITIES 5.2%
BANKS 1.2%
(f) Banc of America Commercial Mortgage Inc., 2005-6, A4, FRN,
5.18%, 9/10/47 ............................................... United States 8,000,000 7,947,786
(f) Citigroup/Deutsche Bank Commercial Mortgage Trust,
2005-CD1, A4, FRN, 5.40%, 7/15/44 ............................ United States 5,440,000 5,420,857
2006-CD3, A5, FRN, 5.617%, 10/15/48 .......................... United States 22,000,000 21,880,982
(f) LB-UBS Commercial Mortgage Trust, 2002-C2, A4, FRN,
5.594%, 6/15/31 .............................................. United States 5,000,000 5,107,678
--------------
40,357,303
--------------
34 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
- ------------------------------------------------------------------------- -------------------- --------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED
SECURITIES (CONTINUED)
DIVERSIFIED FINANCIALS 4.0%
(f) Chase Credit Card Master Trust, 2003-6, A, FRN, 2.826%,
2/15/11 ...................................................... United States 10,000,000 $ 9,980,884
(f) Chase Issuance Trust,
2005-A9, A9, FRN, 2.736%, 11/15/11 ........................... United States 2,000,000 1,979,110
2007-A9, A9, FRN, 2.746%, 6/16/14 ............................ United States 12,000,000 11,448,874
sub. note, 2006-A7, A, FRN, 2.726%, 2/15/13 .................. United States 4,000,000 3,889,409
Countrywide Asset-Backed Certificates,
2004-7, AF4, 4.774%, 8/25/32 ................................. United States 225,276 220,717
2005-11, AF4, 5.21%, 3/25/34 ................................. United States 2,800,000 2,446,550
GE Capital Commercial Mortgage Corp., 2003-C1, A4, 4.819%,
1/10/38 ...................................................... United States 1,827,831 1,823,999
Greenwich Capital Commercial Funding Corp.,
2004-GG1, A7, 5.317%, 6/10/36 ............................ United States 10,714,000 10,896,963
2005-GG5, A5, 5.224%, 4/10/37 ............................ United States 9,280,000 9,208,781
(f) 2006-GG7, A4, FRN, 5.913%, 7/10/38 ....................... United States 12,000,000 12,244,870
GS Mortgage Securities Corp. II,
2003-C1, A3, 4.608%, 1/10/40 ............................. United States 3,965,000 3,847,118
(f) 2006-GG6, A4, FRN, 5.553%, 4/10/38 ....................... United States 10,000,000 9,960,901
JPMorgan Chase Commercial Mortgage Securities Corp.,
(f) 2004-CB9, A4, FRN, 5.373%, 6/12/41 ....................... United States 8,871,306 9,037,088
2004-LN2, A2, 5.115%, 7/15/41 ............................ United States 807,292 802,212
(f) 2005-LDP5, A4, FRN, 5.179%, 12/15/44 ..................... United States 11,700,000 11,647,114
(j) Keystone Owner Trust, 1997-P3, M2, 144A, 7.98%,
12/25/24 ..................................................... United States 29,452 29,235
(f) MBNA Credit Card Master Note Trust, 2005-A4, A4, FRN,
2.756%, 11/15/12 ............................................. United States 6,000,000 5,881,609
(f) MBNA Master Credit Card Trust, 1997-B, A, FRN, 2.876%,
8/15/14 ...................................................... United States 15,000,000 14,425,990
(f) Morgan Stanley Capital I, 2004-IQ7, A4, FRN, 5.431%,
6/15/38 ...................................................... United States 7,000,000 7,070,489
Residential Asset Securities Corp., 2004-KS1, AI4, 4.213%,
4/25/32 ...................................................... United States 340,852 337,894
--------------
127,179,807
--------------
TOTAL ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES (COST $169,489,631) ............... 167,537,110
--------------
MORTGAGE-BACKED SECURITIES 11.4%
(f) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 0.0% (a)
FHLMC, 6.058%, 1/01/33 .......................................... United States 352,391 354,866
--------------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 3.9%
FHLMC Gold 15 Year, 4.50%, 10/01/18 - 9/01/19 ................... United States 6,159,742 6,114,538
FHLMC Gold 15 Year, 5.00%, 12/01/17 - 7/01/22 ................... United States 13,657,717 13,773,792
FHLMC Gold 15 Year, 5.50%, 7/01/17 - 2/01/19 .................... United States 1,194,102 1,222,066
FHLMC Gold 15 Year, 6.50%, 4/01/11 .............................. United States 619 641
Annual Report | 35
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
- ------------------------------------------------------------------------- -------------------- --------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
MORTGAGE-BACKED SECURITIES (CONTINUED)
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE (CONTINUED)
FHLMC Gold 15 Year, 7.00%, 1/01/09 - 9/01/11 .................... United States 862 $ 897
FHLMC Gold 30 Year, 5.00%, 3/01/34 - 6/01/37 .................... United States 20,067,723 19,757,380
FHLMC Gold 30 Year, 5.50%, 6/01/33 - 3/01/38 .................... United States 42,614,427 42,949,016
FHLMC Gold 30 Year, 6.00%, 6/01/33 - 6/01/37 .................... United States 31,134,173 31,901,949
FHLMC Gold 30 Year, 6.50%, 10/01/21 - 11/01/37 .................. United States 8,626,823 8,950,026
FHLMC Gold 30 Year, 7.00%, 9/01/21 - 8/01/32 .................... United States 244,605 260,246
FHLMC Gold 30 Year, 7.50%, 4/01/24 - 1/01/31 .................... United States 43,821 47,314
FHLMC Gold 30 Year, 8.00%, 11/01/25 - 1/01/26 ................... United States 825 894
FHLMC Gold 30 Year, 9.00%, 12/01/24 ............................. United States 458 510
--------------
124,979,269
--------------
(f) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 0.1%
FNMA, 4.515%, 4/01/20 ........................................... United States 349,949 355,686
FNMA, 4.60%, 12/01/34 ........................................... United States 1,735,091 1,744,268
--------------
2,099,954
--------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 7.0%
FNMA 15 Year, 4.50%, 3/01/20 .................................... United States 1,370,625 1,358,444
FNMA 15 Year, 5.00%, 1/01/18 - 6/01/18 .......................... United States 1,826,596 1,847,001
FNMA 15 Year, 5.50%, 3/01/14 - 4/01/21 .......................... United States 6,528,233 6,660,003
FNMA 15 Year, 6.00%, 4/01/13 - 10/01/16 ......................... United States 238,963 246,906
FNMA 15 Year, 6.50%, 2/01/09 - 6/01/13 .......................... United States 23,608 24,552
FNMA 15 Year, 7.50%, 10/01/14 ................................... United States 16,743 17,537
FNMA 30 Year, 5.00%, 4/01/34 - 6/01/37 .......................... United States 34,607,536 34,039,538
(h) FNMA 30 Year, 5.00%, 5/15/37 .................................... United States 5,000,000 4,911,720
FNMA 30 Year, 5.50%, 9/01/33 - 7/01/37 .......................... United States 59,860,396 60,297,181
(h) FNMA 30 Year, 5.50%, 5/15/37 .................................... United States 15,000,000 15,082,035
FNMA 30 Year, 6.00%, 6/01/34 - 7/01/37 .......................... United States 58,042,830 59,443,440
