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 811-7288
--------

Franklin Strategic Mortgage Portfolio
-------------------------------------
(Exact name of registrant as specified in charter)

One Franklin Parkway, San Mateo, CA 94403-1906
(Address of principal executive offices) (Zip code)

Murray L. Simpson, One Franklin Parkway, San Mateo, CA 94403-1906
-----------------------------------------------------------------
(Name and address of agent for service)

Registrant's telephone number, including area code: (650) 312-2000
--------------

Date of fiscal year end: 9/30
----

Date of reporting period: 9/30/03
-------

Item 1. Reports to Stockholders.

SEPTEMBER 30, 2003

[GRAPHIC OMITTED]

ANNUAL REPORT AND SHAREHOLDER LETTER

INCOME

Franklin
Strategic Mortgage Portfolio

Want to receive
this document
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Eligible shareholders can
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franklintempleton.com.
See inside for details.

[GRAPHIC OMITTED]

[LOGO OMITTED]
FRANKLIN(R) TEMPLETON(R)
INVESTMENTS
Franklin o Templeton o Mutual Series

FRANKLIN TEMPLETON INVESTMENTS

GAIN FROM OUR PERSPECTIVE

Franklin Templeton's distinct multi-manager structure combines the
specialized expertise of three world-class investment management
groups--Franklin, Templeton and Mutual Series.

SPECIALIZED EXPERTISE

Each of our portfolio management groups operates autonomously, relying on its
own research and staying true to the unique investment disciplines that underlie
its success.

FRANKLIN. Founded in 1947, Franklin is a leader in tax-free investing and a
driving force in fixed income investing around the globe. They also bring
expertise in growth- and value-style U.S. equity investing.

TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in
1954, launched what has become the industry's oldest global fund. Today, with
research offices in over 25 countries, they offer investors the broadest global
reach in the industry.

MUTUAL SERIES. Established in 1949, Mutual Series is dedicated to a unique style
of value investing, searching aggressively for opportunity among undervalued
stocks, arbitrage situations and distressed companies.

TRUE DIVERSIFICATION

Because our management groups work independently and adhere to distinctly
different investment approaches, Franklin, Templeton and Mutual Series funds
typically have a low overlap of securities. That's why our funds can be used to
build truly diversified portfolios covering every major asset class.

RELIABILITY YOU CAN TRUST

At Franklin Templeton Investments, we seek to consistently provide investors
with exceptional risk-adjusted returns over the long term, as well as the
reliable account services that have helped us become one of the most trusted
names in financial services.

MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS

[GRAPHIC OMITTED]

Not part of the annual report

Contents

SHAREHOLDER LETTER .................... 1

ANNUAL REPORT

Franklin Strategic Mortgage Portfolio . 3

Performance Summary ................... 6

Financial Highlights and
Statement of Investments .............. 8

Financial Statements .................. 13

Notes to Financial Statements ......... 16

Independent Auditors' Report .......... 21

Board Members and Officers ............ 22

Proxy Voting Policies and Procedures .. 27

Annual Report

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: Franklin Strategic Mortgage Portfolio
seeks to obtain a high level of total return relative to the performance of the
general mortgage securities market by investing at least 80% of its net assets
in a portfolio of mortgage securities created from pools of mortgages issued or
guaranteed by the U.S. government, its agencies or instrumentalities. 1

We are pleased to bring you Franklin Strategic Mortgage Portfolio's annual
report for the fiscal year ended September 30, 2003.

PERFORMANCE OVERVIEW

For the 12 months under review, Franklin Strategic Mortgage Portfolio - Class A
delivered a +3.40% cumulative total return, as shown in the Performance Summary
beginning on page 6. In comparison, the Fund's benchmark Citigroup
Mortgage-Backed Securities Index returned 3.49% and the Lipper U.S. Mortgage
Funds Average returned 3.03% for the same period. 2 In addition, the Fund's
return compared favorably with the Lehman Brothers Treasury Index's 3.26% return
for the 12-month period. Notably, from the June 13 interest rate low through
September

PORTFOLIO BREAKDOWN
Based on Total Long-Term Investments

- --------------------------------------------------------------------------------
9/30/03 9/30/02
- --------------------------------------------------------------------------------
30-Year Mortgage Pass-Throughs 61.9% 57.4%
- --------------------------------------------------------------------------------
Adjustable Rate Mortgage 15.5% 14.3%
- --------------------------------------------------------------------------------
15-Year Mortgage Pass-Throughs 14.5% 11.6%
- --------------------------------------------------------------------------------
Home Equity Loans &Manufactured Housing ABS 8.1% 16.7%
- --------------------------------------------------------------------------------

1. U.S. government securities owned by the Fund or held under repurchase
agreement, but not shares of the Fund, are guaranteed by the U.S. government as
to the timely payment of principal and interest. Yield and share price are not
guaranteed and will fluctuate with market conditions.

2. Sources: Standard & Poor's Micropal, Lipper Inc. The unmanaged Citigroup
Mortgage-Backed Securities Index is a total return index that includes
approximately 178 GNMA, FNMA and FHLMC issues. The index includes reinvested
interest. One cannot invest directly in an index, nor is an index representative
of the Fund's portfolio. As of 9/30/03, the Lipper U.S. Mortgage Funds Average
consisted of 79 funds. Lipper calculations do not include sales charges. The
Fund's performance relative to the average might have differed if such charges
had been considered. Past performance does not guarantee future results.

THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL
TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF
INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 9.

Annual Report | 3

DIVIDEND DISTRIBUTIONS*
10/1/02-9/30/03

- --------------------------------------------------------------------------------
MONTH DIVIDEND PER SHARE
- --------------------------------------------------------------------------------
October 4.4730 cents
- --------------------------------------------------------------------------------
November 4.7349 cents
- --------------------------------------------------------------------------------
December 4.8168 cents
- --------------------------------------------------------------------------------
January 4.4543 cents
- --------------------------------------------------------------------------------
February 4.2205 cents
- --------------------------------------------------------------------------------
March 4.1745 cents
- --------------------------------------------------------------------------------
April 4.2611 cents
- --------------------------------------------------------------------------------
May 4.4381 cents
- --------------------------------------------------------------------------------
June 4.8568 cents
- --------------------------------------------------------------------------------
July 4.5538 cents
- --------------------------------------------------------------------------------
August 4.3839 cents
- --------------------------------------------------------------------------------
September 4.8196 cents
- --------------------------------------------------------------------------------
TOTAL 54.1873 CENTS

*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the Fund during the reporting
period.

