EX-99 2 fcfpro205.txt FRANKLIN CUSTODIAN FUNDS 2005 PROSPECTUS FEBRUARY 1, 2005 The SEC has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. PROSPECTUS CLASS A, B, B1, C & R FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND FRANKLIN INCOME FUND FRANKLIN UTILITIES FUND FRANKLIN U.S. GOVERNMENT SECURITIES FUND FRANKLIN CUSTODIAN FUNDS, INC. [Insert FRANKLIN(R) TEMPLETON(R) INVESTMENTS logo] CONTENTS THE FUNDS [Begin callout] INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING [End callout] Franklin DynaTech Fund ........................ 2 Franklin Growth Fund .......................... 15 Franklin Income Fund .......................... 29 Franklin Utilities Fund ....................... 48 Franklin U.S. Government Securities Fund ...... 64 Additional Management Information ............. 77 Distributions and Taxes ....................... 80 YOUR ACCOUNT [Begin callout] INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES [End callout] Choosing a Share Class ........................ 83 Buying Shares ................................. 95 Investor Services ............................. 98 Selling Shares ................................ 102 Exchanging Shares ............................. 105 Account Policies .............................. 112 Questions ..................................... 122 FOR MORE INFORMATION [Begin callout] WHERE TO LEARN MORE ABOUT EACH FUND [End callout] Back Cover FRANKLIN DYNATECH FUND GOAL AND STRATEGIES GOAL The Fund's investment goal is capital appreciation. MAIN INVESTMENT STRATEGIES Under normal market conditions, the Fund invests substantially in equity securities of companies that emphasize scientific or technological development or that are in fast-growing industries. The Fund's manager searches for industry leaders and companies that it believes have a competitive advantage due, for example, to their state-of-the-art products or technologies. While companies that meet these criteria are often considered to be growth stocks, the manager will also invest in these companies when their stock price may be considered undervalued. [Begin callout] The Fund normally invests substantially in common stocks of companies that emphasize scientific or technological development or that are in fast-growing industries. [End callout] The Fund has no limitation on the capitalization of the companies in which it may invest. The Fund may invest a significant portion of its assets in smaller companies. Smaller company stocks are generally those with market capitalizations of less than $1.5 billion. An equity security, or stock, represents a proportionate share of the ownership of a company; its value is based on the success of the company's business and the value of its assets, as well as general market conditions. Common stocks and preferred stocks are examples of equity securities. When choosing equity investments for this Fund, the manager applies a "bottom-up," value-oriented, long-term approach, focusing on the market price of a company's securities relative to the manager's evaluation of the company's long-term earnings, asset value and cash flow potential. The manager also considers a company's price/earnings ratio, profit margins and liquidation value. Although the manager will search for investments across a large number of sectors, it expects to have significant positions in particular sectors. These sectors may include, for example, technology (including computers and telecommunications) and health care (including biotechnology). From time to time due to market appreciation, the Fund may develop a significant investment position in the securities of a single industry or company. Nevertheless, the manager will maintain such a position so long as it believes that the company or industry continues to meet its investment guidelines. TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, the manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments. Temporary defensive investments generally may include short-term U.S. government securities, commercial paper, bank obligations, repurchase agreements, money market fund shares and other money market instruments. The manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity. In these circumstances, the Fund may be unable to achieve its investment goal. MAIN RISKS STOCKS Stocks historically have outperformed other types of investments over the long term. Individual stock prices, however, tend to go up and down more dramatically. These price movements may result from factors affecting individual companies or industries, or the securities market as a whole. A slower-growth or recessionary economic environment could have an adverse effect on the price of the various stocks held by the Fund. TECHNOLOGY AND TELECOMMUNICATIONS COMPANIES The technology and telecommunications sector has historically been volatile due to the rapid pace of product change and development within the sector. For example, their products may not prove commercially successful or may become obsolete quickly. The activities of these companies may also be adversely affected by changes in government regulations. The stock prices of companies operating within this sector may be subject to abrupt or erratic movements. HEALTH CARE COMPANIES The activities of health care companies may be funded or subsidized by federal and state governments. If government funding and subsidies are reduced or discontinued, the profitability of these companies could be adversely affected. Health care companies may also be affected by government policies on health care reimbursements, regulatory approval for new drugs and medical instruments, and similar matters. They are also subject to legislative risk, i.e., the risk of a reform of the health care system through legislation. [Begin callout] Investors should be aware of the special risks of seeking capital appreciation among technology and fast-growing industries, including investment in securities of a more speculative nature. Because the securities the Fund holds fluctuate in price, the value of your investment in the Fund will go up and down. You could lose money. [End callout] SMALLER AND MIDSIZE COMPANIES While smaller and midsize companies may offer substantial opportunities for capital growth, they also involve substantial risks and should be considered speculative. Historically, smaller and midsize company securities have been more volatile in price than larger company securities, especially over the short term. Among the reasons for the greater price volatility are the less certain growth prospects of smaller and midsize companies, the lower degree of liquidity in the markets for such securities, and the greater sensitivity of smaller and midsize companies to changing economic conditions. In addition, smaller and midsize companies may lack depth of management, be unable to generate funds necessary for growth or development, or be developing or marketing new products or services for which markets are not yet established and may never become established. FOREIGN SECURITIES Investing in foreign securities typically involves more risks than investing in U.S. securities. These risks can increase the potential for losses in the Fund and may include, among others, currency risks (fluctuations in currency exchange rates), country risks (political, diplomatic, regional conflicts, terrorism, war, social and economic instability, currency devaluations and policies that have the effect of limiting or restricting foreign investment or the movement of assets), different trading practices, less government supervision, less publicly available information, limited trading markets and greater volatility. VALUE INVESTING A value stock may not increase in price as anticipated by the manager if other investors fail to recognize the company's value and bid up the price, the markets favor faster-growing companies, or the factors that the manager believes will increase the price of the security do not occur. PORTFOLIO TURNOVER Because of the Fund's strategy, the Fund's portfolio turnover rate may increase. This rate may be higher than that of other mutual funds. Higher portfolio turnover may involve additional expenses to the Fund, including transaction costs for purchases and sales of securities. These transactions may result in realization of taxable capital gains, including short-term capital gains, which are generally taxed at ordinary income tax rates. [Begin callout] Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. government. Mutual fund shares involve investment risks, including the possible loss of principal. [End callout] More detailed information about the Fund, its policies and risks can be found in the Fund's Statement of Additional Information (SAI). A description of the Fund's policies and procedures regarding the release of portfolio holdings information is also available in the Fund's SAI. Portfolio holdings information can be viewed only at franklintempleton.com. PERFORMANCE This bar chart and table show the volatility of the Fund's returns, which is one indicator of the risks of investing in the Fund. The bar chart shows changes in the Fund's returns from year to year over the past 10 calendar years. The table shows how the Fund's average annual total returns compare to those of a broad-based securities market index. Of course, past performance (before or after taxes) cannot predict or guarantee future results. CLASS A ANNUAL TOTAL RETURNS/1 [Insert bar graph] 26.13% 28.79% 14.62% 27.34% 37.19% -12.24% -13.11% -19.87 38.64% 7.69% 95 96 97 98 99 00 01 02 03 04 YEAR Best Quarter: Q4 '99 21.93% Worst Quarter: Q4 '00 -14.78% AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2004 ----------------------------------------------------------------------------- 1 Year 5 Years 10 Years ----------------------------------------------------------------------------- Franklin DynaTech Fund - Class A/2 Return Before Taxes 1.50% -2.97% 10.84% Return After Taxes on Distributions 1.50% -3.26% 10.17% Return After Taxes on Distributions and Sale of Fund Shares 0.97% -2.69% 9.26% S&P 500(R) Index/3 10.87% -2.30% 12.07% Nasdaq 100 Index/4 10.44% -15.25% 14.90% (indices reflect no deduction for fees, expenses, or taxes) SINCE INCEPTION 1 YEAR (2/1/00) ------------------------------------------------------------ Franklin DynaTech Fund - Class B/2 2.81% -3.19% S&P 500(R) Index/3 10.87% -1.31% Nasdaq 100 Index/4 10.44% -14.83% SINCE INCEPTION 1 YEAR 5 YEARS (9/16/96) ---------------------------------------------------------------------- Franklin DynaTech Fund - Class C/2 5.79% -2.56% 8.44% S&P 500(R) Index/3 10.87% -2.30% 9.07% Nasdaq 100 Index/4 10.44% -15.25% 10.64% After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your particular tax situation and may differ from those shown. These after-tax return figures do not apply to you if you hold your Fund shares through a tax-deferred arrangement such as a 401(k) plan or individual retirement account. The Fund's past performance, before and after taxes, is not necessarily an indication of how it will perform in the future. After-tax returns are shown only for Class A; after-tax returns for other classes of shares will vary. 1. Figures do not reflect sales charges. If they did, returns would be lower. 2. Figures reflect sales charges. All Fund performance assumes reinvestment of dividends and capital gains. 3. Source: Standard & Poor's Micropal. The S&P 500(R) Index is an unmanaged group of widely held common stocks covering a variety of industries. It includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 4. Source: Standard & Poor's Micropal. The unmanaged Nasdaq 100 Index measures all Nasdaq National Market common stocks. The index is market value-weighted and includes over 4,000 companies. It includes reinvested dividends. FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) -------------------------------------------------------------------- CLASS A CLASS B CLASS C -------------------------------------------------------------------- Maximum sales charge (load) as a percentage of offering price 5.75%/1 4.00% 1.00% Load imposed on purchases 5.75%/1 None None Maximum deferred sales charge (load) None/2 4.00%/3 1.00% Redemption fee on shares sold within 7 calendar days following their purchase 2.00% 2.00% 2.00% date/4 Please see "Choosing a Share Class" on page 83 for an explanation of how and when these sales charges apply. ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS) -------------------------------------------------------------------- CLASS A CLASS B CLASS C -------------------------------------------------------------------- Management fees/5 0.48% 0.48% 0.48% Distribution and service 0.25% 1.00% 1.00% (12b-1) fees Other expenses 0.25% 0.25% 0.25% --------------------------- Total annual Fund operating expenses/5 0.98 % 1.73% 1.73% --------------------------- Management fee reduction/5 -0.01% -0.01% -0.01% --------------------------- Net annual Fund operating expenses/5 0.97% 1.72% 1.72% --------------------------- 1. The dollar amount of the sales charge is the difference between the offering price of the shares purchased (which factors in the applicable sales charge in this table) and the net asset value of those shares. Since the offering price is calculated to two decimal places using standard rounding criteria, the number of shares purchased and the dollar amount of the sales charge as a percentage of the offering price and of your net investment may be higher or lower depending on whether there was a downward or upward rounding. 