(h) FNMA 30 Year, 6.00%, 5/15/38 .................................... United States 15,000,000 15,335,160
FNMA 30 Year, 6.50%, 1/01/24 - 7/01/37 .......................... United States 12,149,110 12,597,608
(h) FNMA 30 Year, 6.50%, 5/15/37 .................................... United States 11,000,000 11,383,284
FNMA 30 Year, 7.50%, 12/01/28 - 10/01/29 ........................ United States 40,290 43,505
FNMA 30 Year, 8.00%, 1/01/25 - 6/01/26 .......................... United States 19,950 21,710
FNMA 30 Year, 8.50%, 7/01/25 .................................... United States 745 818
--------------
223,310,442
--------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 0.4%
GNMA I SF 15 Year, 7.00%, 7/15/08 ............................... United States 3,088 3,124
GNMA I SF 30 Year, 5.00%, 6/15/34 - 7/15/34 ..................... United States 1,442,644 1,432,592
GNMA I SF 30 Year, 5.50%, 2/15/33 - 6/15/36 ..................... United States 4,577,862 4,650,921
GNMA I SF 30 Year, 6.00%, 8/15/36 ............................... United States 825,395 849,635
GNMA I SF 30 Year, 6.50%, 3/15/24 - 3/15/32 ..................... United States 314,617 328,629
GNMA I SF 30 Year, 7.00%, 11/15/27 - 5/15/28 .................... United States 54,835 58,834
GNMA I SF 30 Year, 7.50%, 9/15/23 - 5/15/27 ..................... United States 21,728 23,408
GNMA I SF 30 Year, 8.00%, 2/15/25 - 9/15/27 ..................... United States 18,101 19,821
GNMA I SF 30 Year, 8.50%, 8/15/24 ............................... United States 139 154
GNMA I SF 30 Year, 9.00%, 1/15/25 ............................... United States 852 938
GNMA I SF 30 Year, 9.50%, 6/15/25 ............................... United States 724 814
36 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
- ------------------------------------------------------------------------- -------------------- --------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
MORTGAGE-BACKED SECURITIES (CONTINUED)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE
(CONTINUED)
GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33 ................... United States 2,019,793 $ 1,997,825
GNMA II SF 30 Year, 5.50%, 6/20/34 .............................. United States 1,074,838 1,089,869
GNMA II SF 30 Year, 6.00%, 11/20/34 ............................. United States 966,357 994,723
GNMA II SF 30 Year, 6.50%, 7/20/28 - 12/20/31 ................... United States 419,350 437,737
GNMA II SF 30 Year, 7.50%, 8/20/16 - 4/20/32 .................... United States 243,916 260,636
--------------
12,149,660
--------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $357,004,203) ............ 362,894,191
--------------
U.S. GOVERNMENT AND AGENCY SECURITIES 4.7%
FHLMC,
5.125%, 10/18/16 ............................................. United States 9,000,000 9,576,405
6.00%, 6/15/11 ............................................... United States 4,900,000 5,300,188
6.625%, 9/15/09 .............................................. United States 7,000,000 7,354,193
FNMA, 7.125%, 1/15/30 United States 1,300,000 1,678,587
U.S. Treasury Bond,
4.50%, 5/15/17 ............................................... United States 5,000,000 5,300,395
6.25%, 8/15/23 ............................................... United States 6,800,000 8,205,159
6.88%, 8/15/25 ............................................... United States 1,000,000 1,290,000
7.125%, 2/15/23 .............................................. United States 10,200,000 13,249,647
U.S. Treasury Note,
3.375%, 10/15/09 ............................................. United States 500,000 509,102
3.50%, 12/15/09 .............................................. United States 4,500,000 4,593,519
4.00%, 4/15/10 ............................................... United States 1,100,000 1,137,126
4.00%, 11/15/12 .............................................. United States 1,850,000 1,938,887
4.125%, 8/15/10 .............................................. United States 2,900,000 3,018,042
4.25%, 8/15/13 ............................................... United States 1,000,000 1,057,891
4.25%, 11/15/14 .............................................. United States 700,000 741,070
4.375%, 8/15/12 .............................................. United States 2,600,000 2,764,128
4.50%, 9/30/11 ............................................... United States 2,500,000 2,654,690
4.50%, 3/31/12 ............................................... United States 14,000,000 14,873,908
4.625%, 12/31/11 ............................................. United States 8,000,000 8,540,632
4.625%, 11/15/16 ............................................. United States 6,700,000 7,182,092
4.625%, 2/15/17 .............................................. United States 23,000,000 24,618,993
5.00%, 8/15/11 ............................................... United States 2,100,000 2,262,916
5.625%, 5/15/08 .............................................. United States 3,000,000 3,005,391
(m) Index Linked, 1.625%, 1/15/15 ............................... United States 3,325,655 3,431,663
(m) Index Linked, 2.00%, 1/15/14 ................................ United States 10,310,169 10,887,703
(m) Index Linked, 2.50%, 7/15/16 ................................ United States 4,192,540 4,582,975
--------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $142,403,711).. 149,755,302
--------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 21.4%
European Investment Bank,
4.50%, 5/15/13 .............................................. Supranational(n) 38,100,000 NOK 7,259,250
(f) senior note, FRN, 0.751%, 9/21/11 ........................... Supranational(n) 2,700,000,000 JPY 25,961,113
(f,o) Government of Argentina, senior bond, FRN, 3.092%, 8/03/12 ...... Argentina 70,878,000 37,709,154
Annual Report | 37
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
- ------------------------------------------------------------------------- -------------------- --------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED)
Government of Canada,
4.25%, 12/01/08 .............................................. Canada 26,980,000 CAD $ 27,050,878
5.25%, 6/01/12 ............................................... Canada 250,000 CAD 268,933
6.00%, 6/01/11 ............................................... Canada 593,000 CAD 641,518
Government of Indonesia,
10.00%, 7/15/17 .............................................. Indonesia 10,200,000,000 IDR 940,621
10.25%, 7/15/27 .............................................. Indonesia 86,000,000,000 IDR 7,507,052
11.00%, 10/15/14 ............................................ Indonesia 4,500,000,000 IDR 452,891
11.75%, 8/15/23 .............................................. Indonesia 29,150,000,000 IDR 2,868,535
12.80%, 6/15/21 .............................................. Indonesia 40,130,000,000 IDR 4,259,085
13.15%, 3/15/10 .............................................. Indonesia 7,125,000,000 IDR 794,312