30, 2003, the Fund returned 0.26% compared with the Lehman Brothers Treasury
Index's -3.02% return. 3

ECONOMIC AND MARKET OVERVIEW

Uncertainty about the economy's strength and geopolitical events pushed interest
rates down during the first part of the reporting period. By mid-June, 10-year
U.S. Treasury yields fell to 3.11%, the lowest level in more than 45 years. For
consumers, historically low mortgage rates enabled many homeowners to refinance
their mortgages, and refinancing applications reached their highest levels on
record. Prepayments on mortgage-backed securities increased as well.
Additionally, refinancing activity, stabilized equity markets, rising home
values and improved consumer net worths allowed consumers to continue spending.
In fact, retail sales grew 7.5% in September 2003 from a year earlier, helping
the economy expand.

Many businesses took the opportunity of a lower interest rate environment to
refinance their old debt at more attractive levels. This helped enhance business
operating performance. Credit-related fixed income products also benefited from
this improvement. Additionally, businesses continued to achieve productivity
gains by reducing their labor forces and taking advantage of recent technology
investments. Higher productivity levels helped dampen inflation. In fact, core
inflation (excluding food and energy) for September 2003 increased at a rate of
1.2% compared with the same month a year earlier. Expectations for continued low
inflation contributed to a historically lower overall interest rate environment
during the period.

As some of the immediate perceived risks related to the Iraq war subsided in
late spring, and economic activity and domestic equity markets rebounded,
interest rates rose as investors tolerated more risk in their portfolios. Rising
interest rates led to higher mortgage rates, and prepayments declined.

INVESTMENT STRATEGY

We invest at least 80% of total net assets in mortgage-backed securities and
mortgage-related securities. At least 65% of total net assets are invested in
securities rated AAA by Standard & Poor's or Moody's Investors Service, or if
unrated, will be deemed of comparable quality by the Fund's manager. We analyze
securities using proprietary models to help identify attractive investment
opportunities.

3. Source: Standard &Poor's Micropal. The Lehman Brothers Treasury Index is the
U.S. Treasury component of the Lehman Brothers U.S. Government Index.

4 | Annual Report

MANAGER'S DISCUSSION

During the Fund's fiscal year, we uncovered areas of the agency mortgage-backed
securities markets where prepayment risk seemed mispriced. This led us primarily
to securities with 5% to 7% coupons, although we looked for higher-coupon
opportunities at attractive values. Seeking to help increase yield, we also
purchased some higher-quality, mortgage-related, asset-backed securities as such
securities typically carry a yield premium over their government-guaranteed
counterparts. During periods of stable or rising interest rates, mortgages tend
to outperform similar maturity Treasuries. As 10-year U.S. Treasury yields rose
33 basis points during the reporting period, the Fund's higher returns compared
with those of similar maturity Treasuries reflected this propensity.

Thank you for your continued participation in Franklin Strategic Mortgage
Portfolio. We look forward to serving your future investment needs.

[PHOTO OMITTED]
/S/ ROGER A. BAYSTON
Roger A. Bayston
Portfolio Manager
Franklin Strategic Mortgage Portfolio

THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF
SEPTEMBER 30, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE
FUND'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON 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 ADVISOR 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 | 5

PERFORMANCE SUMMARY AS OF 9/30/03

Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. The performance table and graph do not reflect any taxes due on Fund
dividends, capital gain distributions, if any, or any realized gains on the sale
of Fund shares. Total return reflects the Fund's dividend income, capital gain
distributions, if any, and any unrealized gains or losses.

PRICE AND DISTRIBUTION INFORMATION

- -------------------------------------------------------------------------------------------------
CLASS A CHANGE 9/30/03 9/30/02
- -------------------------------------------------------------------------------------------------

Net Asset Value (NAV) -$0.29 $10.07 $10.36
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/02-9/30/03)
- -------------------------------------------------------------------------------------------------
Dividend Income $0.541873
- -------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.084700
- -------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.006300
- -------------------------------------------------------------------------------------------------
TOTAL $0.632873

Franklin Strategic Mortgage Portfolio paid distributions derived from long-term
capital gains of 0.63 cents ($0.0063) per share in December 2002. The Fund
hereby designates such distributions as capital gain dividends per Internal
Revenue Code Section 852 (b)(3).

PERFORMANCE 1

- -------------------------------------------------------------------------------------------------

CLASS A 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +3.40% +38.15% +94.30%
- -------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -0.99% +5.75% +6.41%
- -------------------------------------------------------------------------------------------------
Distribution Rate 4 5.22%
- -------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 1.28%

ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE
RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SINCE MARKETS CAN GO DOWN AS WELL AS
UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS,
AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES.

FOR MORE CURRENT PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.

6 | Past performance does not guarantee future results. | Annual Report

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 the current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvested dividends. It differs from the Fund in composition and does not pay
management fees or expenses. One cannot invest directly in an index.

[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED INPRINTED GRAPHIC AS FOLLOWS:

Franklin Strategic Citigroup Mortgage-Backed
Mortgage Portfolio Securities Index 6
10/93 $9579 $10000
9625 10034
9548 10016
9640 10090
9752 10192
9600 10128
9408 9878
9359 9816
9384 9850
9352 9824
9526 10016
9554 10038
9425 9902
9403 9900
9378 9864
9464 9946
9657 10170
9905 10429
9938 10471
10069 10611
10397 10954
10460 11012
10475 11034
10581 11136
10676 11236
10786 11140
10904 11472
11030 11614
11123 11703
11034 11611
10985 11571
4/96 10957 11518
10923 11503
11050 11650
11102 11696
11099 11698
11283 11895
11502 12126
11663 12293
11618 12238
11698 12342
11720 12355
11678 12253
11844 12439
11948 12556
12068 12700
12261 12935
12253 12912
12393 13066
12514 13206
12545 13251
12661 13372
12780 13497
12810 13538
12856 13591
12921 13667
13013 13763
13088 13824
13147 13892
13283 14018
13473 14186
10/98 13475 14170
13558 14236
13618 14307
13698 14405
13630 14352
13708 14451
13767 14522
13676 14425
13640 14391
13561 14293
13551 14284
13783 14528
13843 14605
13856 14617
13820 14569
13712 14458
13866 14628
14007 14785
14027 14792
14040 14804
14332 15123
14430 15220
14653 15444
14830 15610
14941 15725
15168 15958
15469 16214
15690 16466
15781 16557
15887 16664
4/01 15903 16682
15994 16785
16062 16808
16331 17121
16471 17277
16699 17532
16915 17770
16811 17607
16764 17543
16918 17716
17085 17909
16907 17728
17240 18058
17361 18191
17512 18338
17719 18545
17850 18708
18000 18844
18060 18915
18056 18898
18247 19097
18291 19151
18402 19282
18423 19276
18499 19349
18543 19359
18559 19400
18204 19050
18321 19174
9/03 18612 19502

ENDNOTES

THE FUND'S SHARE PRICE AND YIELD MAY BE AFFECTED BY INTEREST RATE MOVEMENTS AND
MORTGAGE PREPAYMENTS. SECURITIES OWNED BY THE FUND BUT NOT SHARES OF THE FUND,
ARE GUARANTEED BY THE U.S. GOVERNMENT AS TO TIMELY PAYMENT OF PRINCIPAL AND
INTEREST. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN
INVESTMENT RISKS.

CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to
7/1/94, Fund shares were offered at a higher initial sales charge; thus
actual total returns would be lower.

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 and does not include the sales charge.

3. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum sales
charge.

4. Distribution rate is based on an annualization of September's 4.8196
cent per share dividend and the maximum offering price of $10.52 on 9/30/03.

5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/03.

6. Source: Standard & Poor's Micropal. The Citigroup Mortgage-Backed Securities
Index is a total return index that includes 178 GNMA, FNMA and FHLMC issues. The
index changed its name from Salomon Brothers Mortgage-Backed Securities Index in
April 2003.

Annual Report | Past performance does not guarantee future results. | 7

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

FINANCIAL HIGHLIGHTS

---------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
2003 2002 2001 2000 1999
---------------------------------------------------------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)

Net asset value, beginning of year .................................. $10.36 $10.27 $ 9.77 $9.74 $10.14
---------------------------------------------------------
Income from investment operations:
Net investment income a ............................................ .285 .488 .657 .663 .627
Net realized and unrealized gains (losses) ......................... .048 .280 .539 .043 (.400)
---------------------------------------------------------
Total from investment operations .................................... .333 .768 1.196 .706 .227
---------------------------------------------------------
Less distributions from:
Net investment income .............................................. (.542) (.596) (.693) (.676) (.627)
Realized capital gain .............................................. (.091) (.082) -- -- --
---------------------------------------------------------
Total distributions ................................................. (.633) (.678) (.693) (.676) (.627)
---------------------------------------------------------
Net asset value, end of year ........................................ $10.06 $10.36 $10.27 $9.77 $ 9.74
---------------------------------------------------------

Total return b ...................................................... 3.40% 7.79% 12.60% 7.60% 2.30%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................................... $421,827 $407,701 $188,330 $49,572 $32,877
Ratios to average net assets:
Expenses ........................................................... .52% .25% --% --% --%
Expenses excluding waiver and payments by affiliate ................ .52% .54% .64% .63% .70%
Net investment income .............................................. 2.79% 4.78% 5.98% 6.87% 6.32%
Portfolio turnover rate ............................................. 288.41% 219.99% 310.95% 226.43% 43.70%
Portfolio turnover rate excluding mortgage dollar rolls c ........... 125.17% 87.47% 87.91% 42.00% 41.72%

aBased on average shares outstanding.
bTotal return does not reflect sales commissions and is not annualized for
periods less than one year.
cSee Note 1(f) regarding mortgage dollar rolls.

8 | See notes to financial statements. | Annual Report

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003

- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------

FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) 37.8%
FHLMC, 5.00%, 10/01/17 - 8/01/33 .................................................... $ 23,953,587 $ 24,221,642
FHLMC, 6.00%, 10/01/19 - 9/01/33 .................................................... 36,508,153 37,756,375
FHLMC, 6.50%, 3/01/09 - 9/01/32 ..................................................... 8,784,452 9,183,270
FHLMC, 7.00%, 6/01/09 - 7/01/32 ..................................................... 11,435,312 12,089,274
FHLMC, 7.50%, 4/01/10 - 8/01/32 ..................................................... 5,760,093 6,163,466
FHLMC, 8.00%, 4/01/08 - 5/01/30 ..................................................... 1,097,986 1,186,451
FHLMC, 8.50%, 2/01/17 - 9/01/30 ..................................................... 6,841,422 7,449,524
FHLMC, 9.00%, 7/01/08 - 9/01/30 ..................................................... 1,055,122 1,151,719
FHLMC, 9.25%, 12/01/08 - 8/01/14 .................................................... 262,876 280,777
FHLMC, 9.50%, 12/01/16 - 4/01/25 .................................................... 4,658,064 5,197,877
FHLMC, 10.00%, 1/01/19 .............................................................. 880,862 996,968
FHLMC, 4.50%, 10/01/18 .............................................................. 16,475,000 16,624,296
FHLMC, 5.00%, 10/01/33 .............................................................. 16,975,000 16,975,000
FHLMC, 5.50%, 10/01/33 .............................................................. 18,100,000 18,462,000
FHLMC, 6.00%, 1/01/32 ............................................................... 1,372,168 1,418,228
FHLMC, 9.125%, 9/01/17 .............................................................. 5,082 5,636
--------------
159,162,503
--------------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) - ADJUSTABLE RATE 6.9%
FHLMC, ARM, 3.125%, 4/01/17 ......................................................... 177,016 179,500
FHLMC, ARM, 3.368%, 10/01/18 ........................................................ 586,343 602,821
FHLMC, ARM, 3.411%, 5/01/20 ......................................................... 738,271 756,838
FHLMC, ARM, 3.449%, 3/01/19 ......................................................... 499,139 515,958
FHLMC, ARM, 3.538%, 5/01/22 ......................................................... 384,753 392,290
FHLMC, ARM, 3.617%, 9/01/27 ......................................................... 550,658 568,024
FHLMC, ARM, 3.625%, 4/01/18 ......................................................... 566,098 583,794
FHLMC, ARM, 3.646%, 11/01/25 ........................................................ 1,154,577 1,189,215
FHLMC, ARM, 3.745%, 7/01/22 ......................................................... 3,746,601 3,850,493
FHLMC, ARM, 3.885%, 11/01/16 ........................................................ 1,091,353 1,114,360
FHLMC, ARM, 4.123%, 12/01/30 ........................................................ 480,503 500,852
FHLMC, ARM, 4.243%, 7/01/24 ......................................................... 614,132 631,732
FHLMC, ARM, 5.233%, 1/01/32 ......................................................... 2,061,560 2,120,919
FHLMC, ARM, 5.237%, 5/01/30 ......................................................... 1,292,288 1,340,411
FHLMC, ARM, 5.697%, 11/01/25 ........................................................ 227,477 233,667
FHLMC, ARM, 6.094%, 4/01/24 ......................................................... 716,555 737,850
FHLMC, ARM, 6.119%, 1/01/31 ......................................................... 1,562,922 1,607,416
FHLMC, ARM, 6.244%, 8/01/31 ......................................................... 683,167 706,078
FHLMC, ARM, 6.396%, 4/01/30 ......................................................... 7,397,519 7,613,354
FHLMC, ARM, 6.639%, 7/01/30 ......................................................... 1,561,199 1,633,685
FHLMC, ARM, 6.723%, 1/01/28 ......................................................... 1,020,166 1,045,824
FHLMC, ARM, 6.877%, 11/01/19 ........................................................ 631,097 673,943
FHLMC, ARM, 7.10%, 4/01/31 .......................................................... 582,922 596,256
--------------
29,195,280
--------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) 33.8%
FNMA, 4.25%, 9/01/18 ................................................................ 124,084 125,901
FNMA, 5.00%, 7/01/18 - 10/01/33 ..................................................... 13,559,993 13,869,801
FNMA, 5.50%, 5/01/14 - 10/01/33 ..................................................... 55,070,674 56,366,817
FNMA, 6.00%, 1/01/11 - 2/01/33 ...................................................... 16,767,182 17,458,655
FNMA, 6.50%, 9/01/08 - 8/01/32 ...................................................... 33,261,961 34,717,344
FNMA, 7.00%, 7/01/09 - 10/01/32 ..................................................... 9,339,349 9,888,702