2. There is a 1% contingent deferred sales charge that applies to investments of $1 million or more (see page 88) and purchases by certain retirement plans without an initial sales charge. 3. Declines to zero after six years. 4. The redemption fee is calculated as a percentage of the amount redeemed (using standard rounding criteria), and may be charged when you sell or exchange your shares or if your shares are involuntarily redeemed. The fee is retained by the Fund and generally withheld from redemption proceeds. For more details, see "Redemption Fee" section. 5. The manager had agreed in advance to reduce its fee to reflect reduced services resulting from the Fund's investment in a Franklin Templeton money fund. This reduction is required by the Fund's Board of Directors and an exemptive order by the Securities and Exchange Commission. EXAMPLE This example can help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It assumes: o You invest $10,000 for the periods shown; o Your investment has a 5% return each year; and o The Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years ---------------------------------------------------------------------- If you sell your shares at the end of the period: Class A $668/1 $866 $1,080 $1,696 Class B $575 $842 $1,133 $1,831/2 Class C/3 $275 $542 $933 $2,030 If you do not sell your shares: Class B $175 $542 $933 $1,831/2 Class C/3 $175 $542 $933 $2,030 1. Assumes a contingent deferred sales charge (CDSC) will not apply. 2. Assumes conversion of Class B shares to Class A shares after eight years, lowering your annual expenses from that time on. 3. Revised to show the elimination of the initial sales charge on January 1, 2004. The actual costs are based on a rate that includes the initial sales charge of 1.00% imposed on purchases prior to January 1, 2004. These costs were $372, $636, $1,024 and $2,110, respectively, if you sell your shares at the end of the period or $273, $636, $1,024 and $2,110, respectively, if you do not sell your shares. MANAGEMENT Franklin Advisers, Inc. (Advisers), One Franklin Parkway, San Mateo, CA 94403-1906, is the Fund's investment manager. Together, Advisers and its affiliates manage over $402 billion in assets. The team responsible for the Fund's management is: RUPERT H. JOHNSON, JR., DIRECTOR OF ADVISERS Mr. Johnson has been a manager of the Fund since inception. He joined Franklin Templeton Investments in 1965. Mr. Johnson is primarily responsible for the Fund's investment management decisions. MATT MOBERG, VICE PRESIDENT OF ADVISERS Mr. Moberg has been a manager of the Fund since 2004. He joined Franklin Templeton Investments in 1998. ROBERT DEAN CFA, VICE PRESIDENT OF ADVISERS Mr. Dean has been a manager of the Fund since 2000. He joined Franklin Templeton Investments in 1995. For the fiscal year ended September 30, 2004, management fees, before any reduction, were 0.48% of the Fund's average monthly net assets. Under an agreement by the manager to reduce its fees to reflect reduced services resulting from the Fund's investment in a Franklin Templeton money fund, the Fund paid 0.47% of its average monthly net assets to the manager for its services. This reduction is required by the Fund's Board of Directors and an exemptive order by the Securities and Exchange Commission. FINANCIAL HIGHLIGHTS This table presents the Fund's financial performance for the past five years. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in the Fund assuming reinvestment of dividends and capital gains. This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's financial statements, are included in the annual report, which is available upon request. CLASS A YEAR ENDED SEPTEMBER 30, ---------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------------------------------------------------------------------- Per share data ($) Net asset value, beginning of year 20.17 15.37 18.76 28.60 23.11 ------------------------------------------ Net investment income (.09) (.06) .03 .44 .56 (loss)/1 Net realized and unrealized 1.93 4.86 (3.11) (9.70) 5.30 gains (losses) ------------------------------------------ Total from investment 1.84 4.80 (3.08) (9.26) 5.86 operations ------------------------------------------ Distributions from net investment - - (.29) (.58) (.37) income Distributions from tax return of - - (.02) - - capital ------------------------------------------ Total distributions - - (.31) (.58) (.37) ------------------------------------------ Redemption fees -/2 - - - - ------------------------------------------ NET ASSET VALUE, END OF 22.01 20.17 15.37 18.76 28.60 YEAR ------------------------------------------ Total return (%)/3 9.12 31.23 (16.83) (32.86) 25.57 Ratios/supplemental data Net assets, end of year ($ x 1,000) 640,120 558,687 413,309 530,074 809,140 Ratios to average net assets: (%) Expenses .97 1.04 1.00 .95 .94 Net investment income (.41) (.40) .13 1.93 1.98 Portfolio turnover rate (%) 14.93 13.68 8.11 4.07 5.45 CLASS B YEAR ENDED SEPTEMBER 30, ---------------------------------------------------------------------- 2004 2003 2002 2001 2000/4 ---------------------------------------------------------------------- Per share data ($) Net asset value, beginning of year 19.79 15.20 18.57 28.45 28.05 ------------------------------------------ Net investment income (.25) (.25) (.12) .25 .28 (loss)/1 Net realized and unrealized 1.89 4.84 (3.08) (9.62) .12 gains (losses) ------------------------------------------ Total from investment 1.64 4.59 (3.20) (9.37) .40 operations ------------------------------------------ Distributions from net investment - - (.16) (.51) - income Distributions from tax return of - - (.01) - - capital ------------------------------------------ Total distributions - - (.17) (.51) - ------------------------------------------ Redemption fees -/2 - - - - ------------------------------------------ NET ASSET VALUE, END OF 21.43 19.79 15.20 18.57 28.45 YEAR ------------------------------------------ Total return (%)/3 8.29 30.20 (17.51) (33.37) 1.43 Ratios/supplemental data Net assets, end of year ($ x 1,000) 18,824 10,406 5,066 5,473 4,749 Ratios to average net assets: (%) Expenses 1.72 1.79 1.75 1.70 1.73/5 Net investment income (1.16) (1.15) (.62) 1.13 1.43/5 (loss) Portfolio turnover rate (%) 14.93 13.68 8.11 4.07 5.45 CLASS C YEAR ENDED SEPTEMBER 30, ---------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------------------------------------------------------------------- Per share data ($) Net asset value, beginning of year 19.59 15.04 18.34 27.95 22.64 ------------------------------------------ Net investment income (.25) (.25) (.11) .27 .34 (loss)/1 Net realized and unrealized 1.87 4.80 (3.05) (9.50) 5.21 gains (losses) ------------------------------------------ Total from investment operations 1.62 4.55 (3.16) (9.23) 5.55 ------------------------------------------ Distributions from net investment - - (.13) (.38) (.24) income Distributions from tax return of capital - - (.01) - - ------------------------------------------ Total distributions - - (.14) (.38) (.24) ------------------------------------------ Redemptions fees -/2 - - - - ------------------------------------------ NET ASSET VALUE, END OF 21.21 19.59 15.04 18.34 27.95 YEAR ------------------------------------------ Total return (%)/3 8.27 30.25 (17.48) (33.36) 24.65 Ratios/supplemental data Net assets, end of year ($ x 1,000) 75,642 66,952 51,809 77,204 126,313 Ratios to average net assets: (%) Expenses 1.72 1.79 1.74 1.70 1.69 Net investment income (1.16) (1.15) (.61) 1.19 1.23 (loss) Portfolio turnover rate (%) 14.93 13.68 8.11 4.07 5.45 1. Based on average daily shares outstanding. 2. Amount is less than $0.001 per share. 3. Total return does not include sales charges, and is not annualized. 4. For the period February 1, 2000 (effective date) to September 30, 2000 for Class B. 5. Annualized. FRANKLIN GROWTH FUND GOAL AND STRATEGIES GOAL The Fund's investment goal is capital appreciation. MAIN INVESTMENT STRATEGIES Under normal market conditions, the Fund invests substantially in the equity securities of companies that are leaders in their industries. In selecting securities, the manager considers many factors, including historical and potential growth in revenues and earnings, assessment of strength and quality of management, and determination of a company's strategic positioning in its industry. [Begin callout] The Fund normally invests substantially in the common stocks of companies that are leaders in their industries. [End callout] Although the Fund normally invests substantially in the equity securities of U.S.-based large and medium market capitalization companies, it may invest in companies in new and emerging industries where growth is expected to be above average and may invest up to 40% of its assets in smaller companies. Smaller company stocks are generally those with market capitalizations of less than $1.5 billion. The Fund may invest up to 40% of its assets in foreign securities and up to 10% of its assets in non-U.S. dollar denominated securities. An equity security, or stock, represents a proportionate share of the ownership of a company; its value is based on the success of the company's business and the value of its assets, as well as general market conditions. Common stocks, preferred stocks and convertible securities are examples of equity securities. Convertible securities generally are debt securities or preferred stock that may be converted into common stock after certain time periods or under certain circumstances. The Fund's manager is a research driven, fundamental investor, generally pursuing a "buy-and-hold" growth strategy. The Fund has historically had low portfolio turnover, and its portfolio turnover is expected to be significantly lower than that of comparable actively managed equity funds. Because the Fund uses a "buy-and-hold" investment strategy the Fund's portfolio securities may have a higher level of unrealized capital appreciation than if the Fund did not use these strategies. During periods of net redemptions of Fund shares or when market conditions warrant, the manager may sell these securities, generating a higher level of taxable gain for shareholders than would occur if the Fund had not used these strategies. As a "bottom-up" investor focusing primarily on individual securities, the manager chooses companies that it believes are positioned for growth in revenues, earnings or assets. The manager relies on a team of analysts to provide in-depth industry expertise and uses both qualitative and quantitative analysis to evaluate companies for distinct and sustainable competitive advantages, which are likely to lead to growth in earnings and/or share price. Such advantages as a particular marketing niche, proven technology, sound financial records, strong management, and industry leadership are all factors the manager believes point to strong growth potential. Although the manager will search for investments across a large number of sectors, it expects to have significant positions in particular sectors. These sectors may include, for example, technology (including computers and telecommunications) and health care (including biotechnology). Due to market appreciation, the Fund's investment in an industry sector or the securities of a single company may come to represent a significant portion of the Fund's portfolio. Nevertheless, the manager will maintain such a position so long as it believes that the company or industry continues to meet its investment guidelines. TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, the manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments. Temporary defensive investments generally may include short-term U.S. government securities, commercial paper, bank obligations, repurchase agreements, money market fund shares and other money market instruments. The manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity. In these circumstances, the Fund may be unable to achieve its investment goal. MAIN RISKS STOCKS Stocks historically have outperformed other types of investments over the long term. Individual stock prices, however, tend to go up and down more dramatically. These price movements may result from factors affecting individual companies or industries, or the securities market as a whole. A slower-growth or recessionary economic environment could have an adverse effect on the price of the various stocks held by the Fund. SMALLER AND MIDSIZE COMPANIES While smaller and midsize companies may offer substantial opportunities for capital growth, they also involve substantial risks and should be considered speculative. Historically, smaller and midsize company securities have been more volatile in price than larger company securities, especially over the short term. Among the reasons for the greater price volatility are the less certain growth prospects of smaller and midsize companies, the lower degree of liquidity in the markets for such securities, and the greater sensitivity of smaller and midsize companies to changing economic conditions. [Begin callout] Because the securities the Fund holds fluctuate in price, the value of your investment in the Fund will go up and down. You could lose money. [End callout] In addition, smaller and midsize companies may lack depth of management, be unable to generate funds necessary for growth or development, or be developing or marketing new products or services for which markets are not yet established and may never become established. FOREIGN SECURITIES Investing in foreign securities typically involves more risks than investing in U.S. securities. These risks can increase