13.15%, 1/15/12 .............................................. Indonesia 17,300,000,000 IDR 1,935,849
14.25%, 6/15/13 .............................................. Indonesia 63,035,000,000 IDR 7,282,799
14.275%, 12/15/13 ............................................ Indonesia 28,415,000,000 IDR 3,289,769
FR47, 10.00%, 2/15/28 ........................................ Indonesia 28,000,000,000 IDR 2,317,910
(p) Government of Iraq, Reg S, 5.80%, 1/15/28 ....................... Iraq 14,000,000 9,623,040
Government of Malaysia,
3.461%, 7/31/13 .............................................. Malaysia 16,100,000 MYR 5,061,633
3.756%, 4/28/11 .............................................. Malaysia 53,580,000 MYR 17,111,432
3.814%, 2/15/17 .............................................. Malaysia 31,190,000 MYR 9,841,689
3.833%, 9/28/11 .............................................. Malaysia 6,150,000 MYR 1,969,297
4.24%, 2/07/18 ............................................... Malaysia 64,800,000 MYR 21,062,256
4.305%, 2/27/09 .............................................. Malaysia 53,510,000 MYR 17,072,485
6.45%, 7/01/08 ............................................... Malaysia 16,188,000 MYR 5,150,695
7.00%, 3/15/09 ............................................... Malaysia 4,760,000 MYR 1,553,973
Government of Mexico,
8.00%, 12/17/15 .............................................. Mexico 725,000(q) MXN 6,937,743
10.00%, 12/05/24 ............................................. Mexico 3,355,000(q) MXN 38,019,335
Government of New Zealand, 6.50%, 4/15/13 ....................... New Zealand 7,590,000 NZD 5,883,210
Government of Norway,
5.50%, 5/15/09 ............................................... Norway 112,330,000 NOK 22,107,193
6.00%, 5/16/11 ............................................... Norway 105,850,000 NOK 21,524,580
Government of Poland,
5.75%, 9/23/22 ............................................... Poland 38,800,000 PLN 17,222,692
6.00%, 5/24/09 ............................................... Poland 64,850,000 PLN 29,264,749
6.25%, 10/24/15 .............................................. Poland 17,100,000 PLN 7,848,377
Government of Singapore,
2.375%, 10/01/09 ............................................. Singapore 7,470,000 SGD 5,612,740
4.375%, 1/15/09 .............................................. Singapore 19,290,000 SGD 14,561,063
5.625%, 7/01/08 .............................................. Singapore 12,660,000 SGD 9,407,924
Government of Sweden,
5.00%, 1/28/09 ............................................... Sweden 273,650,000 SEK 45,970,110
5.50%, 10/08/12 .............................................. Sweden 24,960,000 SEK 4,416,293
6.50%, 5/05/08 ............................................... Sweden 236,350,000 SEK 39,477,530
(r) Strip, 9/17/08 .............................................. Sweden 21,000,000 SEK 3,455,032
(f) KfW Bankengruppe, FRN, 0.658%, 8/08/11 .......................... Germany 7,875,000,000 JPY 75,672,675
38 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(E) VALUE
- ------------------------------------------------------------------------- -------------------- --------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED)
Korea Treasury Bond,
5.25%, 9/10/12 ............................................... South Korea 14,100,000,000 KRW $ 14,230,438
5.25%, 3/10/27 ............................................... South Korea 13,696,000,000 KRW 13,836,236
5.50%, 9/10/17 ............................................... South Korea 14,000,000,000 KRW 14,357,127
Korea Treasury Note, 4.75%, 6/10/09 South Korea 13,200,000,000 KRW 13,130,845
New South Wales Treasury Corp., 6.00%, 5/01/12 .................. Australia 5,820,000 AUD 5,296,253
Nota Do Tesouro Nacional,
9.762%, 1/01/14 .............................................. Brazil 5,200(s) BRL 2,702,168
9.762%, 1/01/17 .............................................. Brazil 60,650(s) BRL 30,234,078
(t) Index Linked, 6.00%, 5/15/15 ................................. Brazil 4,000(s) BRL 3,761,524
(t) Index Linked, 6.00%, 5/15/45 ................................. Brazil 3,570(s) BRL 3,282,879
Queensland Treasury Corp., 6.00%, 7/14/09 ....................... Australia 14,250,000 AUD 13,284,274
--------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $637,728,863) .......................................... 680,483,237
--------------
MUNICIPAL BONDS 1.9%
California State GO,
Refunding, 5.00%, 4/01/38 .................................... United States 43,000,000 42,799,620
Various Purpose, Refunding, 5.25%, 3/01/38 ................... United States 17,900,000 18,340,519
--------------
TOTAL MUNICIPAL BONDS (COST $60,881,362) ........................ 61,140,139
--------------
TOTAL LONG TERM INVESTMENTS (COST $3,048,768,655) ............... 3,050,208,927
--------------
SHORT TERM INVESTMENTS 4.8%
FOREIGN GOVERNMENT AND AGENCY SECURITIES 1.6%
(r) Egypt Treasury Bills, 7/01/08 - 3/03/09 ......................... Egypt 169,600,000 EGP 30,534,740
Government of Canada, 6.00%, 6/01/08 ............................ Canada 3,000,000 CAD 2,986,706
Government of Malaysia, 3.562%, 7/15/08 ......................... Malaysia 34,075,000 MYR 10,791,290
(r) Government of Sweden, Strip, 6/18/08 ............................ Sweden 21,000,000 SEK 3,490,477
(r) Norway Treasury Bills, 6/18/08 - 9/17/08 ........................ Norway 6,400,000 NOK 1,235,532
--------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $46,459,454) ........................................... 49,038,745
--------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUND
(COST $3,095,228,109) ........................................ 3,099,247,672
--------------
Shares
---------------------
MONEY MARKET FUND (COST $102,810,662) 3.2%
(u) Franklin Institutional Fiduciary Trust Money Market
Portfolio, 2.29% ............................................. United States 102,810,662 102,810,662
--------------
TOTAL INVESTMENTS (COST $3,198,038,771) 100.6% .................. 3,202,058,334
NET UNREALIZED GAIN ON FORWARD EXCHANGE
CONTRACTS 0.1% .................................................. 1,179,399
OTHER ASSETS, LESS LIABILITIES (0.7)% ........................... (21,233,086)
--------------
NET ASSETS 100.0% ............................................... $3,182,004,647
==============
Annual Report | 39
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2008 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
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
PLN - Polish Zloty
SEK - Swedish Krona
SGD - Singapore Dollar
SELECTED PORTFOLIO ABBREVIATIONS
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Association
FRN - Floating Rate Note
GNMA - Government National Mortgage Association
GO - General Obligation
L/C - Letter of Credit
PIK - Payment-In-Kind
SF - Single Family
(a) Rounds to less than 0.1% of net assets.