Annual Report | 9

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)

FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) (CONT.)
FNMA, 7.50%, 7/01/09 - 5/01/32 ...................................................... $ 1,938,729 $ 2,070,185
FNMA, 8.00%, 7/01/16 - 7/01/31 ...................................................... 336,772 364,323
FNMA, 8.50%, 7/01/24 - 4/01/30 ...................................................... 905,490 988,173
FNMA, 9.00%, 8/01/09 - 9/01/26 ...................................................... 1,752,907 1,929,199
FNMA, 9.25%, 10/01/09 ............................................................... 28,724 30,569
FNMA, 9.50%, 11/01/15 - 4/01/30 ..................................................... 1,997,693 2,213,838
FNMA, 10.00%, 8/01/15 - 4/01/21 ..................................................... 1,779,082 2,011,344
FNMA, 10.50%, 1/01/16 - 5/01/30 ..................................................... 285,977 317,243
FNMA, 10.75%, 10/01/05 .............................................................. 2,028 2,062
FNMA, 11.00%, 10/01/15 - 6/01/30 .................................................... 235,252 269,809
FNMA, 11.25%, 2/01/16 ............................................................... 16,667 19,080
FNMA, 12.00%, 4/01/15 - 5/01/16 ..................................................... 9,395 10,801
FNMA, 12.50%, 9/01/13 - 12/01/13 .................................................... 2,684 3,113
--------------
142,656,959
--------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - ADJUSTABLE RATE 10.4%
FNMA, ARM, 3.074%, 7/01/17 .......................................................... 389,795 393,290
FNMA, ARM, 3.193%, 8/01/30 .......................................................... 885,171 918,249
FNMA, ARM, 3.203%, 4/01/18 .......................................................... 124,298 127,670
FNMA, ARM, 3.208%, 1/01/17 .......................................................... 1,044,345 1,082,566
FNMA, ARM, 3.292%, 7/01/27 .......................................................... 369,405 381,057
FNMA, ARM, 3.355%, 4/01/21 .......................................................... 248,369 256,394
FNMA, ARM, 3.363%, 1/01/18 .......................................................... 4,331,279 4,393,495
FNMA, ARM, 3.423%, 12/01/22 ......................................................... 591,106 608,850
FNMA, ARM, 3.526%, 10/01/29 ......................................................... 702,101 724,143
FNMA, ARM, 3.54%, 7/01/19 ........................................................... 142,959 146,002
FNMA, ARM, 3.605%, 8/01/29 .......................................................... 515,406 534,495
FNMA, ARM, 3.722%, 7/01/14 .......................................................... 1,068,489 1,101,093
FNMA, ARM, 3.735%, 4/01/27 .......................................................... 673,317 691,772
FNMA, ARM, 3.742%, 7/01/19 .......................................................... 4,450,662 4,592,059
FNMA, ARM, 3.754%, 5/01/25 .......................................................... 133,183 137,895
FNMA, ARM, 3.876%, 6/01/25 .......................................................... 300,031 309,804
FNMA, ARM, 3.928%, 8/01/27 .......................................................... 184,955 190,370
FNMA, ARM, 4.041%, 7/01/25 .......................................................... 325,931 335,660
FNMA, ARM, 4.056%, 10/01/24 ......................................................... 1,218,957 1,252,112
FNMA, ARM, 4.074%, 10/01/29 ......................................................... 1,979,197 2,032,662
FNMA, ARM, 4.613%, 5/01/27 .......................................................... 3,115,732 3,197,636
FNMA, ARM, 4.878%, 10/01/19 ......................................................... 929,956 967,207
FNMA, ARM, 5.218%, 12/01/31 ......................................................... 1,047,402 1,075,463
FNMA, ARM, 5.246%, 8/01/32 .......................................................... 877,323 914,008
FNMA, ARM, 5.377%, 2/01/32 .......................................................... 1,184,954 1,225,092
FNMA, ARM, 5.568%, 6/01/17 .......................................................... 265,791 276,217
FNMA, ARM, 5.57%, 7/01/26 ........................................................... 123,721 125,075
FNMA, ARM, 5.622%, 1/01/32 .......................................................... 601,960 616,987
FNMA, ARM, 5.637%, 5/01/30 .......................................................... 461,519 477,781
FNMA, ARM, 5.753%, 8/01/26 .......................................................... 1,235,929 1,284,971
FNMA, ARM, 5.895%, 5/01/21 .......................................................... 1,041,485 1,079,117
FNMA, ARM, 5.937%, 4/01/18 .......................................................... 464,978 481,859
FNMA, ARM, 5.94%, 7/01/31 ........................................................... 794,949 823,498
FNMA, ARM, 5.994%, 10/01/32 ......................................................... 929,778 956,507

10 | Annual Report

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)

FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - ADJUSTABLE RATE (CONT.)
FNMA, ARM, 6.034%, 6/01/31 .......................................................... $ 1,694,933 $ 1,744,825
FNMA, ARM, 6.075%, 11/01/28 ......................................................... 721,773 741,747
FNMA, ARM, 6.086%, 5/01/28 .......................................................... 1,724,071 1,768,250
FNMA, ARM, 6.11%, 8/01/29 ........................................................... 313,414 322,535
FNMA, ARM, 6.121%, 5/01/31 .......................................................... 279,623 289,024
FNMA, ARM, 6.255%, 12/01/24 ......................................................... 273,254 282,381
FNMA, ARM, 6.42%, 4/01/31 ........................................................... 740,233 765,869
FNMA, ARM, 6.843%, 7/01/31 .......................................................... 3,377,710 3,483,170
FNMA, ARM, 7.022%, 9/01/32 .......................................................... 686,945 708,374
FNMA, ARM, 8.485%, 6/01/30 .......................................................... 233,032 246,302
--------------
44,063,533
--------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA), SF, 16.3%
GNMA, 5.50%, 7/15/33 - 10/01/33 ..................................................... 16,987,500 17,427,565
GNMA, 6.00%, 2/15/29 - 1/15/33 ...................................................... 4,087,530 4,251,541
GNMA, 6.50%, 1/15/24 - 8/15/32 ...................................................... 12,897,154 13,540,260
GNMA, 7.00%, 10/15/09 - 11/20/32 .................................................... 14,765,567 15,687,249
GNMA, 7.50%, 6/20/17 - 7/20/32 ...................................................... 8,531,098 9,073,036
GNMA, 8.00%, 9/15/15 - 1/15/28 ...................................................... 2,858,400 3,110,701
GNMA, 8.25%, 6/15/04 - 10/15/21 ..................................................... 903,703 984,046
GNMA, 8.50%, 6/15/16 - 8/15/26 ...................................................... 1,952,831 2,152,363
GNMA, 9.00%, 11/15/04 - 8/15/28 ..................................................... 579,563 632,855
GNMA, 9.50%, 10/15/09 - 10/15/20 .................................................... 310,904 340,634
GNMA, 10.00%, 10/15/18 - 2/15/19 .................................................... 47,138 53,455
GNMA, 10.50%, 1/15/16 ............................................................... 1,342 1,530
GNMA II, 6.50%, 1/20/26 - 6/20/27 ................................................... 794,541 833,854
GNMA II, 7.00%, 9/20/27 ............................................................. 237,992 252,814
GNMA II, 7.50%, 11/20/22 - 1/20/23 .................................................. 490,328 524,709
GNMA II, 8.00%, 8/20/26 ............................................................. 2,258 2,434
GNMA II, 9.00%, 9/20/24 - 11/20/24 .................................................. 20,007 22,052
GNMA II, 10.50%, 6/20/20 ............................................................ 310 353
--------------
68,891,451
--------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA), ADJUSTABLE RATE, SF, .4%
GNMA, ARM, 5.625%, 11/20/25 ......................................................... 386,749 402,577
GNMA, ARM, 5.750%, 7/20/27 .......................................................... 1,114,593 1,147,931
--------------
1,550,508
--------------
HOME EQUITY ASSET-BACKED SECURITIES 9.3%
AFC Home Equity Loan Trust, 1.36%, 12/22/27 ......................................... 3,051,119 3,048,378
Ameriquest Mortgage Securities Co., AQ1, M1, 6.863%, 8/25/16 ........................ 6,000,000 6,228,487
Chase Funding Mortgage Loan Asset Backed CTFS, 1.365%, 9/25/29 ...................... 726,544 727,764
Citifinancial Mortgage Securities Inc., 1, AF3, 4.001%, 2/21/30 ..................... 4,000,000 4,084,918
Contimortgage Home Equity Loan Trust,
1, A6, 6.69%, 1/15/16 ............................................................ 106,341 106,331
3, A6, 7.68%, 12/25/29 ........................................................... 820,000 883,173
Countrywide Home Loan, 12, 1A1, 5.25%, 8/25/32 ...................................... 1,030,545 1,033,377
Fannie Mae Whole Loan, W2, AF3, 5.258%, 5/25/29 ..................................... 102,384 102,375
Morgan Stanley Capital I,
2002-NC4, A2, 1.51%, 9/25/32 ..................................................... 4,240,477 4,246,895
2003-NC3, M1, 2.01%, 3/25/33 ..................................................... 10,000,000 10,060,995

Annual Report | 11

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2003 (CONTINUED)

HOME EQUITY ASSET-BACKED SECURITIES (CONT.)
Residential Asset Securities Corp., 1.37%, 3/25/30 .................................. $ 5,001,581 $ 4,999,511
Residential Funding Mortgage Securities, 4.04%, 7/25/15 ............................. 2,500,000 2,582,313
Saxon Asset Security Trust, 5.564%, 8/25/16 ......................................... 1,107,043 1,112,181
--------------
39,216,698
--------------
MISCELLANEOUS MORTGAGE-BACKED SECURITIES .1%
Travelers Mortgage Services Inc., 4.118%, 12/25/18 .................................. 354,528 354,527
Vanderbilt Mortgage Finance, 6.75%, 10/07/28 ........................................ 100,000 96,463
--------------
450,990
--------------
TOTAL LONG TERM INVESTMENTS (COST $480,494,275) ..................................... 485,187,922
--------------
SHORT TERM INVESTMENTS 9.3%
a Joint Repurchase Agreement, .976%, 10/01/03, (Maturity Value $17,962,349) ........... 17,961,862 17,961,862
ABN Amro Inc. (Maturity Value $1,651,436)
Banc of America Securities LLC., (Maturity Value $1,651,436)
Barclays Capital Inc. (Maturity Value $1,651,436)
Bear Stearns & Co. Inc. (Maturity Value $1,016,268)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $1,778,469)
Deutsche Bank Securities (Maturity Value $1,651,436)
Goldman Sachs & Co. (Maturity Value $1,651,436)
Greenwich Capital Markets (Maturity Value $1,651,436)
Lehman Brothers Inc. (Maturity Value $304,688)
Morgan Stanley & Co. Inc. (Maturity Value $1,651,436)
Paribas Corp. (Maturity Value $1,651,436)
UBS Warburg LLC (Maturity Value $1,651,436)
Collateralized by U.S. Treasury Bills, Notes and Bonds, and
U.S. Government Agency Securities
U.S. Treasury Bill, .875%, 11/13/03 ................................................... 200,000 199,802

--------------
SHARES
--------------
b Franklin Institutional Fiduciary Trust Money Market Portfolio ....................... 21,020,022 21,020,022
--------------
TOTAL SHORT TERM INVESTMENTS (COST $39,181,161) ..................................... 39,181,686
--------------
TOTAL INVESTMENTS BEFORE PAYDOWN RESERVE 124.3% ..................................... 524,369,608
c RESERVE FOR PAYDOWN GAINS (LOSSES) (.3)% ............................................ (1,401,680)
--------------
TOTAL INVESTMENTS (COST $519,675,936) 124.0% ........................................ 522,967,928
OTHER ASSETS, LESS LIABILITIES (24.0)% .............................................. (101,140,984)
--------------
NET ASSETS 100.0% ................................................................... $ 421,826,944
--------------

PORTFOLIO ABBREVIATIONS | ARM - Adjustable Rate Mortgage | SF - Single Family

aSee Note 1(b) regarding joint repurchase agreement.
bSee Note 6 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio.
cSee Note 1(d) regarding reserve for paydown.