the potential for losses in the Fund and may include, among others, currency risks (fluctuations in currency exchange rates), country risks (political, diplomatic, regional conflicts, terrorism, war, social and economic instability, currency devaluations and policies that have the effect of limiting or restricting foreign investment or the movement of assets), different trading practices, less government supervision, less publicly available information, limited trading markets and greater volatility. TECHNOLOGY AND TELECOMMUNICATIONS COMPANIES The technology and telecommunications sector has historically been volatile due to the rapid pace of product change and development within the sector. For example, their products may not prove commercially successful or may become obsolete quickly. The activities of these companies may also be adversely affected by changes in government regulations. The stock prices of companies operating within this sector may be subject to abrupt or erratic movements. HEALTH CARE COMPANIES The activities of health care companies may be funded or subsidized by federal and state governments. If government funding and subsidies are reduced or discontinued, the profitability of these companies could be adversely affected. Health care companies may also be affected by government policies on health care reimbursements, regulatory approval for new drugs and medical instruments, and similar matters. They are also subject to legislative risk, i.e., the risk of a reform of the health care system through legislation. More detailed information about the Fund, its policies and risks can be found in the Fund's Statement of Additional Information (SAI). A description of the Fund's policies and procedures regarding the release of portfolio holdings information is also available in the Fund's SAI. Portfolio holdings information can be viewed online at franklintempleton.com. [Begin callout] Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. government. Mutual fund shares involve investment risks, including the possible loss of principal. [End callout] PERFORMANCE This bar chart and table show the volatility of the Fund's returns, which is one indicator of the risks of investing in the Fund. The bar chart shows changes in the Fund's returns from year to year over the past 10 calendar years. The table shows how the Fund's average annual total returns compare to those of a broad-based securities market index. Of course, past performance (before or after taxes) cannot predict or guarantee future results. Class A Annual Total Returns/1 [Insert bar graph] 38.40% 16.68% 18.60% 18.52% 12.19% 7.53% -9.47% -24.35% 28.03% 11.30% 95 96 97 98 99 00 01 02 03 04 YEAR Best Quarter: Q2 '03 17.70% Worst Quarter: Q3 '02 -18.75% AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2004 ---------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS ---------------------------------------------------------------------- Franklin Growth Fund - Class A/2 Return Before Taxes 4.89% -0.22% 9.68% Return After Taxes on Distributions 4.85% -0.57% 9.11% Return After Taxes on Distributions and Sale of Fund Shares 3.23% -0.33% 8.30% S&P 500(R) Index/3 10.87% -2.30% 12.07% (index reflects no deduction for fees, expenses, or taxes) SINCE INCEPTION 1 YEAR (1/1/99) ------------------------------------------------------------ Franklin Growth Fund - Class B/2 6.47% 1.84% S&P 500(R) Index/3 10.87% 1.25% SINCE INCEPTION 1 YEAR 5 YEARS (5/1/95) ---------------------------------------------------------------------- Franklin Growth Fund - Class C/2 9.46% 0.21% 8.56% S&P 500(R) Index/3 10.87% -2.30% 11.10% 1 YEAR 5 YEARS 10 YEARS ---------------------------------------------------------------------- Franklin Growth Fund - Class R/2,4 10.04% 0.72% 10.03% S&P 500(R) Index/3 10.87% -2.30% 12.07% After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your particular tax situation and may differ from those shown. These after-tax return figures do not apply to you if you hold your Fund shares through a tax-deferred arrangement such as a 401(k) plan or individual retirement account. The Fund's past performance, before and after taxes, is not necessarily an indication of how it will perform in the future. After-tax returns are shown only for Class A; after-tax returns for other classes of shares will vary. 1. Figures do not reflect sales charges. If they did, returns would be lower. 2. Figures reflect sales charges. All Fund performance assumes reinvestment of dividends and capital gains. 3. Source: Standard & Poor's Micropal. The S&P 500(R) Index is an unmanaged group of widely held common stocks covering a variety of industries. It includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 4. Effective January 1, 2002, the Fund began offering Class R shares, which do not have initial sales charges. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to January 1, 2002, a restated figure is used based on the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, reflecting the Rule 12b-1 rate differential between Class A and R; and (b) for periods after January 1, 2002, actual Class R performance is used reflecting all charges and fees applicable to that class. FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) ------------------------------------------------------------------- CLASS A CLASS B CLASS C CLASS R ------------------------------------------------------------------- Maximum sales charge (load) as a percentage of offering 5.75%/1 4.00% 1.00% 1.00% price Load imposed on purchases 5.75%/1 None None None Maximum deferred sales charge (load) None/2 4.00%/3 1.00% 1.00% Redemption fee on shares sold within 7 calendar days following their purchase date/4 2.00% 2.00% 2.00% 2.00% Please see "Choosing a Share Class" on page 83 for an explanation of how and when these sales charges apply. ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS) ------------------------------------------------------------------- CLASS A CLASS B CLASS C CLASS R ------------------------------------------------------------------- Management fees 0.46% 0.46% 0.46% 0.46% Distribution and service (12b-1) fees 0.25% 1.00% 1.00% 0.50% Other expenses 0.27% 0.27% 0.27% 0.27% ------------------------------------ TOTAL ANNUAL FUND OPERATING EXPENSES 0.98% 1.73% 1.73% 1.23% ------------------------------------ 1. The dollar amount of the sales charge is the difference between the offering price of the shares purchased (which factors in the applicable sales charge in this table) and the net asset value of those shares. Since the offering price is calculated to two decimal places using standard rounding criteria, the number of shares purchased and the dollar amount of the sales charge as a percentage of the offering price and of your net investment may be higher or lower depending on whether there was a downward or upward rounding. 2. There is a 1% contingent deferred sales charge that applies to investments of $1 million or more (see page 88) and purchases by certain retirement plans without an initial sales charge. 3. Declines to zero after six years. 4. The redemption fee is calculated as a percentage of the amount redeemed (using standard rounding criteria), and may be charged when you sell or exchange your shares or if your shares are involuntarily redeemed. The fee is retained by the Fund and generally withheld from redemption proceeds. For more details, see "Redemption Fee" section. EXAMPLE This example can help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It assumes: o You invest $10,000 for the periods shown; o Your investment has a 5% return each year; and o The Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS ---------------------------------------------------------------- If you sell your shares at the end of the period: CLASS A $669/1 $869 $1,086 $1,707 CLASS B $576 $845 $1,139 $1,842/2 CLASS C/3 $276 $545 $939 $2,041 CLASS R $225 $390 $676 $1,489 If you do not sell your shares: CLASS B $176 $545 $939 $1,842/2 CLASS C/3 $176 $545 $939 $2,041 CLASS R $125 $390 $676 $1,489 1. Assumes a contingent deferred sales charge (CDSC) will not apply. 2. Assumes conversion of Class B shares to Class A shares after eight years, lowering your annual expenses from that time on. 3. Revised to show the elimination of the initial sales charge on January 1, 2004. The actual costs are based on a rate that includes the initial sales charge of 1.00% imposed on purchases prior to January 1, 2004. These costs were $373, $639, $1,029 and $2,121, respectively, if you sell your shares at the end of the period or $274, $639, $1,029 and $2,121, respectively, if you do not sell your shares. MANAGEMENT Franklin Investment Advisory Services, Inc. (Investment Advisory), One Franklin Parkway, San Mateo, CA 94403-1906, is the Fund's investment manager. Together, Investment Advisory and its affiliates manage over $402 billion in assets. The team responsible for the Fund's management is: VIVIAN J. PALMIERI, VICE PRESIDENT OF INVESTMENT ADVISORY Mr. Palmieri has been a manager of the Fund since 1965. He joined Franklin Templeton Investments in 1965. CONRAD B. HERRMANN CFA, PORTFOLIO MANAGER OF INVESTMENT ADVISORY Mr. Herrmann has been a manager of the Fund since 1993. He joined Franklin Templeton Investments in 1989. The Fund pays Investment Advisory a fee for managing the Fund's assets. For the fiscal year ended September 30, 2004, the Fund paid 0.46% of its average monthly net assets to the manager for its services. FINANCIAL HIGHLIGHTS This table presents the Fund's financial performance for the past five years. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in the Fund assuming reinvestment of dividends and capital gains. This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's financial statements, are included in the annual report, which is available upon request. CLASS A YEAR ENDED SEPTEMBER 30, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ----------------------------------------------------------------------- Per share data ($) Net asset value, beginning of year 26.87 22.02 27.81 36.91 33.21 -------------------------------------------- Net investment income1 .06 .08 .07 .23 .45 Net realized and unrealized 3.68 4.81 (5.65) (7.26) 3.96 gains (losses) -------------------------------------------- Total from investment 3.74 4.89 (5.58) (7.03) 4.41 operations -------------------------------------------- Distributions from net investment income (.03) (.04) (.16) (.40) (.45) Distributions from net realized gains - - (.05) (1.67) (.26) -------------------------------------------- Total distributions (.03) (.04) (.21) (2.07) (.71) -------------------------------------------- Redemptions fees -/2 - - - - -------------------------------------------- NET ASSET VALUE, END OF 30.58 26.87 22.02 27.81 36.91 YEAR -------------------------------------------- Total return (%)/3 13.92 22.27 (20.35) (20.12) 13.53 Ratios/supplemental data Net assets, end of year ($ x 1,000) 1,531,871 1,433,742 1,249,745 1,657,387 2,149,928 Ratios to average net assets: (%) Expenses .98 1.06 .96 .91 .93 Net investment income .20 .31 .24 .69 1.27 Portfolio turnover rate 1.56 5.12 2.16 .29 8.12 (%) CLASS B YEAR ENDED SEPTEMBER 30, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ----------------------------------------------------------------------- Per share data ($) Net asset value, beginning of year 26.32 21.70 27.46 36.54 33.03 -------------------------------------------- Net investment income (.16) (.11) (.14) (.03) .16 (loss)/1 Net realized and unrealized 3.61 4.73 (5.57) (7.18) 3.96 gains (losses) -------------------------------------------- Total from investment operations 3.45 4.62 (5.71) (7.21) 4.12 -------------------------------------------- Distributions from net investment income - - - (.20) (.35) Distributions from net realized gains - - (.05) (1.67) (.26) -------------------------------------------- Total distributions - - (.05) (1.87) (.61) -------------------------------------------- Redemption fees -/2 - - - - -------------------------------------------- NET ASSET VALUE, END OF 29.77 26.32 21.70 27.46 36.54 YEAR -------------------------------------------- Total return (%)/3 13.11 21.29 (20.90) (20.74) 12.68 Ratios/supplemental data Net assets, end of year ($ x 1,000) 121,986 103,499 75,141 66,095 38,353 Ratios to average net assets: (%) Expenses 1.73 1.81 1.71 1.66 1.68 Net investment income (.55) (.44) (.51) (.10) .45 (loss) Portfolio turnover rate 1.56 5.12 2.16 .29 8.12 (%) CLASS C YEAR ENDED SEPTEMBER 30, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ----------------------------------------------------------------------- Per share data ($) Net asset value, beginning of year 26.09 21.51 27.24 36.19 32.58 -------------------------------------------- Net investment (.16) (.11) (.14) (.02) .18 income(loss)/1 Net realized and unrealized 3.58 4.69 (5.54) (7.13) 3.91 gains (losses) -------------------------------------------- Total from investment 3.42 4.58 (5.68) (7.15) 4.09 operations -------------------------------------------- Distributions from net investment income - - - (.13) (.22) Distributions from net realized gains - - (.05) (1.67) (.26) -------------------------------------------- Total distributions - - (.05) (1.80) (.48) -------------------------------------------- Redemption fees -/2 - - - - -------------------------------------------- NET ASSET VALUE, END OF 29.51 26.09 21.51 27.24 36.19 YEAR -------------------------------------------- Total return (%)/3 13.11 21.29 (20.92) (20.72) 12.71 Ratios/supplemental data Net assets, end of year ($ x 1,000) 270,131 259,169 232,307 310,650 374,483 Ratios to average net assets: (%) Expenses 1.73 1.82 1.70 1.66 1.68 Net investment income (.55) (.45) (.51) (.06) .52 (loss) Portfolio turnover rate 1.56 5.12 2.16 .29 8.12 (%) CLASS R YEAR ENDED SEPTEMBER 30, -------------------------------------------------------- 2004 2003 2002/4 -------------------------------------------------------- Per share data ($) Net asset value, beginning of year 26.74 21.98 31.59 ----------------------------- Net investment (.02) - - income(loss)/1 ----------------------------- Net realized and unrealized 3.67 4.81 (9.61) gains (losses) ----------------------------- Total from investment 3.65 4.81 (9.61) operations ----------------------------- Distributions from net investment income - (.05) - ----------------------------- Redemption fees -/2 - - ----------------------------- Net asset value, end of 30.39 26.74 21.98 year ----------------------------- Total return (%)/3 13.65 21.92 (30.42) Ratios/supplemental data Net assets, end of year ($ x 1,000) 20,060 14,755 2,788 Ratios to average net assets: (%) Expenses 1.23 1.31 1.215 Net investment income (.05) .06 .025 Portfolio turnover rate 1.56 5.12 2.16 (%) 1. Based on average daily shares outstanding. 