(b) Non-income producing for the twelve months ended April 30, 2008.
(c) See Note 10 regarding restricted securities.
(d) Security has been deemed illiquid because it may not be able to be sold
within seven days. At April 30, 2008, the aggregate value of these
securities was $3,873, 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 security purchased on a delayed delivery or TBA
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 April 30, 2008,
the aggregate value of these securities was $144,913,558, representing
4.55% of net assets.
(k) Perpetual bond with no stated maturity date.
(l) Income may be received in additional securities and/or cash.
(m) Principal amount of security is adjusted for inflation. See Note 1(h).
(n) A supranational organization is an entity formed by two or more central
governments through international treaties.
(o) The principal amount is stated in original face, and scheduled paydowns are
reflected in the market price on ex-date.
(p) 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 April 30, 2008, the value of this security was
$9,623,040, representing 0.30% of net assets.
(q) Principal amount is stated in 100 Mexican Peso Units.
(r) The security is traded on a discount basis with no stated coupon rate.
(s) Principal amount is stated in 1000 Brazilian Real Units.
(t) Redemption price at maturity is adjusted for inflation. See Note 1(h).
(u) 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.
40 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
April 30, 2008
FRANKLIN
STRATEGIC
INCOME FUND
--------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................ $3,095,228,109
Cost - Sweep Money Fund (Note 7) ....................... 102,810,662
--------------
Total cost of investments .............................. $3,198,038,771
==============
Value - Unaffiliated issuers ........................... $3,099,247,672
Value - Sweep Money Fund (Note 7) ...................... 102,810,662
--------------
Total value of investments ............................. 3,202,058,334
Cash 794,266
Receivables:
Investment securities sold ............................. 9,176,856
Capital shares sold .................................... 14,558,119
Dividends and interest ................................. 45,002,159
Unrealized gain on forward exchange contracts (Note 8) .... 6,910,115
--------------
Total assets ........................................ 3,278,499,849
--------------
Liabilities:
Payables:
Investment securities purchased ........................ 81,897,083
Capital shares redeemed ................................ 5,768,346
Affiliates ............................................. 2,280,719
Unrealized loss on forward exchange contracts (Note 8) .... 5,730,716
Unrealized loss on unfunded loan commitments (Note 11) .... 22,955
Accrued expenses and other liabilities .................... 795,383
--------------
Total liabilities ................................... 96,495,202
--------------
Net assets, at value ............................. $3,182,004,647
==============
Net assets consist of:
Paid-in capital ........................................... $3,176,876,027
Undistributed net investment income ....................... 11,698,413
Net unrealized appreciation (depreciation) ................ 5,755,684
Accumulated net realized gain (loss) ...................... (12,325,477)
--------------
Net assets, at value ............................. $3,182,004,647
==============
Annual Report | The accompanying notes are an integral part of these
financial statements. | 41
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2008
FRANKLIN
STRATEGIC
INCOME FUND
--------------
CLASS A:
Net assets, at value ..................................................... $2,123,947,149
--------------
Shares outstanding ....................................................... 206,674,750
--------------
Net asset value per share(a) ............................................. $ 10.28
--------------
Maximum offering price per share (net asset value per share / 95.75%)..... $ 10.74
--------------
CLASS B:
Net assets, at value ..................................................... $ 105,620,049
--------------
Shares outstanding ....................................................... 10,235,214
--------------
Net asset value and maximum offering price per share(a) .................. $ 10.32
--------------
CLASS C:
Net assets, at value ..................................................... $ 733,071,270
--------------
Shares outstanding ....................................................... 71,350,696
--------------
Net asset value and maximum offering price per share(a) .................. $ 10.27
--------------
CLASS R:
Net assets, at value ..................................................... $ 108,019,841
--------------
Shares outstanding ....................................................... 10,535,535
--------------
Net asset value and maximum offering price per share(a) .................. $ 10.25
--------------
ADVISOR CLASS:
Net assets, at value ..................................................... $ 111,346,338
--------------
Shares outstanding ....................................................... 10,826,759
--------------
Net asset value and maximum offering price per share(a) .................. $ 10.28
--------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
42 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended April 30, 2008
FRANKLIN
STRATEGIC
INCOME FUND
------------
Investment income:
Dividends:
Unaffiliated issuers .................................................. $ 2,658,077
Sweep Money Fund (Note 7) ............................................. 2,875,192
Interest ................................................................. 163,123,880
------------
Total investment income ............................................ 168,657,149
------------
Expenses:
Management fees (Note 3a) ................................................ 11,999,532
Distribution fees: (Note 3c)
Class A ............................................................... 4,555,448
Class B ............................................................... 668,633
Class C ............................................................... 3,684,331
Class R ............................................................... 435,740
Transfer agent fees (Note 3e) ............................................ 3,770,812
Custodian fees (Note 4) .................................................. 751,136
Reports to shareholders .................................................. 257,286
Registration and filing fees ............................................. 141,787
Professional fees ........................................................ 74,910
Trustees' fees and expenses .............................................. 37,874
Other .................................................................... 72,709
------------
Total expenses ..................................................... 26,450,198
Expense reductions (Note 4) ........................................ (39,426)
------------
Net expenses .................................................... 26,410,772
------------
Net investment income ........................................ 142,246,377
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................... 5,958,041
Foreign currency transactions ......................................... 39,941,638
------------
Net realized gain (loss) ..................................... 45,899,679
------------
Net change in unrealized appreciation (depreciation) on:
Investments .............................................................. (56,175,762)
Translation of assets and liabilities denominated in foreign currencies... 148,637
------------
Net change in unrealized appreciation (depreciation) ......... (56,027,125)
------------
Net realized and unrealized gain (loss) ..................................... (10,127,446)
------------
Net increase (decrease) in net assets resulting from operations ............. $132,118,931
============
Annual Report | The accompanying notes are an integral part of these
financial statements. | 43
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
-------------------------------
2008 2007
-------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................. $ 142,246,377 $ 89,407,218
Net realized gain (loss) from investments and foreign currency transactions ....... 45,899,679 23,971,751
Net change in unrealized appreciation (depreciation) on investments and translation
of assets and liabilities denominated in foreign currencies .................... (56,027,125) 41,340,324
-------------- --------------
Net increase (decrease) in net assets resulting from operations ................ 132,118,931 154,719,293
-------------- --------------
Distributions to shareholders from net investment income:
Class A ........................................................................... (121,244,242) (69,450,108)
Class B ........................................................................... (6,404,920) (5,676,985)
Class C ........................................................................... (35,256,134) (18,536,653)
Class R ........................................................................... (5,569,720) (2,534,963)
Advisor Class ..................................................................... (6,366,080) (3,568,807)
-------------- --------------
Total distributions to shareholders .................................................. (174,841,096) (99,767,516)
-------------- --------------
Capital share transactions: (Note 2)
Class A ........................................................................... 632,530,329 485,094,064
Class B ........................................................................... 3,048,823 (2,806,860)
Class C ........................................................................... 304,040,457 131,890,312
Class R ........................................................................... 43,785,438 30,979,468
Advisor Class ..................................................................... 46,009,389 7,746,480
-------------- --------------
Total capital share transactions ..................................................... 1,029,414,436 652,903,464
-------------- --------------
Redemption fees ...................................................................... 32,113 15,988
-------------- --------------
Net increase (decrease) in net assets .......................................... 986,724,384 707,871,229
Net assets:
Beginning of year .................................................................... 2,195,280,263 1,487,409,034
-------------- --------------
End of year .......................................................................... $3,182,004,647 $2,195,280,263
============== ==============
Undistributed net investment income (distributions in excess of net investment
income) included in net assets:
End of year ....................................................................... $ 11,698,413 $ (496,671)
============== ==============
44 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS
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
eleven 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.