12 | See notes to financial statements. | Annual Report

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES

September 30, 2003

Assets:
Investments in securities:

Cost .......................................................................... $519,675,936
-------------
Value ......................................................................... 522,967,928
Cash ........................................................................... 1,971,062
Receivables:
Investment securities sold .................................................... 1,605,664
Capital shares sold ........................................................... 352,841
Dividends and interest ........................................................ 1,930,740
-------------
Total assets .............................................................. 528,828,235
-------------
Liabilities:
Payables:
Investment securities purchased ............................................... 104,741,182
Capital shares redeemed ....................................................... 1,563,759
Affiliates .................................................................... 162,028
Shareholders .................................................................. 31,510
Distributions to shareholders .................................................. 434,929
Other liabilities .............................................................. 67,883
-------------
Total liabilities ......................................................... 107,001,291
-------------
Net assets, at value ..................................................... $421,826,944
-------------
Net assets consist of:
Undistributed net investment income ............................................ $ (472,622)
Net unrealized appreciation (depreciation) ..................................... 3,291,992
Accumulated net realized gain (loss) ........................................... (5,883,305)
Capital shares ................................................................. 424,890,879
-------------
Net assets, at value ..................................................... $421,826,944
-------------
Net asset value per share a ($421,826,944 / 41,911,767 shares outstanding) ..... $10.06
-------------
Maximum offering price per share ($10.06 / 95.75%) ............................. $10.51
-------------

aRedemption price is equal to net asset value less any applicable contingent
deferred sales charge.

Annual Report | See notes to financial statements. | 13

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF OPERATIONS
for the year ended September 30, 2003

Investment income:

Dividends ..................................................................... $ 204,021
Interest ...................................................................... 14,206,739
------------
Total investment income .................................................. 14,410,760
------------
Expenses:
Management fees (Note 3) ...................................................... 1,634,993
Transfer agent fees (Note 3) .................................................. 455,806
Custodian fees ................................................................ 5,521
Reports to shareholders ....................................................... 32,066
Registration and filing fees .................................................. 87,588
Professional fees ............................................................. 31,910
Other ......................................................................... 32,876
------------
Total expenses ........................................................... 2,280,760
------------
Net investment income ................................................... 12,130,000
------------
Realized and unrealized gains (losses): Net realized gain (loss) from:
Investments .................................................................. 5,898,905
Financials futures contracts ................................................. 110,382
------------
Net realized gain (loss) ...................................................... 6,009,287
------------
Net unrealized appreciation (depreciation) on investments ..................... (3,978,112)
------------
Net realized and unrealized gain (loss) ........................................ 2,031,175
------------
Net increase (decrease) in net assets resulting from operations ................ $14,161,175
------------

14 | See notes to financial statements. | Annual Report

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

FINANCIAL STATEMENTS (CONTINUED)

STATEMENTS OF CHANGES IN NET ASSETS
for the years ended September 30, 2003 and 2002

------------------------------
2003 2002
------------------------------
Increase (decrease) in net assets:
Operations:

Net investment income ................................................................. $ 12,130,000 $ 13,744,630
Net realized gain (loss) from investments and financial futures ....................... 6,009,287 5,715,234
Net unrealized appreciation (depreciation) on investments ............................. (3,978,112) 3,699,755
------------------------------
Net increase (decrease) in net assets resulting from operations ....................... 14,161,175 23,159,619
Distributions to shareholders from:
Net investment income ................................................................. (23,092,475) (16,591,328)
Net realized gains .................................................................... (3,766,405) (1,823,534)
------------------------------
Total distributions to shareholders .................................................. (26,858,880) (18,414,862)
Capital share transactions (Note 2) .................................................. 26,823,466 214,626,197
------------------------------
Net increase (decrease) in net assets ................................................... 14,125,761 219,370,954
Net assets:
Beginning of year ...................................................................... 407,701,183 188,330,229
------------------------------
End of year ............................................................................ $421,826,944 $ 407,701,183
------------------------------
Undistributed net investment income included in net assets:
End of year ............................................................................ $ (472,622) $ (260,494)
------------------------------

Annual Report | See notes to financial statements. | 15

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Franklin Strategic Mortgage Portfolio (the Trust) is registered under the
Investment Company Act of 1940 as a diversified, open-end investment company,
consisting of one Fund, the Franklin Strategic Mortgage Portfolio (the Fund).
The Fund seeks total return. The following summarizes the Fund's significant
accounting policies.

A. SECURITY VALUATION

Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the last reported sales price. Over-the-counter securities and listed
securities for which no sale is reported are valued within the range of the
latest quoted bid and asked prices. Securities for which market quotations are
not readily available are valued at fair value as determined by management in
accordance with procedures established by the Board of Trustees.

B. JOINT REPURCHASE AGREEMENT

The Fund may enter into a joint repurchase agreement whereby its uninvested cash
balance is deposited into a joint cash account to be used to invest in one or
more repurchase agreements. The value and face amount of the joint repurchase
agreement are allocated to the Fund based on its 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 Fund, with the value of the
underlying securities marked to market daily to maintain coverage of at least
100%. At September 30, 2003, all repurchase agreements had been entered into on
that date.

C. SECURITIES PURCHASED ON A TBA BASIS

The Fund may purchase securities on a 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.

D. RESERVE FOR PAYDOWN GAINS/LOSSES

The Fund provides estimates, based on historical experience, for anticipated
paydown gains and losses. The reserve is recorded as a reduction or increase to
net assets as noted on the Statement of Investments and is included in the
unrealized appreciation/depreciation shown on the accompanying financial
statements.

16 | Annual Report

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

E. FUTURES CONTRACTS

The Fund may purchase financial futures contracts to gain exposure to market
changes. A financial futures contract is an agreement between two parties to buy
or sell a security for a set price on a future date. Required initial margin
deposits of cash or securities are maintained by the Fund's custodian in
segregated accounts. Subsequent payments, known as variation margin, are made or
received by the Fund depending on the fluctuations in the value of the
underlying securities. Such variation margin is accounted for as unrealized
gains or losses until the contract is closed, at which time the gains or losses
are reclassified to realized. Realized and unrealized gains and losses are
included in the Statement of Operations.

The risks of these contracts include the possibility there may be an illiquid
secondary market and/or a change in the value of the contract may not correlate
with the changes in the value of the underlying securities.

F. MORTGAGE DOLLAR ROLLS

The Fund enters into mortgage dollar rolls, typically on a TBA basis. Dollar
rolls are agreements between the Fund and a financial institution to
simultaneously sell and repurchase a mortgage-backed security at a future date.
Gains or losses are realized at the time of the sale and the difference between
the repurchase price and sale price is recorded as an unrealized gain to the
Fund. The risks of mortgage dollar roll transactions include the potential
inability of the counterparty to fulfill their obligations.

G. INCOME TAXES

No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its tax- able income.

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. Dividends from net
investment income are normally declared daily and distributed monthly to
shareholders.

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 expense during the reporting period. Actual results could differ from those
estimates.

Annual Report | 17

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

J. GUARANTEES AND INDEMNIFICATIONS

Under the Fund's organizational documents, its officers and trustees are
indemnified against certain liability arising out of the performance of their
duties to the Fund. Additionally, in the normal course of business, the Fund
enters into contracts with service providers that contain general
indemnification clauses. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Fund expects the
risk of loss to be remote.