2. Amount is less than $0.001 per share. 3. Total return does not include sales charges and is not annualized. 4. For the period January 1, 2002 (effective date) to September 30, 2002 for Class R. 5. Annualized. FRANKLIN INCOME FUND GOAL AND STRATEGIES GOAL The Fund's investment goal is to maximize income while maintaining prospects for capital appreciation. MAIN INVESTMENT STRATEGIES Under normal market conditions, the Fund invests in a diversified portfolio of debt and equity securities. Debt securities represent an obligation of the issuer to repay a loan of money to it and generally provide for the payment of interest. These include bonds, notes and debentures. An equity security, or stock, represents a proportionate share of the ownership of a company; its value is based on the success of the company's business and the value of its assets, as well as general market conditions. Common stocks, preferred stocks and convertible securities are examples of equity securities. Convertible securities generally are debt securities or preferred stock that may be converted into common stock after certain time periods or under certain circumstances. [Begin callout] The Fund normally invests in a diversified portfolio of bonds and stocks in the U.S. and abroad. [End callout] The Fund seeks income by selecting investments such as corporate, foreign and U.S. Treasury bonds, as well as stocks with attractive dividend yields. In its search for growth opportunities, the Fund maintains the flexibility to invest in common stocks of companies from a variety of industries such as utilities, oil, gas, real estate and consumer goods. The Fund may invest up to 100% of total assets in debt securities that are rated below investment grade, but it is not currently expected that the Fund will invest more than 50% of its assets in these securities. Securities rated in the top four ratings categories by independent rating organizations such as Standard & Poor's Ratings Group (S&P(R)) and Moody's Investors Service (Moody's) are considered investment grade. Higher yields are ordinarily available from securities in the lower rating categories, such as securities rated Ba or lower by Moody's or BB or lower by S&P or from unrated securities deemed by the Fund's manager to be of comparable quality. Such high-yield securities are considered to be below "investment grade" and are sometimes referred to as "junk bonds." Generally, lower-rated securities pay higher yields than more highly rated securities to compensate investors for the higher risk. As of September 30, 2004, approximately 28.8% of the Fund's net assets were invested in lower-rated and comparable quality unrated debt securities. The Fund may invest up to 25% of its assets in foreign securities. It ordinarily buys foreign securities that are traded in the U.S. or American Depositary Receipts, which are certificates typically issued by a bank or trust company that give their holders the right to receive securities issued by a foreign or a domestic company. The Fund's manager searches for undervalued or out-of-favor securities it believes offer opportunities for income today and significant growth tomorrow. It performs independent analysis of the debt securities being considered for the Fund's portfolio, rather than relying principally on the ratings assigned by rating agencies. In its analysis, the manager considers a variety of factors, including: o the experience and managerial strength of the company; o responsiveness to changes in interest rates and business conditions; o debt maturity schedules and borrowing requirements; o the company's changing financial condition and market recognition of the change; and o a security's relative value based on such factors as anticipated cash flow, interest or dividend coverage, asset coverage, and earnings prospects. TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, the manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments. Temporary defensive investments generally may include short-term U.S. government securities, commercial paper, bank obligations, repurchase agreements, money market fund shares and other money market instruments. The manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity. In these circumstances, the Fund may be unable to achieve its investment goal. MAIN RISKS STOCKS Stocks historically have outperformed other types of investments over the long term. Individual stock prices, however, tend to go up and down more dramatically. These price movements may result from factors affecting individual companies or industries, or the securities market as a whole. A slower-growth or recessionary economic environment could have an adverse effect on the price of the various stocks held by the Fund. Utility company securities are particularly sensitive to interest rate movements: when interest rates rise, the stock prices of these companies tend to fall. [Begin callout] If a security's credit rating is downgraded or a company's financial condition deteriorates, the price of the security will fall and so too will the Fund's share price. If interest rates rise, the price of the Fund's debt securities will also fall. Because the value of the Fund's holdings fluctuates in price, the value of your investment in the Fund will go up and down. You could lose money. [End callout] CREDIT An issuer of securities may be unable to make interest payments and repay principal. Changes in an issuer's financial strength or in a security's credit rating may affect a security's value and, thus, impact Fund performance. Lower-rated securities. Junk bonds generally have more credit risk than higher-rated securities. Companies issuing high yield, fixed-income securities are not as strong financially as those issuing securities with higher credit ratings. These companies are more likely to encounter financial difficulties and are more vulnerable to changes in the economy, such as a recession or a sustained period of rising interest rates, that could affect their ability to make interest and principal payments. If an issuer stops making interest and/or principal payments, payments on the securities may never resume. These securities may be worthless and the Fund could lose its entire investment. The prices of high yield, fixed-income securities fluctuate more than higher-quality securities. Prices are especially sensitive to developments affecting the company's business and to changes in the ratings assigned by rating agencies. Prices often are closely linked with the company's stock prices and typically rise and fall in response to factors that affect stock prices. In addition, the entire high yield securities market can experience sudden and sharp price swings due to changes in economic conditions, stock market activity, large sustained sales by major investors, a high-profile default, or other factors. High yield securities generally are less liquid than higher-quality securities. Many of these securities do not trade frequently, and when they do their prices may be significantly higher or lower than expected. At times, it may be difficult to sell these securities promptly at an acceptable price, which may limit the Fund's ability to sell securities in response to specific economic events or to meet redemption requests. INTEREST RATE When interest rates rise, debt security prices fall. The opposite is also true: debt security prices rise when interest rates fall. In general, securities with longer maturities are more sensitive to changes in interest rates. The Fund may also maintain investments in equity securities of companies whose values are sensitive to interest rate changes such as utilities and real estate securities. INCOME Since the Fund can only distribute what it earns, the Fund's distributions to its shareholders may decline when interest rates fall. CONVERTIBLE SECURITIES The value of convertible securities may rise and fall with the market value of the underlying stock or, like a debt security, vary with changes in interest rates and the credit quality of the issuer. A convertible security tends to perform more like a stock when the underlying stock price is high (because it is assumed it will be converted) and more like a debt security when the underlying stock price is low (because it is assumed it will not be converted). Because its value can be influenced by many different factors, a convertible security is not as sensitive to interest rate changes as a similar non-convertible debt security, and generally has less potential for gain or loss than the underlying stock. FOREIGN SECURITIES Investing in foreign securities, including securities of foreign governments and depositary receipts, typically involves more risks than investing in U.S. securities. Certain of these risks also may apply to securities of U.S. companies with significant foreign operations. These risks can increase the potential for losses in the Fund and affect its share price. Currency exchange rates. Foreign securities may be issued and traded in foreign currencies. As a result, their values may be affected by changes in exchange rates between foreign currencies and the U.S. dollar, as well as between currencies of countries other than the U.S. For example, if the value of the U.S. dollar goes up compared to a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. Political and economic developments. The political, economic and social structures of some foreign countries may be less stable and more volatile than those in the U.S. Investments in these countries may be subject to the risks of internal and external conflicts, currency devaluations, foreign ownership limitations and tax increases. It is possible that a government may take over the assets or operations of a company or impose restrictions on the exchange or export of currency or other assets. Some countries also may have different legal systems that may make it difficult for the Fund to vote proxies, exercise shareholder rights, and pursue legal remedies with respect to its foreign investments. Diplomatic and political developments, including rapid and adverse political changes, social instability, regional conflicts, terrorism and war, could affect the economies, industries and securities and currency markets, and the value of the Fund's investments, in non-U.S. countries. These factors are extremely difficult, if not impossible, to predict and take into account with respect to the Fund's investments. Trading practices. Brokerage commissions and other fees generally are higher for foreign securities. Government supervision and regulation of foreign stock exchanges, currency markets, trading systems and brokers may be less than in the U.S. The procedures and rules governing foreign transactions and custody (holding of the Fund's assets) also may involve delays in payment, delivery or recovery of money or investments. Availability of information. Foreign companies may not be subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies. Thus, there may be less information publicly available about foreign companies than about most U.S. companies. Limited markets. Certain foreign securities may be less liquid (harder to sell) and more volatile than many U.S. securities. This means the Fund may at times be unable to sell foreign securities at favorable prices. VALUE INVESTING A value stock or debt security may not increase in price as anticipated by the manager if other investors fail to recognize the company's value and bid up the price, the markets favor faster-growing companies, or the factors that the manager believes will increase the price of the security do not occur. The Fund's policy of investing in securities that may be out of favor, including turnarounds, cyclical companies, companies emerging from bankruptcy, companies reporting poor earnings, and companies whose share prices have declined sharply or that are not widely followed by other investors, differs from the approach followed by many other mutual funds. Cyclical stocks in which the Fund may invest tend to increase in value more quickly during economic upturns than non-cyclical stocks, but they also tend to lose value more quickly in economic downturns. Companies emerging from bankruptcy may have difficulty retaining customers and suppliers. These companies may have relatively weak balance sheets and, during economic downturns, they may have