Annual Report | 45
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (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. 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.
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.
46 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 or to gain exposure to certain foreign
currencies. 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.
E. MORTGAGE DOLLAR ROLLS
The Fund may enter into mortgage dollar rolls, typically on a TBA basis.
Mortgage 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 on the initial sale, and the
difference between the repurchase price and the sale price is recorded as an
unrealized gain or loss to the fund upon entering into the mortgage dollar roll.
In addition, the Fund may earn interest on the cash proceeds that are received
from the initial sale. During the period between the sale and repurchase, the
Fund is not entitled to principal and interest paid on the mortgage backed
securities. The risks of mortgage dollar roll transactions include the potential
inability of the counterparty to fulfill its obligations.
Annual Report | 47
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
The Fund has reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of April 30, 2008, and has
determined that no provision for income tax is required in the Fund's financial
statements.
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.
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.
48 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class. 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.
Annual Report | 49
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
2. SHARES OF BENEFICIAL INTEREST
At April 30, 2008, there were an unlimited number of shares authorized (without
par value). Transactions in the Fund's shares were as follows:
YEAR ENDED APRIL 30,
---------------------------------------------------------
2008 2007
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
CLASS A SHARES:
Shares sold ................. 91,217,409 $ 936,036,841 64,577,523 $ 661,797,699
Shares issued in reinvestment
of distributions ......... 8,915,352 91,352,929 4,904,231 50,058,427
Shares redeemed ............. (38,572,698) (394,859,441) (22,187,101) (226,762,062)
----------- ------------- ----------- -------------
Net increase (decrease) ..... 61,560,063 $ 632,530,329 47,294,653 $ 485,094,064
=========== ============= =========== =============
CLASS B SHARES:
Shares sold ................. 2,874,628 $ 29,428,423 1,326,154 $ 13,607,104
Shares issued in reinvestment
of distributions ......... 408,776 4,208,385 356,823 3,651,957
Shares redeemed ............. (2,980,058) (30,587,985) (1,953,852) (20,065,921)
----------- ------------- ----------- -------------
Net increase (decrease) ..... 303,346 $ 3,048,823 (270,875) $ (2,806,860)
=========== ============= =========== =============
CLASS C SHARES:
Shares sold ................. 37,244,007 $ 381,547,354 18,208,945 $ 186,898,178
Shares issued in reinvestment
of distributions ......... 2,345,925 24,029,491 1,165,184 11,894,052
Shares redeemed ............. (9,929,608) (101,536,388) (6,539,064) (66,901,918)
----------- ------------- ----------- -------------
Net increase (decrease) ..... 29,660,324 $ 304,040,457 12,835,065 $ 131,890,312
=========== ============= =========== =============
CLASS R SHARES:
Shares sold ................. 6,278,677 $ 64,256,553 3,989,540 $ 40,838,506
Shares issued in reinvestment
of distributions ......... 505,060 5,161,628 237,409 2,419,134
Shares redeemed ............. (2,511,917) (25,632,743) (1,200,894) (12,278,172)
----------- ------------- ----------- -------------
Net increase (decrease) ..... 4,271,820 $ 43,785,438 3,026,055 $ 30,979,468
=========== ============= =========== =============
ADVISOR CLASS SHARES:
Shares sold ................. 5,446,481 $ 56,078,457 2,180,173 $ 22,375,180
Shares issued in reinvestment
of distributions ......... 515,703 5,286,545 299,259 3,050,388
Shares redeemed ............. (1,497,484) (15,355,613) (1,736,283) (17,679,088)
----------- ------------- ----------- -------------
Net increase (decrease) ..... 4,464,700 $ 46,009,389 743,149 $ 7,746,480
=========== ============= =========== =============
50 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (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
Effective January 1, 2008, 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 $7.5 billion
0.440% Over $7.5 billion, up to and including $10 billion
0.430% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% Over $15 billion, up to and including $17.5 billion
0.380% Over $17.5 billion, up to and including $20 billion
0.360% Over $20 billion, up to and including $35 billion
0.355% Over $35 billion, up to and including $50 billion
0.350% In excess of $50 billion
Prior to January 1, 2008, the Fund paid fees 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
Annual Report | 51
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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.
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 year:
Sales charges retained net of commissions paid to unaffiliated
broker/dealers ............................................ $1,870,711
Contingent deferred sales charges retained ................... $ 258,880
E. TRANSFER AGENT FEES
For the year ended April 30, 2008, the Fund paid transfer agent fees of
$3,770,812, of which $2,204,612 was retained by Investor Services.
52 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
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 year ended April 30, 2008, 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, 2008, the Fund had tax basis capital losses of
$10,888,827 expiring in 2011. During the year ended April 30, 2008, the Fund
utilized $2,491,680 of capital loss carryforwards.
For tax purposes, realized capital 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, 2008, the Fund deferred realized capital losses of
$1,404,408.
The tax character of distributions paid during the years ended April 30, 2008
and 2007, was as follows:
2008 2007
------------ -----------
Distributions paid from ordinary income... $174,841,096 $99,767,516
At April 30, 2008, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments...................................... $3,206,739,550
==============
Unrealized appreciation.................................. $ 94,570,541
Unrealized depreciation.................................. (99,251,757)
--------------
Net unrealized appreciation (depreciation)............... $ (4,681,216)
--------------
Distributable earnings - undistributed ordinary income... $ 22,154,124
==============
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, payments-in-kind, bond discounts and premiums and
inflation related adjustments on foreign securities.