2. SHARES OF BENEFICIAL INTEREST

At September 30, 2003, there were an unlimited number of shares authorized
($0.01 par value). Transactions in the Fund's shares were as follows:

----------------------------------------------------------------
SEPTEMBER 30,
2003 2002
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------

Shares sold ....................... 16,477,900 $ 168,508,139 27,397,407 $279,603,949
Shares issued in reinvestment of
distributions ..................... 2,108,653 21,507,173 1,446,781 14,762,228
Shares redeemed ................... (16,044,902) (163,191,846) (7,806,806) (79,739,980)
----------------------------------------------------------------
Net increase ...................... 2,541,651 $ 26,823,466 21,037,382 $214,626,197
----------------------------------------------------------------

3. TRANSACTIONS WITH AFFILIATES

Certain officers and trustees of the Fund are also officers and/or directors of
the following entities.

- ------------------------------------------------------------------------------
ENTITY AFFILIATION
- ------------------------------------------------------------------------------
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin/Templeton Distributers, Inc. (Distributors) Principal underwriter
Franklin/Templeton Investor Services, LLC
(Investor Services) Transfer agent

The Fund pays an investment management fee to Advisers based on the average net
assets of the Fund as follows:

- ---------------------------------------------------------------------------
ANNUALIZED FEE RATE AVERAGE DAILY NET ASSETS
- ---------------------------------------------------------------------------
.40% First $250 million
.38% Over $250 million, up to and including $500 million
.36% In excess of $500 million

18 | Annual Report

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. TRANSACTIONS WITH AFFILIATES (CONTINUED)

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.

Distributors received net commissions from sales of Fund shares, and received
contingent deferred sales charges for the year of $45,605 and $14,398,
respectively.

The Fund paid transfer agent fees of $455,806, of which $255,334 was paid to
Investor Services.

4. INCOME TAXES

At September 30, 2003, the Fund has deferred capital losses occurring subsequent
to October 31, 2002 of $5,873,670. For tax purposes, such losses will be
reflected in the year ending September 30, 2004.

The tax character of distributions paid during the years ended September 30,
2003 and 2002, were as follows:

--------------------------
2003 2002
--------------------------
Distributions paid from:
Ordinary income .......................... $26,597,758 $18,414,862
Long-term capital gain ................... 261,122 --
--------------------------
$26,858,880 $18,414,862
--------------------------

At September 30, 2003, 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 ..................................... $520,275,735
-------------
Unrealized appreciation ................................. 3,734,766
Unrealized depreciation ................................. (1,042,573)
-------------
Net unrealized appreciation ............................. $ 2,692,193
-------------
Undistributed ordinary income ........................... $ 552,472
Undistributed long term capital gains ................... --
-------------
Distributable earnings .................................. $ 552,472
-------------

Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of mortgage dollar roll transactions and
paydown losses.

Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatment of wash sales, mortgage dollar roll
transactions, and paydown losses.

Annual Report | 19

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short-term securities) for the
year ended September 30, 2003 aggregated $1,454,959,848 and $1,338,948,434
respectively.

6. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO

The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Advisers. Management fees paid by the Fund are reduced on assets invested in the
Sweep Money Fund, in an amount not to exceed the management fees paid by the
Sweep Money Fund. The Fund earned $204,021 of dividend income from investment in
the Sweep Money Fund for the year ended September 30, 2003.

20 | Annual Report

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN STRATEGIC MORTGAGE
PORTFOLIO

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 Mortgage
Portfolio (the "Fund") at September 30, 2003, 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 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
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 auditing standards generally accepted in
the United States of America, which 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 September 30, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.

PricewaterhouseCoopers LLP

San Francisco, California
November 4, 2003

Annual Report | 21

Board Members and Officers

The name, age 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. Each board member will serve until
that person's successor is elected and qualified.

INDEPENDENT BOARD MEMBERS

- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------

FRANK H. ABBOTT, III (82) Trustee Since 1992 115 None
One Franklin Parkway
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Director, Abbott Corporation (an investment company).
- ------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (71) Trustee Since 1992 142 Director, 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).
- ------------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (71) Trustee Since 1992 143 None
One Franklin Parkway
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch.
- ------------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (51) Trustee Since 92 Director, Amerada Hess Corporation
One Franklin Parkway April 2003 (exploration and refining of oil and
San Mateo, CA 94403-1906 gas); Beverly Enterprises, Inc. (health
care); H.J. Heinz Company (processed
foods and allied products); RTI
International Metals, Inc. (manufacture
and distribution of titanium); and
Canadian National Railway (railroad).

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).
- ------------------------------------------------------------------------------------------------------------------------------------

22 | Annual Report

FRANK W.T. LAHAYE (74) Trustee Since 1992 115 Director, The California Center for Land
One Franklin Parkway Recycling (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).
- ------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (75) Trustee Since 1998 142 Director, White Mountains Insurance
One Franklin Parkway Group, Ltd. (holding company); Martek
San Mateo, CA 94403-1906 Biosciences Corporation; MedImmune, Inc.
(biotechnology); Overstock.com (Internet
services); and Spacehab, Inc. (aerospace
services); and FORMERLY, Director, MCI
Communication Corporation (subsequently
known as MCI WorldCom, Inc. and
WorldCom, Inc.) (communications
services) (1988-2002).

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and FORMERLY, Chairman, White River Corporation
(financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association
of Securities Dealers, Inc.(1970-1987).
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INTERESTED BOARD MEMBERS AND OFFICERS

**HARMON E. BURNS (58) Trustee and Trustee since 38 None
One Franklin Parkway Vice 1993 and
San Mateo, CA 94403-1906 President Vice President
since 1992

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors,Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services,
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 49 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (70) Trustee and Trustee since 142 None
One Franklin Parkway Chairman of 1992 and
San Mateo, CA 94403-1906 the Board Chairman of the
Board since 1993

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice
President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or
trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in
Franklin Templeton Investments.
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Annual Report | 23

**RUPERT H. JOHNSON, JR. (63) Trustee, Trustee since 125 None
One Franklin Parkway President and 1992, President
San Mateo, CA 94403-1906 Chief since 1993 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.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, 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 49 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
MARTIN L. FLANAGAN (43) Vice Since 1995 Not Applicable None
One Franklin Parkway President
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive
Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and Chief Operating
Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin
Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory
Services, LLC; Chairman, Franklin Templeton 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 49 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (56) Senior Vice Since 2002 Not Applicable None
500 East Broward Blvd. President and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091Executive
Officer -
Finance and
Administration

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC, and officer of some of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------

24 | Annual Report

DAVID P. GOSS (56) Vice President Since 2000 Not Applicable None
One Franklin Parkway
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources, Inc.;
officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and
Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000).
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BARBARA J. GREEN (55) Vice President Since 2000 Not Applicable None
One Franklin Parkway
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, Inc.,
Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin
Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin
Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment
companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant
and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts)
(until 1979).
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MICHAEL O. MAGDOL (66) Vice Since 2002 Not Applicable Director, FTI Banque, Arch Chemicals,
600 Fifth Avenue President - Inc. and Lingnan Foundation
Rockefeller Center AML
New York, NY 10048-0772 Compliance