insufficient cash flow to pay their debt obligations and difficulty finding additional financing needed for their operations. More detailed information about the Fund, its policies and risks can be found in the Fund's Statement of Additional Information (SAI). A description of the Fund's policies and procedures regarding the release of portfolio holdings information is also available in the Fund's SAI. Portfolio holdings information can be viewed online at franklintempleton.com. [Begin callout] Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. government. Mutual fund shares involve investment risks, including the possible loss of principal. [End callout] PERFORMANCE This bar chart and table show the volatility of the Fund's returns, which is one indicator of the risks of investing in the Fund. The bar chart shows changes in the Fund's returns from year to year over the past 10 calendar years. The table shows how the Fund's average annual total returns compare to those of a broad-based securities market index. Of course, past performance (before or after taxes) cannot predict or guarantee future results. CLASS A ANNUAL TOTAL RETURNS/1 [Insert bar graph] 21.29% 10.45% 16.85% 0.95% -0.74% 20.59% 0.65% -1.06% 30.96% 12.17% 95 96 97 98 99 00 01 02 03 04 YEAR Best Quarter: Q2 '03 14.24% Worst Quarter: Q2 '02 -5.98% AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2004 ----------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS ----------------------------------------------------------------- Franklin Income Fund - Class A/2 Return Before Taxes 7.28% 11.01% 10.25% Return After Taxes on Distributions 5.10% 7.92% 6.95% Return After Taxes on 5.01% 7.55% 6.75% Distributions and Sale of Fund Shares S&P 500(R) Index/3 10.87% -2.30% 12.07% Lehman Bros. Gov't/Credit Index/4 4.34% 7.71% 7.72% (indices reflect no deduction for fees, expenses, or taxes) SINCE INCEPTION 1 YEAR (1/1/99) ------------------------------------------------------- Franklin Income Fund - Class B/2,5 7.29% 8.59% S&P 500(R) Index/3 10.87% 1.25% Lehman Bros. Gov't/Credit Index/4 4.34% 6.24% SINCE INCEPTION 1 YEAR (11/01/01) -------------------------------------------------------- Franklin Income Fund - Class B1/2 7.61% 9.14% S&P 500(R) Index/3 10.87% 1.25% Lehman Bros. Gov't/Credit Index/4 4.34% 6.24% SINCE 1 YEAR 5 YEARS INCEPTION(5/1/95) ----------------------------------------------------------------- Franklin Income Fund - Class C/2 10.56% 11.41% 9.77% S&P 500(R) Index/3 10.87% -2.30% 11.10% Lehman Bros. Gov't/Credit Index/4 4.34% 7.71% 7.30% 1 YEAR 5 YEARS 10 YEARS ----------------------------------------------------------------- Franklin Income Fund - Class R/2,6 10.90% 11.49% 10.18% S&P 500(R) Index/3 10.87% -2.30% 12.07% Lehman Bros. Gov't/Credit Index/4 4.34% 7.71% 7.72% After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your particular tax situation and may differ from those shown. These after-tax return figures do not apply to you if you hold your Fund shares through a tax-deferred arrangement such as a 401(k) plan or individual retirement account. The Fund's past performance, before and after taxes, is not necessarily an indication of how it will perform in the future. After-tax returns are shown only for Class A; after-tax returns for other classes of shares will vary. 1. Figures do not reflect sales charges. If they did, returns would be lower. 2. Figures reflect sales charges. All Fund performance assumes reinvestment of dividends and capital gains. 3. Source: Standard & Poor's Micropal. The S&P 500(R) Index is an unmanaged group of widely held common stocks covering a variety of industries. It includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 4. Source: Standard & Poor's Micropal. Lehman Brothers Government/Credit Index is an unmanaged index of fixed-rate U.S. government and foreign and domestic corporate bonds that are rated investment grade or higher and have maturities of one year or more and at least $50 million outstanding. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 5. The Fund began offering shares in a new Class B on November 1, 2001. The new Class B performance shown reflects a restatement of the old Class B (now Class B1) performance to include the Rule 12b-1 fee applicable to the new Class B as though it was in effect from the inception of old Class B (now Class B1) shares. 6. Effective January 1, 2002, the Fund began offering Class R shares, which do not have initial sales charges. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to January 1, 2002, a restated figure is used based on the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, reflecting the Rule 12b-1 rate differential between Class A and R; and (b) for periods after January 1, 2002, actual Class R performance is used reflecting all charges and fees applicable to that class. FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) ---------------------------------------------------------------------------- CLASS A CLASS B CLASS B1 CLASS C CLASS R ---------------------------------------------------------------------------- Maximum sales charge (load) as a percentage of offering 4.25%/1 4.00% 4.00% 1.00% 1.00% price Load imposed on purchases 4.25%/1 None None None None Maximum deferred sales charge (load) None/2 4.00%/3 4.00%/4 1.00% 1.00% Redemption fee on shares sold within 7 calendar days following their purchase 2.00% 2.00% 2.00% 2.00% 2.00% date/5 Please see "Choosing a Share Class" on page 83 for an explanation of how and when these sales charges apply. ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS) ---------------------------------------------------------------------------- Class A Class B Class B1 Class C Class R ---------------------------------------------------------------------------- Management fees 0.43% 0.43% 0.43% 0.43% 0.43% Distribution and service (12b-1) fees 0.15% 1.00% 0.65% 0.65% 0.50% Other expenses 0.10% 0.10% 0.10% 0.10% 0.10% ---------------------------------------------- TOTAL ANNUAL FUND OPERATING EXPENSES 0.68% 1.53% 1.18% 1.18% 1.03% ---------------------------------------------- 1. The dollar amount of the sales charge is the difference between the offering price of the shares purchased (which factors in the applicable sales charge in this table) and the net asset value of those shares. Since the offering price is calculated to two decimal places using standard rounding criteria, the number of shares purchased and the dollar amount of the sales charge as a percentage of the offering price and of your net investment may be higher or lower depending on whether there was a downward or upward rounding. 2. There is a 1% contingent deferred sales charge that applies to investments of $1 million or more (see page 88) and purchases by certain retirement plans without an initial sales charge. 3. Declines to zero after six years. 4. The redemption fee is calculated as a percentage of the amount redeemed (using standard rounding criteria), and may be charged when you sell or exchange your shares or if your shares are involuntarily redeemed. The fee is retained by the Fund and generally withheld from redemption proceeds. For more details, see "Redemption Fee" section. EXAMPLE This example can help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It assumes: o You invest $10,000 for the periods shown; o Your investment has a 5% return each year; and o The Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years ---------------------------------------------------------------------- If you sell your shares at the end of the period: CLASS A $492/1 $633 $788 $1,236 CLASS B $556 $783 $1,034 $1,594/2 CLASS B1 $520 $675 $849 $1,293 CLASS C/3 $220 $375 $649 $1,432 CLASS R $205 $328 $569 $1,259 If you do not sell your shares: CLASS B $156 $483 $834 $1,594 CLASS B1 $120 $375 $649 $1,293/2 CLASS C/3 $120 $375 $649 $1,432 CLASS R $105 $328 $569 $1,259 1. Assumes a contingent deferred sales charge (CDSC) will not apply. 2. Assumes conversion of Class B and B1 shares to Class A shares after eight years, lowering your annual expenses from that time on. 3. Revised to show the elimination of the initial sales charge on January 1, 2004. The actual costs are based on a rate that includes the initial sales charge of 1.00% imposed on purchases prior to January 1, 2004. These costs were $318, $471, $743 and $1,517, respectively, if you sell your shares at the end of the period or $219, $471, $743 and $1,517, respectively, if you do not sell your shares. MANAGEMENT Franklin Advisers, Inc. (Advisers), One Franklin Parkway, San Mateo, CA 94403-1906, is the Fund's investment manager. Together, Advisers and its affiliates manage over $402 billion in assets. The Fund's portfolio managers are: EDWARD D. PERKS CFA, VICE PRESIDENT OF ADVISERS Mr. Perks has been a manager of the Fund since 2002. He joined Franklin Templeton Investments in 1992. CHARLES B. JOHNSON, CHAIRMAN OF THE BOARD OF ADVISERS Mr. Johnson has been a manager of the Fund since 1957. He joined Franklin Templeton Investments in 1957. The Fund pays Advisers a fee for managing the Fund's assets. For the fiscal year ended September 30, 2004, the Fund paid 0.43% of its average monthly net assets to the manager for managing the Fund's assets. FINANCIAL HIGHLIGHTS This table presents the Fund's financial performance for the past five years. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in the Fund assuming reinvestment of dividends and capital gains. This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's financial statements, are included in the annual report, which is available upon request. CLASS A YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------------- 2004 2003 2002 2001 2000 -------------------------------------------------------------------- Per share data ($) Net asset value, beginning of year 2.25 1.90 2.16 2.35 2.23 -------------------------------------------- Net investment .12 .14 .14 .17 .18 income/1 Net realized and unrealized .22 .38 (.21) (.15) .13 gains (losses) -------------------------------------------- Total from investment operations .34 .52 (.07) .02 .31 -------------------------------------------- Distributions from net investment (.16) (.16) (.17) (.18) (.18) income Distributions from net (.01) (.01) (.02) (.03) (.01) realized gains -------------------------------------------- Total distributions (.17) (.17) (.19) (.21) (.19) -------------------------------------------- Redemption fees -/2 - - - - -------------------------------------------- NET ASSET VALUE, END 2.42 2.25 1.90 2.16 2.35 OF YEAR -------------------------------------------- Total return (%)/3 15.50 28.12 (4.18) .58 14.68 Ratios/supplemental data Net assets, end of year 14,743,190 9,640,156 6,001,117 5,960,990 6,083,135 ($ x 1,000) Ratios to average net assets: (%) Expenses .68 .73 .72 .73 .76 Net investment income 5.11 6.63 6.67 7.54 8.01 Portfolio turnover 31.90 48.36 51.16 28.13 24.41 rate (%) CLASS B YEAR ENDED SEPTEMBER 30, -------------------------------------------------- 2004 2003 2002/4 -------------------------------------------------- Per share data ($) Net asset value, beginning of year 2.24 1.90 2.15 ------------------------ Net investment income/1 .10 .12 .11 Net realized and unrealized .22 .37 (.21) gains (losses) ------------------------- Total from investment operations .32 .49 (.10) ------------------------- Distributions from net investment (.14) (.14) (.13) income Distributions from net realized losses (.01) (.01) (.02) ------------------------- Total distributions (.15) (.15) (.15) ------------------------- Redemption fees -/2 - - ------------------------- Net asset value, end of 2.41 2.24 1.90 year ------------------------- Total return (%)/3 14.59 26.58 (5.63) Ratios/supplemental data Net assets, end of year ($ x 1,000) 3,486,880 2,083,783 558,580 Ratios to average net assets: (%) Expenses 1.53 1.58 1.57/5 Net investment income 4.26 5.78 6.01/5 Portfolio turnover rate 31.90 48.36 51.16 (%) CLASS B1 YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------------- 2004 2003 2002 2001 2000 -------------------------------------------------------------------- Per share data ($) Net asset value, beginning of year 2.25 1.90 2.17 2.35 2.24 Net investment income/1 .11 .13 .13 .16 .17 ------------------------------------------- Net realized and unrealized .21 .38 (.22) (.14) .12 gains (losses) ------------------------------------------- Total from investment operations .32 .51 (.09) .02 .29 Distributions from net investment (.14) (.15) (.16) (.17) (.17) income ------------------------------------------- Distributions from net realized gains (.01) (.01) (.02) (.03) (.01) ------------------------------------------- Total distributions (.15) (.16) (.18) (.20) (.18) ------------------------------------------- Redemption fees -/2 - - - - ------------------------------------------- NET ASSET VALUE, END OF 2.42 2.25 1.90 2.17 2.35 YEAR ------------------------------------------- Total return (%)/3 14.90 27.51 (4.66) .10 14.09 Ratios/supplemental data Net assets, end of year ($ x 1,000) 511,471 495,004 430,226 446,245 140,711 Ratios to average net assets: (%) Expenses 1.18 1.23 1.22 1.23 1.26 Net investment income 4.61 6.13 6.15 7.02 7.49 Portfolio turnover rate 31.90 48.36 51.16 28.13 24.41 (%) CLASS C YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------------- 2004 2003 2002 2001 2000 -------------------------------------------------------------------- Per share data ($) Net asset value, beginning of year 2.26 1.91 2.17 2.36 2.24 ------------------------------------------- Net investment .11 .13 .13 .16 .17 income/1 Net realized and unrealized .21 .38 (.21) (.15) .13 gains (losses) ------------------------------------------- Total from investment operations .32 .51 (.08) .01 .30 ------------------------------------------- Distributions from net investment (.14) (.15) (.16) (.17) (.17) income Distributions from net realized gains (.01) (.01) (.02) (.03) (.01) ------------------------------------------- Total distributions (.15) (.16) (.18) (.20) (.18) ------------------------------------------- Redemption fees -/2 - - - - ------------------------------------------- NET ASSET VALUE, END OF 2.43 2.26 1.91 2.17 2.36 YEAR ------------------------------------------- Total return (%)/3 14.85 27.37 (4.64) .09 14.54 Ratios/supplemental data Net assets, end of year ($ x 1,000) 6,616,891 3,764,372 1,545,377 1,080,315 872,662 Ratios to average net assets: (%) Expenses 1.18 1.24 1.21 1.23 1.26 Net investment income 4.61 6.12 6.21 7.04 7.51 Portfolio turnover rate 31.90 48.36 51.16 28.13 24.41 (%) CLASS R YEAR ENDED SEPTEMBER 30, -------------------------------------------------- 2004 2003 2002/6 -------------------------------------------------- Per share data ($) Net asset value, beginning of year 2.23 1.89 2.18 ------------------------- Net investment income/1 .11 .13 .10 Net realized and unrealized .22 .37 (.27) gains (losses) ------------------------- Total from investment operations .33 .50 (.17) ------------------------- Distributions from net investment (.15) (.15) (.12) income Distributions from net realized losses (.01) (.01) - ------------------------- Total distributions (.16) (.16) (.12) ------------------------- Redemption fees -/2 - - ------------------------- NET ASSET VALUE, END OF 2.40 2.23 1.89 YEAR ------------------------- 15.25 27.31 (8.34) Total return (%)/3 Ratios/supplemental data Net assets, end of year ($ x 1,000) 73,165 36,417 6,350 Ratios to average net assets: (%) Expenses 1.03 1.08 1.07/5 Net investment income 4.76 6.28 6.77/5 Portfolio turnover rate 31.90 48.36 51.16 (%) 1. Based on average daily shares outstanding. 