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
and inflation related adjustments on foreign securities.
Annual Report | 53
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended April 30, 2008, aggregated $1,882,874,013 and $790,755,142,
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.
8. FORWARD EXCHANGE CONTRACTS
At April 30, 2008, the Fund had the following forward exchange contracts
outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT(a) DATE GAIN LOSS
----------------- ---------- ---------- -----------
CONTRACTS TO BUY
23,099,600 Swiss Franc ....... 20,000,000 10/24/08 $2,308,821 $ --
7,625,100 Swiss Franc ....... 7,000,000 1/22/09 362,429 --
226,500,000 Indian Rupee ...... 7,340,454 NZD 2/27/09 57,055 --
CONTRACTS TO SELL
22,688,628 Mexican Peso ...... 86,103,344 INR 5/15/08 -- (33,094)
95,141,931 Mexican Peso ...... 4,364,636,082 CLP 6/12/08 396,411 --
85,260,441 Mexican Peso ...... 931,119,898 KZT 6/30/08 -- (382,131)
35,638,464 Mexican Peso ...... 1,620,480,980 CLP 9/15/08 138,449 --
55,719,530 Mexican Peso ...... 199,888,242 INR 10/20/08 -- (293,173)
44,379,630 Mexican Peso ...... 499,350,721 KZT 1/16/09 -- (60,767)
73,468,367 Mexican Peso ...... 255,905,014 INR 1/27/09 -- (509,996)
27,622,500,000 South Korean Won... 31,831,225 CHF 2/13/09 3,190,501 --
63,268,687 Mexican Peso ...... 5,622,884 2/27/09 -- (173,943)
59,280,000 Euro .............. 88,755,794 3/04/09 -- (2,505,048)
9,880,000 Euro .............. 1,503,587,800 JPY 3/05/09 -- (517,283)
9,880,000 Euro .............. 1,519,524,240 JPY 3/09/09 -- (356,138)
29,200,000 Euro .............. 44,548,980 3/16/09 -- (385,490)
9,600,000 Euro .............. 1,485,984,000 JPY 4/06/09 -- (215,918)
54 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
8. FORWARD EXCHANGE CONTRACTS (CONTINUED)
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT(a) DATE GAIN LOSS
----------------- ---------- ---------- -----------
CONTRACTS TO SELL (CONTINUED)
169,061,600 Mexican Peso........ 15,313,551 4/07/09 $ -- $ (97,646)
2,848,160 US Dollar........... 358,198,842 KZT 4/17/09 14,084 --
4,400,000 Euro................ 696,850,000 JPY 4/23/09 65,917 --
13,820,000 Euro................ 21,615,586 4/23/09 376,448 --
9,915,000,000 South Korean Won.... 10,036,146 CHF 4/24/09 -- (200,089)
---------- -----------
Unrealized gain (loss) on forward exchange contracts.................... 6,910,115 (5,730,716)
---------- -----------
Net unrealized gain (loss) on forward exchange contracts............. $1,179,399
==========
(a) In U.S. dollars unless otherwise indicated.
CURRENCY ABBREVIATIONS
CHF - Swiss Franc
CLP - Chilean Peso
INR - Indian Rupee
JPY - Japanese Yen
KZT - Kazakhstan Tenge
NZD - New Zealand Dollar
9. CREDIT RISK
The Fund has 43.3% of its portfolio invested in high yield, senior secured
floating rate notes, or other securities rated below investment grade. These
securities may be more sensitive to economic conditions causing greater price
volatility and are potentially subject to a greater risk of loss due to default
than higher rated securities.
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.
Annual Report | 55
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
10. RESTRICTED SECURITIES (CONTINUED)
At April 30, 2008, 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:
ACQUISITION
SHARES ISSUER DATE COST VALUE
- ------- --------------------------------------------------- ----------- ------- ------
516,372 Cambridge Industries Liquidating Trust Interest ... 1/09/02 $ -- $3,873
64,666 VS Holdings Inc. .................................. 12/06/01 64,666 --
------
TOTAL RESTRICTED SECURITIES (0.00%(a) of Net Assets) ...................... $3,873
======
(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 April 30, 2008, unfunded commitments were as follows:
UNFUNDED
BORROWER COMMITMENTS
- ---------------------------------------------------------- -----------
Bausch & Lomb Inc., Delayed Draw Term Loan ............... $ 230,000
Community Health Systems, Inc., Delayed Draw Term Loan ... 765,449
Laureate Education, Inc., Delayed Draw Term Loan ......... 561,673
----------
$1,557,122
==========
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.
12. NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (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.
56 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
12. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. The Fund is currently
evaluating the impact, if any, of applying the various provisions of SFAS 161.
Annual Report | 57
Franklin Strategic Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FRANKLIN STRATEGIC INCOME FUND
TO THE BOARD OF TRUSTEES OF FRANKLIN STRATEGIC SERIES AND SHAREHOLDERS OF
FRANKLIN STRATEGIC INCOME FUND
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Strategic Income Fund (one
of the funds constituting Franklin Strategic Series, hereafter referred to as
the "Fund") at April 30, 2008, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at April
30, 2008 by correspondence with the custodian, brokers and agent banks provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
June 18, 2008
58 | Annual Report
Franklin Strategic Series
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Trust, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- --------------- ---------------- ----------------------- -----------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1991 143 Bar-S Foods (meat packing company).
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief
Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
ROBERT F. CARLSON (1928) Trustee Since 2007 122 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired; and FORMERLY, Vice President, senior member and past President, Board of Administration, California Public Employees
Retirement Systems (CALPERS) (1971-January 2008); member and Chairman of the Board, Sutter Community Hospitals; member, Corporate
Board, Blue Shield of California; and Chief Counsel, California Department of Transportation.
SAM GINN (1937) Trustee Since 2007 122 Chevron Corporation (global
One Franklin Parkway energy company) and ICO Global
San Mateo, CA 94403-1906 Communications (Holdings) Limited
(satellite company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief
Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding
company) (1988-1994).
EDITH E. HOLIDAY (1952) Trustee Since 1998 143 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas), H.J.
San Mateo, CA 94403-1906 Heinz Company (processed foods and
allied products), RTI International
Metals, Inc. (manufacture and
distribution of titanium), Canadian
National Railway (railroad) and
White Mountains Insurance Group,
Ltd. (holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of
the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and
Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
Annual Report | 59
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- --------------- ---------------- ----------------------- -----------------------------------
FRANK W.T. LAHAYE (1929) Trustee Since 1991 122 Center for Creative Land Recycling
One Franklin Parkway (brownfield redevelopment).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital).