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; and officer and/or director, as the case
may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 47 of the investment companies in Franklin Templeton
Investments.
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KIMBERLEY H. MONASTERIO (39) Treasurer and Treasurer since Not Applicable None
One Franklin Parkway Chief 2000
San Mateo, CA 94403-1906 Financial and Chief
Officer Financial Officer
since 2002

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; and officer of 51 of the investment companies in Franklin Templeton
Investments.
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Annual Report | 25

MURRAY L. SIMPSON (66) Vice President Since 2000 Not Applicable None
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of the
subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY,
Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director,
Templeton Asset Management Ltd. (until 1999).
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*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 adviser or affiliated investment
advisers.
**Charles B. Johnson and Rupert H. Johnson, Jr. are considered
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. (Resources), which is the parent company of the Trust's adviser
and distributor. Harmon E. Burns is considered an interested person of the Trust
under the federal securities laws due to his position as officer and director of
Resources.

Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.

THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE TRUST TO DISCLOSE WHETHER THE TRUST'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE TRUST'S BOARD OF TRUSTEES HAVE DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED FRANK W.T. LAHAYE AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD
BELIEVES THAT MR. LAHAYE QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE
BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS PRESIDENT AND DIRECTOR
OF MCCORMICK SELPH ASSOCIATES FROM 1954 THROUGH 1965; DIRECTOR AND CHAIRMAN OF
TELEDYNE CANADA LTD. FROM 1966 THROUGH 1971; DIRECTOR AND CHAIRMAN OF
QUARTERDECK CORPORATION FROM 1982 THROUGH 1998; AND SERVICES AS A DIRECTOR OF
VARIOUS OTHER PUBLIC COMPANIES INCLUDING U.S. TELEPHONE INC. (1981-1984), FISHER
IMAGING INC. (1991-1998) AND DIGITAL TRANSMISSIONS SYSTEMS (1995-1999). IN
ADDITION, MR. LAHAYE SERVED FROM 1981 TO 2000 AS A DIRECTOR AND CHAIRMAN OF
PEREGRINE VENTURE MANAGEMENT CO., A VENTURE CAPITAL FIRM, AND HAS BEEN A MEMBER
AND CHAIRMAN OF THE TRUST'S AUDIT COMMITTEE SINCE ITS INCEPTION. AS A RESULT OF
SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF TRUSTEES BELIEVES THAT MR. LAHAYE
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 TRUST, AS WELL AS AN
UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN
UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. LAHAYE IS AN INDEPENDENT TRUSTEE
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.

26 | Annual Report

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

PROXY VOTING POLICIES AND PROCEDURES

The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group.

Annual Report | 27

This page intentionally left blank.

LITERATURE REQUEST

For a brochure and prospectus, which contains more complete information,
including charges and expenses, call Franklin Templeton Investments at
1-800/DIAL BEN (R) (1-800/342-5236). Please read the prospectus carefully before
investing or sending money. 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.

FRANKLIN TEMPLETON INVESTMENTS

INTERNATIONAL

Mutual European Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund

GLOBAL
Franklin Global Aggressive Growth Fund
Franklin Global Growth Fund
Mutual Discovery Fund
Templeton Capital Accumulator Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund

GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1

VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 3
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Shares Fund

BLEND
Franklin Blue Chip Fund
Franklin Convertible Securities Fund

Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund 4

SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Franklin Technology Fund
Mutual Financial Services Fund

ASSET ALLOCATION
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund

INCOME
Franklin Adjustable U.S. Government Securities Fund 5
Franklin's AGE High Income Fund
Franklin Federal Money Fund 5, 6
Franklin Floating Rate Daily Access Fund
Franklin Floating Rate Trust 7
Franklin Income Fund
Franklin Money Fund 5, 6
Franklin Short-Intermediate
U.S. Government Securities Fund 5
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund

Franklin U.S. Government Securities Fund 5
Templeton Global Bond Fund

TAX-FREE INCOME 8
Double Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 9
Tax-Exempt Money Fund 5, 6

STATE-SPECIFIC TAX-FREE INCOME 8
Alabama
Arizona
California 10
Colorado
Connecticut
Florida 10
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 9
Michigan 9
Minnesota 9
Missouri
New Jersey
New York 10
North Carolina
Ohio 9
Oregon
Pennsylvania
Tennessee
Virginia

VARIABLE INSURANCE PRODUCTS FUNDS
Franklin Templeton Variable Insurance
Products Trust 11

1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders as well as select retirement
plans.
3. Effective June 30, 2003, the fund reopened to all new investors.
4. Upon reaching approximately $350 million in assets, the fund will close to
all investors.
5. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
6. No assurance exists that the fund's $1.00 per share price will be maintained.
It is possible to lose money by investing in the fund.
7. The fund is a continuously offered, closed-end fund. Shares may be purchased
daily; there is no daily redemption. However, each quarter, pending board
approval, the fund will authorize the repurchase of 5%-25% of the outstanding
number of shares. Investors may tender all or a portion of their shares during
the tender period.
8. For investors subject to the alternative minimum tax, a small portion of
these dividends may be taxable. Distributions of capital gains are generally
taxable.
9. Portfolio of insured municipal securities.
10. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA) and
limited-term, intermediate-term and money market portfolios (CA and NY).
11. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.

09/03

Not part of the annual report

[LOGO OMITTED]

FRANKLIN(R) TEMPLETON(R)
INVESTMENTS

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 Strategic
Mortgage Portfolio

INVESTMENT MANAGER
Franklin Advisers, Inc.

DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN (R)
franklintempleton.com

SHAREHOLDER SERVICES
1-800/632-2301

This report must be preceded or accompanied by the current Franklin Strategic
Mortgage Portfolio prospectus, which contains more complete information
including charges, expenses and risks.

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.

157 A2003 11/03

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.

(d) N/A

(f) Pursuant to Item 10(a), the Registrant is attaching as an exhibit a copy of
its code of ethics that applies to its principal executive officers 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 if Frank W.T. LaHaye and he is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.

Item 4. Principal Accountant Fees and Services. N/A
Item 5. Audit Committee of Listed Registrants. N/A
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies. N/A

Item 9. 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 10. Exhibits.

(A) Code of Ethics for Principal Executive and Senior Financial Officers.

(B)(1) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Kimberley H. Monasterio, Chief Financial Officer

(B(2) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Kimberley H. Monasterio, Chief Financial Officer

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

By /s/Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date November 28, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

By /s/Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date November 28, 2003

By /s/Kimberley H. Monasterio
Chief Financial Officer
Date November 28, 2003