2. Amount is less than $0.001 per share. 3. Total return does not include sales charges, and is not annualized for periods less than one year. 4. For the period November 1, 2001 (effective date) to September 30, 2002 for Class B. 5. Annualized. 6. For the period January 1, 2002 (effective date) to September 30, 2002 for Class R. FRANKLIN UTILITIES FUND GOALS AND STRATEGIES GOALS The Fund's investment goals are capital appreciation and current income. MAIN INVESTMENT STRATEGIES Under normal market conditions, the Fund invests at least 80% of its net assets in the securities of public utilities companies. These are companies that provide electricity, natural gas, water, and communications services to the public and companies that provide services to public utilities companies. Shareholders will be given 60 days' advance notice of any change to the 80% policy regarding investment in securities of public utilities companies. The Fund concentrates (invests more than 25% of its total assets) in companies operating in the utilities industry. [Begin callout] The Fund normally invests most of its assets in securities of public utilities companies. [End callout] The Fund invests primarily in equity securities. An equity security, or stock, represents a proportionate share of the ownership of a company; its value is based on the success of the company's business and the value of its assets, as well as general market conditions. Common stocks, preferred stocks and convertible securities are examples of equity securities. Convertible securities generally are debt securities or preferred stock that may be converted into common stock after certain time periods or under certain circumstances. The Fund may invest up to 25% of its assets in debt securities. Debt securities represent an obligation of the issuer to repay a loan of money to it and generally provide for the payment of interest. These include bonds, notes and debentures. The Fund generally buys "investment grade" debt securities. However, the Fund may invest a portion of its assets in debt securities that are rated below investment grade, sometimes called "junk bonds." TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, the manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments. Temporary defensive investments generally may include short-term U.S. government securities, commercial paper, bank obligations, repurchase agreements, money market fund shares and other money market instruments. The manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity. In these circumstances, the Fund may be unable to achieve its investment goals. MAIN RISKS UTILITIES INDUSTRY The Fund's performance is closely tied to conditions affecting the public utilities industry. These conditions may change rapidly. Utility company securities, which are generally bought for their dividend yield, have been historically sensitive to interest rate movements: when interest rates rise, the stock prices of these companies tend to fall. However, regulatory changes in certain states have led to greater competition in the industry and the emergence of non-regulated providers as a significant part of the industry. While regulated providers tend to have regulated returns, non-regulated providers' returns are not regulated and generally are more volatile. These developments have reduced stability of cash flows in those states with non-regulated providers and have impacted the short-term earnings potential of some in this industry. These trends have also made shares of some utility companies less sensitive to interest rate changes but more sensitive to changes in revenue and earnings and caused them to reduce the ratio of their earnings they pay out as dividends. In addition, the industry is subject to a variety of risks specific to this industry: utilities often find it difficult to obtain adequate returns on invested capital in spite of rate increases or because rate increases become increasingly difficult to obtain; they may face difficulty in financing large construction programs during inflationary and rising interest rate periods; utilities are subject to many restrictions on operations and increased costs due to environmental and safety regulations; utilities may face difficulties in obtaining fuel for electric generation at reasonable prices; utilities may face risks associated with the operation of nuclear power plants; utilities may face greater demands in providing reliable service with the increasing complexity of the power grid; utilities also may be subject to adverse effects of the results of energy conservation programs as well as other factors affecting the level of demand for services. State and other regulators monitor and control utility revenues and costs, and therefore may limit utility profits and dividends paid to investors. Regulatory authorities also may restrict a utility company's access to new markets, thereby diminishing the company's long-term prospects. [Begin callout] Utility company securities are sensitive to interest rate movements: when interest rates rise, the stock prices of these companies tend to fall. Because the securities the Fund holds fluctuate in price, the value of your investment in the Fund will go up and down. You could lose money. [End callout] STOCKS Stocks historically have outperformed other types of investments over the long term. Individual stock prices, however, tend to go up and down more dramatically. These price movements may result from factors affecting individual companies or industries, or the securities market as a whole. A slower-growth or recessionary economic environment could have an adverse effect on the price of the various stocks held by the Fund. INTEREST RATE When interest rates rise, debt security prices fall. The opposite is also true: debt security prices rise when interest rates fall. In general, securities with longer maturities are more sensitive to changes in interest rates. The values of equity securities of regulated providers in the utilities industry may respond in a similar fashion to changes in interest rates. INCOME Since the Fund can only distribute what it earns, the Fund's distributions to its shareholders may decline when interest rates fall. FOREIGN SECURITIES Investing in foreign securities typically involves more risks than investing in U.S. securities. Certain of these risks also may apply to securities of U.S. companies with significant foreign operations. These risks can increase the potential for losses in the Fund and affect its share price. Currency exchange rates. Foreign securities may be issued and traded in foreign currencies. As a result, their values may be affected by changes in exchange rates between foreign currencies and the U.S. dollar, as well as between currencies of countries other than the U.S. For example, if the value of the U.S. dollar goes up compared to a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. Political and economic developments. The political, economic and social structures of some foreign countries may be less stable and more volatile than those in the U.S. Investments in these countries may be subject to the risks of internal and external conflicts, currency devaluations, foreign ownership limitations and tax increases. It is possible that a government may take over the assets or operations of a company or impose restrictions on the exchange or export of currency or other assets. Some countries also may have different legal systems that may make it difficult for the Fund to vote proxies, exercise shareholder rights, and pursue legal remedies with respect to its foreign investments. Diplomatic and political developments, including rapid and adverse political changes, social instability, regional conflicts, terrorism and war, could affect the economies, industries and securities and currency markets, and the value of the Fund's investments, in non-U.S. countries. These factors are extremely difficult, if not impossible, to predict and take into account with respect to the Fund's investments. Trading practices. Brokerage commissions and other fees generally are higher for foreign securities. Government supervision and regulation of foreign stock exchanges, currency markets, trading systems and brokers may be less than in the U.S. The procedures and rules governing foreign transactions and custody (holding of the Fund's assets) also may involve delays in payment, delivery or recovery of money or investments. Availability of information. Foreign companies may not be subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies. Thus, there may be less information publicly available about foreign companies than about most U.S. companies. Limited markets. Certain foreign securities may be less liquid (harder to sell) and more volatile than many U.S. securities. This means the Fund may at times be unable to sell foreign securities at favorable prices. More detailed information about the Fund, its policies and risks can be found in the Fund's Statement of Additional Information (SAI). A description of the Fund's policies and procedures regarding the release of portfolio holdings information is also available in the Fund's SAI. Portfolio holdings information can be viewed online at franklintempleton.com. [Begin callout] Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. government. Mutual fund shares involve investment risks, including the possible loss of principal. [End callout] PERFORMANCE This bar chart and table show the volatility of the Fund's returns, which is one indicator of the risks of investing in the Fund. The bar chart shows changes in the Fund's returns from year to year over the past 10 calendar years. The table shows how the Fund's average annual total returns compare to those of a broad-based securities market index. Of course, past performance (before or after taxes) cannot predict or guarantee future results. CLASS A ANNUAL TOTAL RETURNS/1 [Insert bar graph] 30.68% 2.03% 24.90% 7.57% -15.00% 41.61% -8.09% -10.48% 19.30% 23.14% 95 96 97 98 99 00 01 02 03 04 YEAR Best Quarter: Q3 '00 26.73% Worst Quarter: Q3 '02 -11.94% AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2004 ---------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS ---------------------------------------------------------------- Franklin Utilities Fund - Class A/2 Return Before Taxes 17.88% 10.39% 9.57% Return After Taxes on Distributions 16.94% 8.59% 7.20% Return After Taxes on Distributions 12.32% 7.97% 6.90% and Sale of Fund Shares S&P 500(R) Index/3 10.87% -2.30% 12.07% S&P 500(R) Utilities Index/4 24.28% 3.73% 8.16% (indices reflect no deduction for fees, expenses, or taxes) SINCE 1 YEAR INCEPTION(1/1/99) -------------------------------------------------------- Franklin Utilities Fund - Class B/2 18.65% 5.82% S&P 500(R) Index/3 10.87% 1.25% S&P 500(R) Utilities Index/4 24.28% 1.46% SINCE INCEPTION 1 YEAR 5 YEARS (5/1/95) ---------------------------------------------------------------- Franklin Utilities Fund - Class C/2 21.70% 10.82% 9.19% S&P 500(R) Index/3 10.87% -2.30% 11.10% S&P 500(R) Utilities Index/4 24.28% 3.73% 7.51% 1 YEAR 5 YEARS 10 YEARS ---------------------------------------------------------------- Franklin Utilities Fund - Class R/2,5 21.80% 10.98% 9.60% S&P 500(R) Index/3 10.87% -2.30% 12.07% S&P 500(R) Utilities Index/4 24.28% 3.73% 8.16% After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your particular tax situation and may differ from those shown. These after-tax return figures do not apply to you if you hold your Fund shares through a tax-deferred arrangement such as a 401(k) plan or individual retirement account. The Fund's past performance, before and after taxes, is not necessarily an indication of how it will perform in the future. After-tax returns are shown only for Class A; after-tax returns for other classes of shares will vary. 1. Figures do not reflect sales charges. If they did, returns would be lower. 