FRANK A. OLSON (1932) Trustee Since 2007 143 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas) and
San Mateo, CA 94403-1906 Sentient Jet (private jet service).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
LARRY D. THOMPSON (1945) Trustee Since 2007 143 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of
The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General,
U.S. Department of Justice (2001-2003).
JOHN B. WILSON (1959) Lead Trustee since 122 None
One Franklin Parkway Independent 2006 and Lead
San Mateo, CA 94403-1906 Trustee Independent
Trustee since
January 2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit
boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer
and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Executive Vice President -
Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting
firm) (1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- --------------- ---------------- ----------------------- -----------------------------------
**CHARLES B. JOHNSON (1933) Trustee and Trustee since 143 None
One Franklin Parkway Chairman of 1991 and
San Mateo, CA 94403-1906 the Board Chairman of the
Board since 1993
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.;
and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42
of the investment companies in Franklin Templeton Investments.
60 | Annual Report
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- --------------- ---------------- ----------------------- -----------------------------------
**RUPERT H. JOHNSON, JR. (1940) Trustee, Trustee since 56 None
One Franklin Parkway President and 1991 and
San Mateo, CA 94403-1906 Chief President and
Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and
Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the
case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin
Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since
San Mateo, CA 94403-1906 Officer and 2004 and Vice
Vice President President - AML
- AML Compliance since
Compliance 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
LAURA F. FERGERSON (1962) Treasurer, Treasurer since Not Applicable Not Applicable
One Franklin Parkway Chief Financial 2004, Chief
San Mateo, CA 94403-1906 Officer and Financial
Chief Officer and
Accounting Chief
Officer Accounting
Officer since
February 2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the
investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC
(1997-2003).
JIMMY D. GAMBILL (1947) Vice President Since February Not Applicable Not Applicable
500 East Broward Blvd. 2008
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
Annual Report | 61
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- --------------- ---------------- ----------------------- -----------------------------------
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
EDWARD B. JAMIESON (1948) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton
Institutional, LLC; officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of
four of the investment companies in Franklin Templeton Investments.
CHRISTOPHER J. MOLUMPHY (1962) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director and Executive Vice President, Franklin Advisers, Inc.; and officer of some of the other subsidiaries of Franklin Resources,
Inc. and of six of the investment companies in Franklin Templeton Investments.
KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin
Templeton Investments.
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling,
LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
62 | Annual Report
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- --------------- ---------------- ----------------------- -----------------------------------
GALEN G. VETTER (1951) Senior Vice Since February Not Applicable Not Applicable
500 East Broward Blvd. President and 2008
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of some of the other subsidiaries of Franklin Resources, Inc. and
of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc.
(1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be
interested persons of the Trust under the federal securities laws due to
their positions as officers and directors and major shareholders of
Franklin Resources, Inc., which is the parent company of the Trust's
investment manager and distributor.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS
AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED
JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT
MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS
BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF
STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF
THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL
APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES,
ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT
PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY
COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL
CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT
COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS
DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND
RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
Annual Report | 63
Franklin Strategic Series
SHAREHOLDER INFORMATION
FRANKLIN STRATEGIC INCOME FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held April 15, 2008, the Board of Trustees (Board), including a
majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for Franklin Strategic Income Fund, one of the
separate funds within Franklin Strategic Series (Fund(s)). In reaching this
decision, the Board took into account information furnished throughout the year
at regular Board meetings, as well as information prepared specifically in
connection with the annual renewal review process. Information furnished and
discussed throughout the year included investment performance reports and
related financial information for each Fund, as well as periodic reports on
shareholder services, legal, compliance, pricing, brokerage commissions and
execution and other services provided by the Investment Manager (Manager) and
its affiliates. Information furnished specifically in connection with the
renewal process included a report for each Fund prepared by Lipper, Inc.
(Lipper), an independent organization, as well as a Fund profitability analysis
report prepared by management. The Lipper reports compared each Fund's
investment performance and expenses with those of other mutual funds deemed
comparable to the Fund as selected by Lipper. The Fund profitability analysis
report discussed the profitability to Franklin Templeton Investments from its
overall U.S. fund operations, as well as on an individual fund-by-fund basis.
Included with such profitability analysis report was information on a
fund-by-fund basis listing portfolio managers and other accounts they manage, as
well as information on management fees charged by the Manager and its affiliates
including management's explanation of differences where relevant and a
three-year expense analysis with an explanation for any increase in expense
ratios. Additional material accompanying such report was a memorandum prepared
by management describing project initiatives and capital investments relating to
the services provided to the Fund by the Franklin Templeton Investments
organization, as well as a memorandum relating to economies of scale and a
comparative analysis concerning transfer agent fees charged each Fund.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. While the investment
management agreements for all Funds were considered at the same Board meeting,
the Board dealt with each Fund separately. In approving continuance of the
investment management agreement for each Fund, the Board, including a majority
of independent Trustees, determined that the existing management fee structure
was fair and reasonable and that continuance of the investment management
agreement was in the best interests of each Fund and its shareholders. While
attention was given to all information furnished, the following discusses some
primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Fund and its shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished them showing that the investment policies and restrictions for
the Fund were consistently complied with as well as other reports periodically
64 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin Templeton fund complex, the adherence to fair value
pricing procedures established by the Board, and the accuracy of net asset value
calculations. The Board also noted the extent of benefits provided Fund
shareholders from being part of the Franklin Templeton family of funds,
including the right to exchange investments between the same class of funds
without a sales charge, the ability to reinvest Fund dividends into other funds
and the right to combine holdings in other funds to obtain a reduced sales
charge. Favorable consideration was given to management's continuous efforts and
expenditures in establishing back-up systems and recovery procedures to function
in the event of a natural disaster, it being noted that such systems and
procedures had functioned smoothly during the Florida hurricanes and blackouts
experienced in recent years. Consideration was also given to the experience of
the Fund's portfolio management team, the number of accounts managed and general
method of compensation. In this latter respect, the Board noted that a primary
factor in management's determination of a portfolio manager's bonus compensation
was the relative investment performance of the funds he or she managed and that
a portion of such bonus was required to be invested in a predesignated list of
funds within such person's fund management area so as to be aligned with the
interests of Fund shareholders. The Board also took into account the quality of
transfer agent and shareholder services provided Fund shareholders by an
affiliate of the Manager, noting continuing expenditures by management to
increase and improve the scope of such services, periodic favorable reports on
such service conducted by third parties, the high industry ranking given to the
Franklin Templeton website, and the firsthand experience of individual Board
members who deal with the shareholder services department in their capacities as
shareholders in one or more of the various Franklin Templeton funds.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings throughout the year, particular attention in
assessing performance was given to the Lipper reports furnished for the
agreement renewals. The Lipper report prepared for the Fund showed investment
performance of its Class A shares in comparison to a performance universe
selected by Lipper. Comparative performance for the Fund was shown for the
one-year period ended January 31, 2008, and previous periods ended that date of
up to 10 years. The following summarizes the performance results for the Fund
and the Board's view of such performance.
The performance universe for the Fund consisted of the Fund and all retail and
institutional multisector income funds as selected by Lipper. The Lipper report
comparison showed that for the one-year period the Fund's income return was in
the highest quintile of such performance universe,
Annual Report | 65
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
and its total return was in the second-highest quintile of such universe. The
report further showed that the Fund's income and total return during the
previous three-, five- and 10-year periods on an annualized basis were, in each
case, in either the highest or second-highest quintile of such performance
universe. The Board was satisfied with such performance.
COMPARATIVE EXPENSES. Consideration was given to the management fee and total
expense ratios of the Fund compared with those of a group of other funds
selected by Lipper as its appropriate Lipper expense group. Prior to making such
comparison, the Board relied upon a survey showing that the scope of services
covered under the Fund's investment management agreement was similar to those
provided by fund managers to other mutual fund groups. In reviewing comparative
costs, emphasis was given to the Fund's contractual investment management fee in
comparison with the investment management fee that would have been charged by
other funds within its Lipper expense group assuming they were similar in size
to the Fund, as well as the actual total expenses of the Fund in comparison with
those of its Lipper expense group. The Lipper contractual investment management
fee analysis includes administrative charges as being part of the investment
management fee, and actual total expenses, for comparative consistency, are
shown by Lipper for Fund Class A shares. The results of such expense comparisons
showed the contractual investment management fee rates and actual total expenses
for Franklin Strategic Income Fund were in the least expensive quintile of its
Lipper expense group. The Board was satisfied with the contractual management
fees and total expenses of the Fund in comparison to its expense group as shown
in the Lipper report.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
the Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
the Fund. Specific attention was given to the methodology followed in allocating
costs to the Fund, it being recognized that allocation methodologies are
inherently subjective and various allocation methodologies may each be
reasonable while producing different results. In this respect, the Board noted
that, while being continuously refined and reflecting changes in the Manager's
own cost accounting, the allocation methodology was consistent with that
followed in profitability report presentations for the Fund made in prior years
and that the Fund's independent registered public accounting firm had been
engaged by the Manager to perform certain procedures on a biennial basis,
specified and approved by the Manager and the Fund's Board solely for their
purposes and use in reference to the profitability analysis. In reviewing and
discussing such analysis, management discussed with the Board its belief that
costs incurred in establishing the infrastructure necessary for the type of
mutual fund operations conducted by the Manager and its affiliates may
66 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
not be fully reflected in the expenses allocated to the Fund in determining its
profitability, as well as the fact that the level of profits, to a certain
extent, reflected operational cost savings and efficiencies initiated by
management. The Board also took into account management's expenditures in
improving shareholder services provided the Fund, as well as the need to meet
additional regulatory and compliance requirements resulting from the
Sarbanes-Oxley Act and recent SEC and other regulatory requirements. In
addition, the Board considered a third-party study comparing the profitability
of the Manager's parent on an overall basis as compared to other publicly held
managers broken down to show profitability from management operations exclusive
of distribution expenses, as well as profitability including distribution
expenses. The Board also considered the extent to which the Manager and its
affiliates might derive ancillary benefits from fund operations, including its
interest in a joint venture entity that financed up-front commissions paid to
brokers/dealers who sold fund Class B shares prior to February 2005, when the
offering of such shares was discontinued, as well as potential benefits
resulting from allocation of fund brokerage and the use of "soft" commission
dollars to pay for research. Based upon its consideration of all these factors,
the Board determined that the level of profits realized by the Manager and its
affiliates from providing services to the Fund was not excessive in view of the
nature, quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Fund grows larger and the extent to which this is
reflected in the level of management fees charged. While recognizing that any
precise determination is inherently subjective, the Board noted that based upon
the Fund profitability analysis, it appears that as some funds get larger, at
some point economies of scale do result in the Manager realizing a larger profit
margin on management services provided such a fund. The Board noted that
economies of scale were shared with the Fund and its shareholders through
management fee breakpoints so that as a Fund grows in size, its effective
management fee rate declines. The fee structure under the investment management
agreement for the Fund contains breakpoints that continued to asset levels that
exceeded its asset size at December 31, 2007. It was noted that new or reduced
breakpoints in the fee structure for Franklin Strategic Income Fund at the $7.5
billion and $10 billion asset levels had been authorized by the Trustees at a
Board meeting held December 3, 2007, and had become effective January 1, 2008.
In view of such structure and the favorable fee and expense comparisons of the
Fund within its expense group, the Board believed that to the extent economies
of scale may be realized by the manager of the Fund and its affiliates, that
there was a sharing of benefits with the Fund and its shareholders.
Annual Report | 67
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
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.
68 | Annual Report
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(FRANKLIN TEMPLETON INVESTMENTS LOGO) One Franklin Parkway
San Mateo, CA 94403-1906
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inside for details.
ANNUAL 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 A2008 06/08
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
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $320,584 for the fiscal year ended April 30, 2008 and $391,902 for the
fiscal year ended April 30, 2007.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4.
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of their financial
statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $0 for the fiscal year ended April
30, 2008 and $46,000 for the fiscal year ended April 30, 2007. The services for
which these fees were paid included tax compliance and advice.
(d) All Other Fees
There were no fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4.
There were no fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant other than
services reported in paragraphs (a)-(c) of Item 4.
(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to the
Fund by the auditors;
(iii)pre-approval of all non-audit related services to be provided to the
registrant by the auditors to the registrant's investment adviser or to any
entity that controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations or
financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and the registrant's
investment adviser and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant were $0 for the fiscal year ended April 30, 2008 and $46,000 for the
fiscal year ended April 30, 2007.
(h) The registrant's audit committee of the board has considered whether the
provision of non-audit services that were rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
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 Galen G. Vetter, Chief Executive Officer - Finance and Administration, and
Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura
F. Fergerson, Chief Financial Officer and Chief Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN STRATEGIC SERIES
By /S/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Executive Officer - Finance and Administration
Date June 26, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /S/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Executive Officer - Finance and Administration
Date June 26, 2008
By /S/LAURA F. FERGERSON
---------------------
Laura F. Fergerson
Chief Financial Officer and Chief Accounting Officer
Date June 26, 2008