2. Figures reflect sales charges. All Fund performance assumes reinvestment of dividends and capital gains. 3. Source: Standard & Poor's Micropal. The S&P 500(R) Index is an unmanaged group of widely held common stocks covering a variety of industries. It includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 4. Source: Standard & Poor's Micropal. S&P 500(R) Utilities Index is an unmanaged, market capitalization weighted index consisting of utilities companies in the S&P 500 Index and is designed to measure the performance of the utilities sector. It includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 5. Effective January 1, 2002, the Fund began offering Class R shares, which do not have initial sales charges. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to January 1, 2002, a restated figure is used based on the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, reflecting the Rule 12b-1 rate differential between Class A and R; and (b) for periods after January 1, 2002, actual Class R performance is used reflecting all charges and fees applicable to that class. FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) ------------------------------------------------------------------- CLASS A CLASS B CLASS C CLASS R ------------------------------------------------------------------- Maximum sales charge (load) as a percentage of offering 4.25%/1 4.00% 1.00% 1.00% price Load imposed on purchases 4.25%/1 None None None Maximum deferred sales charge (load) None/2 4.00%/3 1.00% 1.00% Redemption fee on shares sold within 7 calendar days following their purchase date/4 2.00% 2.00% 2.00% 2.00% Please see "Choosing a Share Class" on page 83 for an explanation of how and when these sales charges apply. ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS) ------------------------------------------------------------------- CLASS A CLASS B CLASS C CLASS R ------------------------------------------------------------------- Management fees 0.47% 0.47% 0.47% 0.47% Distribution and service (12b-1) fees 0.15% 0.65% 0.65% 0.50% Other expenses 0.18% 0.18% 0.18% 0.18% ------------------------------------ TOTAL ANNUAL FUND OPERATING EXPENSES 0.80% 1.30% 1.30% 1.15% ------------------------------------ 1. The dollar amount of the sales charge is the difference between the offering price of the shares purchased (which factors in the applicable sales charge in this table) and the net asset value of those shares. Since the offering price is calculated to two decimal places using standard rounding criteria, the number of shares purchased and the dollar amount of the sales charge as a percentage of the offering price and of your net investment may be higher or lower depending on whether there was a downward or upward rounding. 2. There is a 1% contingent deferred sales charge that applies to investments of $1 million or more (see page 88) and purchases by certain retirement plans without an initial sales charge. 3. Declines to zero after six years. 4. The redemption fee is calculated as a percentage of the amount redeemed (using standard rounding criteria), and may be charged when you sell or exchange your shares or if your shares are involuntarily redeemed. The fee is retained by the Fund and generally withheld from redemption proceeds. For more details, see "Redemption Fee" section. EXAMPLE This example can help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It assumes: o You invest $10,000 for the periods shown; o Your investment has a 5% return each year; and o The Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS ---------------------------------------------------------------- If you sell your shares at the end of the period: CLASS A $503/1 $670 $850 $1,373 CLASS B $532 $712 $913 $1,430/2 CLASS C/3 $232 $412 $713 $1,568 CLASS R $217 $365 $633 $1,398 If you do not sell your shares: CLASS B $132 $412 $713 $1,430/2 CLASS C/3 $132 $412 $713 $1,568 CLASS R $117 $365 $633 $1,398 1. Assumes a contingent deferred sales charge (CDSC) will not apply. 2. Assumes conversion of Class B shares to Class A shares after eight years, lowering your annual expenses from that time on. 3. Revised to show the elimination of the initial sales charge on January 1, 2004. The actual costs are based on a rate that includes the initial sales charge of 1.00% imposed on purchases prior to January 1, 2004. These costs were $330, $508, $806 and $1,652, respectively, if you sell your shares at the end of the period or $231, $508, $806 and $1,652, respectively, if you do not sell your shares. MANAGEMENT Franklin Advisers, Inc. (Advisers), One Franklin Parkway, San Mateo, CA 94403-1906, is the Fund's investment manager. Together, Advisers and its affiliates manage over $402 billion in assets. The team responsible for the Fund's management is: JOHN KOHLI CFA, VICE PRESIDENT OF ADVISERS Mr. Kohli has been a manager of the Fund since 1998. He joined Franklin Templeton Investments in 1992. MATTHEW SMITH CFA, RESEARCH ANALYST OF ADVISERS Mr. Smith has been a manager of the Fund since 2004. He joined Franklin Templeton Investments in 2002. The Fund pays Advisers a fee for managing the Fund's assets. For the fiscal year ended September 30, 2004, the Fund paid 0.47% of its average monthly net assets to the manager for its services. FINANCIAL HIGHLIGHTS This table presents the Fund's financial performance for the past five years. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in the Fund assuming reinvestment of dividends and capital gains. This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's financial statements, are included in the annual report, which is available upon request. CLASS A YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------------- 2004 2003 2002 2001 2000 -------------------------------------------------------------------- Per share data ($) Net asset value, beginning of year 8.80 7.96 10.02 10.89 9.58 ------------------------------------------- Net investment income/1 .43 .42 .46 .46 .43 Net realized and unrealized 1.33 .85 (1.60) (.86) 1.69 gains (losses) ------------------------------------------- Total from investment 1.76 1.27 (1.14) (.40) 2.12 operations ------------------------------------------- Distributions from net investment income (.40) (.43) (.45) (.45) (.45) Distributions from net realized gains - - (.47) (.02) (.36) ------------------------------------------- Total distributions (.40) (.43) (.92) (.47) (.81) ------------------------------------------- Redemption fees -/2 - - - - ------------------------------------------- NET ASSET VALUE, END OF 10.16 8.80 7.96 10.02 10.89 YEAR ------------------------------------------- Total return (%)/3 20.40 16.38 (12.49) (4.03) 24.27 Ratios/supplemental data Net assets, end of year ($ x 1,000) 1,450,832 1,259,886 1,090,216 1,349,027 1,574,897 Ratios to average net assets: (%) Expenses .80 .83 .80 .79 .83 Net investment income 4.49 5.00 4.87 4.26 4.74 Portfolio turnover rate 16.13 25.81 30.60 34.03 19.86 (%) CLASS B YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------------- 2004 2003 2002 2001 2000 -------------------------------------------------------------------- Per share data ($) Net asset value, beginning of year 8.80 7.97 10.02 10.90 9.59 ------------------------------------------- Net investment income/1 .38 .37 .41 .41 .38 Net realized and unrealized 1.33 .85 (1.58) (.87) 1.70 gains (losses) ------------------------------------------- Total from investment 1.71 1.22 (1.17) (.46) 2.08 operations Distributions from net investment (.36) (.39) (.41) (.40) (.41) income Distributions from net realized gains - - (.47) (.02) (.36) ------------------------------------------- Total distributions (.36) (.39) (.88) (.42) (.77) ------------------------------------------- Redemption fees -/2 - - - - ------------------------------------------- NET ASSET VALUE, END OF 10.15 8.80 7.97 10.02 10.90 YEAR ------------------------------------------- Total return (%)/3 19.71 15.88 (12.88) (4.58) 23.79 Ratios/supplemental data Net assets, end of year ($ x 1,000) 127,105 95,321 32,802 15,212 8,819 Ratios to average net assets: (%) Expenses 1.30 1.34 1.31 1.30 1.34 Net investment income 3.99 4.49 4.44 3.74 4.11 Portfolio turnover rate 16.13 25.81 30.60 34.03 19.86 (%) CLASS C YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------------- 2004 2003 2002 2001 2000 -------------------------------------------------------------------- Per share data ($) Net asset value, beginning of year 8.78 7.95 10.01 10.88 9.57 ------------------------------------------- Net investment income/1 .38 .36 .41 .41 .38 Net realized and unrealized 1.33 .86 (1.59) (.87) 1.69 gains (losses) ------------------------------------------- Total from investment 1.71 1.22 (1.18) (.46) 2.07 operations Distributions from net investment (.36) (.39) (.41) (.39) (.40) income Distributions from net realized gains - - (.47) (.02) (.36) ------------------------------------------- Total distributions (.36) (.39) (.88) (.41) (.76) ------------------------------------------- Redemption fees -/2 - - - - ------------------------------------------- NET ASSET VALUE, END OF 10.13 8.78 7.95 10.01 10.88 YEAR ------------------------------------------- Total return (%)/3 19.76 15.77 (12.90) (4.50) 23.65 Ratios/supplemental data Net assets, end of year ($ x 1,000) 283,747 222,030 67,428 44,985 37,837 Ratios to average net assets: (%) Expenses 1.30 1.34 1.29 1.30 1.34 Net investment income 3.99 4.49 4.43 3.76 4.22 Portfolio turnover rate 16.13 25.81 30.60 34.03 19.86 (%) CLASS R YEAR ENDED SEPTEMBER 30, -------------------------------------------------------- 2004 2003 2002/4 -------------------------------------------------------- Per share data ($) Net asset value, beginning of year 8.79 7.96 9.81 ----------------------------- Income from investment operations: Net investment income/1 .39 .37 .32 Net realized and unrealized 1.34 .86 (1.85) gains (losses) ----------------------------- Total from investment 1.73 1.23 (1.53) operations ----------------------------- Less distributions from net investment income (.37) (.40) (.32) ----------------------------- Redemption fees -2 - - ----------------------------- NET ASSET VALUE, END OF 10.15 8.79 7.96 YEAR ----------------------------- Total return (%)/3 20.02 15.96 (16.01) Ratios/supplemental data Net assets, end of year ($ x 1,000) 1,590 1,142 142 Ratios to average net assets: (%) Expenses 1.15 1.19 1.16/5 Net investment income 4.14 4.64 4.82/5 Portfolio turnover rate 16.13 25.81 30.60 (%) 1. Based on average daily shares outstanding. 2. Amount is less than $0.001 per share. 3. Total return does not include sales charges, and is not annualized. 4. For the period January 1, 2002 (effective date) to September 30, 2002 for Class R. 5. Annualized. FRANKLIN U.S. GOVERNMENT SECURITIES FUND GOAL AND STRATEGIES GOAL The Fund's investment goal is income. MAIN INVESTMENT STRATEGIES Under normal market conditions, the Fund invests at least 80% of its net assets in U.S. government securities. Shareholders will be given 60 days' advance notice of any change to the 80% policy regarding investment in U.S. government securities. The Fund presently invests substantially all of its assets in Government National Mortgage Association obligations (Ginnie Maes). Ginnie Maes represent an ownership interest in mortgage loans made by banks and other financial institutions to finance purchases of homes. The mortgage loans may have either fixed or adjustable interest rates. Individual loans are packaged or "pooled" together for sale to investors such as the Fund. As the underlying mortgage loans are paid off, investors receive principal and interest payments. [Begin callout] The Fund invests substantially all of its assets in Ginnie Maes. [End callout] Ginnie Maes carry a guarantee as to the timely repayment of principal and interest that is backed by the full faith and credit of the U.S. government. The guarantee does not apply to the market prices and yields of the Ginnie Maes or to the net asset value or performance of the Fund, which will vary with changes in interest rates and other market conditions. The Fund may also invest in other U.S. government securities, which are backed by the full faith and credit of the U.S. government, such as U.S. Treasury STRIPS, bills, bonds and notes. The Fund's short-term investments include short-term government securities and cash. The Fund may also invest in repurchase agreements collateralized by U.S. government securities. TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, the manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments. Temporary defensive investments generally may include short-term U.S. government securities, commercial paper, bank obligations, repurchase agreements, money market fund shares and other money market instruments. The manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity. In these circumstances, the Fund may be unable to achieve its investment goal. MAIN RISKS GINNIE MAES Ginnie Maes differ from conventional corporate debt securities because principal is paid back monthly over the life of the security rather than at maturity. The Fund may receive unscheduled prepayments of principal due to voluntary prepayments, refinancing or foreclosure on the underlying mortgage loans. During periods of declining interest rates, the volume of principal prepayments generally increases as borrowers refinance their mortgages at lower rates. The Fund may be forced to reinvest returned principal at lower interest rates, reducing the Fund's income. For this reason, Ginnie Maes may be less effective than some other types of securities as a means of "locking in" long-term interest rates and may have less potential for capital appreciation during periods of falling interest rates than some other investments with similar maturities. A reduction in the anticipated rate of principal prepayments, especially during periods of rising interest rates, may increase the effective maturity of Ginnie Maes, making them more susceptible than some other debt securities to a decline in market value when interest rates rise. This could increase the volatility of the Fund's performance and share price. [Begin callout] Changes in interest rates affect the prices of the Fund's debt securities. If rates rise, the value of the Fund's debt securities will fall and so too will the Fund's share price. If rates fall, mortgage holders may refinance their mortgage loans at lower interest rates, which may reduce the Fund's income and yield. You could lose money. [End callout] INTEREST RATE When interest rates rise, debt security prices fall. While the opposite is also true, that debt security prices rise when interest rates fall, this may be less true for Ginnie Maes since homeowners may refinance their mortgages when interest rates fall, thus limiting the potential of the Ginnie Maes to appreciate in value. In general, securities with longer maturities are more sensitive to these interest rate changes. INCOME Since the Fund can only distribute what it earns, the Fund's distributions to shareholders may decline when interest rates fall. In addition, any increase in the Fund's distributions will lag increases in interest rates. More detailed information about the Fund, its policies and risks can be found in the Fund's Statement of Additional Information (SAI). A description of the Fund's policies and procedures regarding the release of portfolio holdings information is also available in the Fund's SAI. Portfolio holdings information can be viewed online at franklintempleton.com. [Begin callout] Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. government. Mutual fund shares involve investment risks, including the possible loss of principal. [End callout] PERFORMANCE This bar chart and table show the volatility of the Fund's returns, which is one indicator of the risks of investing in the Fund. The bar chart shows changes in the Fund's returns from year to year over the past 10 calendar years. The table shows how the Fund's average annual total returns compare to those of a broad-based securities market index. Of course, past performance (before or after taxes) cannot predict or guarantee future results. CLASS A ANNUAL TOTAL RETURNS/1 [Insert bar graph] 16.73% 4.60% 9.46% 6.61% 0.82% 10.56% 7.67% 8.58% 1.78% 3.80% 95 96 97 98 99 00 01 02 03 04 YEAR Best Quarter: Q2 '95 5.37% Worst Quarter: Q2 '04 -0.95% AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2004 ------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS ------------------------------------------------------------------- Franklin U.S. Government Securities Fund - Class A/2 Return Before Taxes -0.62% 5.51% 6.51% Return After Taxes on Distributions -2.37% 3.22% 3.92% Return After Taxes on Distributions and -0.43% 3.29% 3.94% Sale of Fund Shares Lehman Brothers Intermediate U.S. 2.33% 6.57% 6.75% Government Bond Index/3 (index reflects no deduction for fees, expenses, or taxes) SINCE 1 YEAR INCEPTION(1/1/99) ------------------------------------------------------------ Franklin U.S. Government Securities Fund -0.69% 4.79% - Class B/2 Lehman Brothers Intermediate U.S. 2.33% 5.53% Government Bond Index/3 SINCE 1 YEAR 5 YEARS INCEPTION(5/1/95) ------------------------------------------------------------------- Franklin U.S. Government Securities 2.27% 5.86% 5.92% Fund - Class C/2 Lehman Brothers Intermediate U.S. 2.33% 6.57% 6.41% Government Bond Index/3 1 YEAR 5 YEARS 10 YEARS ------------------------------------------------------------------- Franklin U.S. Government Securities Fund 2.43% 6.03% 6.48% - Class R/2,4 Lehman Brothers Intermediate U.S. 2.33% 6.57% 6.75% Government Bond Index/3 After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your particular tax situation and may differ from those shown. These after-tax return figures do not apply to you if you hold your Fund shares through a tax-deferred arrangement such as a 401(k) plan or individual retirement account. The Fund's past performance, before and after taxes, is not necessarily an indication of how it will perform in the future. After-tax returns are shown only for Class A; after-tax returns for other classes of shares will vary. 1. Figures do not reflect sales charges. If they did, returns would be lower. 2. Figures reflect sales charges. All Fund performance assumes reinvestment of dividends and capital gains. 3. Source: Standard & Poor's Micropal. Lehman Brothers Intermediate U.S. Government Bond Index is an unmanaged index of fixed-rate bonds issued by the U.S. government and its agencies that are rated investment grade or higher and have one to ten years remaining until maturity and at least $100 million outstanding. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 4. Effective January 1, 2002, the Fund began offering Class R shares, which do not have initial sales charges. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to January 1, 2002, a restated figure is used based on the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, reflecting the Rule 12b-1 rate differential between Class A and R; and (b) for periods after January 1, 2002, actual Class R performance is used reflecting all charges and fees applicable to that class. FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) ------------------------------------------------------------------- CLASS A CLASS B CLASS C CLASS R ------------------------------------------------------------------- Maximum sales charge (load) as a percentage of offering 4.25%/1 4.00% 1.00% 1.00% price Load imposed on purchases 4.25%/1 None None None Maximum deferred sales charge None/2 4.00%/3 1.00% 1.00% (load) Redemption fee on shares sold within 7 calendar days following their purchase date/4 2.00% 2.00% 2.00% 2.00% Please see "Choosing a Share Class" on page 83 for an explanation of how and when these sales charges apply. ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS) ------------------------------------------------------------------- CLASS A CLASS B CLASS C CLASS R ------------------------------------------------------------------- Management fees/5 0.45% 0.45% 0.45% 0.45% Distribution and service (12b-1) fees 0.12% 0.65% 0.65% 0.50% Other expenses 0.14% 0.14% 0.14% 0.14% ------------------------------------ Total annual Fund operating expenses/5 0.71% 1.24% 1.24% 1.09% ------------------------------------ Management fee reduction/5 -0.01 -0.01 -0.01 -0.01 ------------------------------------ Net annual Fund operating expenses/5 0.70% 1.23% 1.23% 1.08% ------------------------------------ 1. The dollar amount of the sales charge is the difference between the offering price of the shares purchased (which factors in the applicable sales charge in this table) and the net asset value of those shares. Since the offering price is calculated to two decimal places using standard rounding criteria, the number of shares purchased and the dollar amount of the sales charge as a percentage of the offering price and of your net investment may be higher or lower depending on whether there was a downward or upward rounding. 2. There is a 1% contingent deferred sales charge that applies to investments of $1 million or more (see page 88) and purchases by certain retirement plans without an initial sales charge. 3. Declines to zero after six years. 4. The redemption fee is calculated as a percentage of the amount redeemed (using standard rounding criteria), and may be charged when you sell or exchange your shares or if your shares are involuntarily redeemed. The fee is retained by the Fund and generally withheld from redemption proceeds. For more details, see "Redemption Fee" section. 5. The manager had agreed in advance to reduce its fee to reflect reduced services resulting from the Fund's investment in a Franklin Templeton money fund. This reduction is required by the Fund's Board of Directors and an exemptive order by the Securities and Exchange Commission. EXAMPLE This example can help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It assumes: o You invest $10,000 for the periods shown; o Your investment has a 5% return each year; and o The Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years ---------------------------------------------------------------- If you sell your shares at the end of the period: CLASS A $493/1 $639 $798 $1,259 CLASS B $525 $690 $876 $1,342/2 CLASS C/3 $226 $391 $677 $1,489 CLASS R $210 $343 $595 $1,317 If you do not sell your shares: CLASS B $125 $390 $676 $1,342/2 CLASS C/3 $126 $391 $677 $1,489 CLASS R $110 $343 $595 $1,317 1. Assumes a contingent deferred sales charge (CDSC) will not apply. 2. Assumes conversion of Class B shares to Class A shares after eight years, lowering your annual expenses from that time on. 3. Revised to show the elimination of the initial sales charge on January 1, 2004. The actual costs are based on a rate that includes the initial sales charge of 1.00% imposed on purchases prior to January 1, 2004. These costs were $323, $486, $769 and $1,574, respectively, if you sell your shares at the end of the period or $224, $486, $769 and $1,574, respectively, if you do not sell your shares. MANAGEMENT Franklin Advisers, Inc. (Advisers), One Franklin Parkway, San Mateo, CA 94403-1906, is the Fund's investment manager. Together, Advisers and its affiliates manage over $402 billion in assets. The team responsible for the Fund's management is: JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS Mr. Lemein has been a manager of the Fund since 1984 and has more than 30 years' experience in the securities industry. ROGER BAYSTON CFA, SENIOR VICE PRESIDENT OF ADVISERS Mr. Bayston has been a manager of the Fund since 1993. He joined Franklin Templeton Investments in 1991. For the fiscal year ended September 30, 2004, management fees, before any reduction, were 0.45% of the Fund's average monthly net assets. Under an agreement by the manager to reduce its fees to reflect reduced services resulting from the Fund's investment in a Franklin Templeton money fund, the Fund paid 0.44% of its average monthly net assets to the manager for its services. This reduction is required by the Fund's Board of Directors and an exemptive order by the Securities and Exchange Commission. FINANCIAL HIGHLIGHTS This table presents the Fund's financial performance for the past five years. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned on an investment in the Fund assuming reinvestment of dividends and capital gains. This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's financial statements, are included in the annual report, which is available upon request. CLASS A YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------------------- 2004 2003 2002/1 2001 2000 -------------------------------------------------------------------------- Per share data ($) Net asset value, beginning of year 6.81 6.99 6.93 6.63 6.62 ------------------------------------------------- Net investment income/1 .27 .28 .38 .41/2 .43 Net realized and unrealized (.04) (.10) .09 .33/2 .01 gains (losses) ------------------------------------------------- Total from investment operations .23 .18 .47 .74 .44 ------------------------------------------------- Distributions from net investment income (.36) (.36) (.41) (.44) (.43) ------------------------------------------------- Redemptions fees -/3 - - - - ------------------------------------------------- NET ASSET VALUE, END OF 6.68 6.81 6.99 6.93 6.63 YEAR ------------------------------------------------- Total return (%)/4 3.46 2.66 7.06 11.52 6.90 Ratios/supplemental data Net assets, end of year ($ x 1,000) 6,420,381 7,286,317 7,726,914 7,197,334 6,852,374 Ratios to average net assets: (%) Expenses .70 .70 .69 .68 .70 Net investment income 4.09 4.11 5.48 6.12/2 6.62 Portfolio turnover rate 41.45 66.96 44.62 19.18 3.98 (%) Class B Year ended September 30, -------------------------------------------------------------------------- 2004 2003 20021 2001 2000 -------------------------------------------------------------------------- Per share data ($) Net asset value, beginning of year 6.80 6.98 6.93 6.63 6.62 --------------------------------------------------- Net investment .24 .25 .34 .37/2 .39 income/1 Net realized and unrealized (.05) (.10) .09 .33/2 .01 gains (losses) --------------------------------------------------- Total from investment operations .19 .15 .43 .70 .40 --------------------------------------------------- Distributions from net (.32) (.33) (.38) (.40) (.39) investment income --------------------------------------------------- Redemption fees -/3 - - - - --------------------------------------------------- NET ASSET VALUE, END 6.67 6.80 6.98 6.93 6.63 OF YEAR --------------------------------------------------- Total return (%)/4 2.92 2.13 6.37 10.94 6.35 Ratios/supplemental data Net assets, end of year 568,276 678,814 559,966 225,517 80,167 ($ x 1,000) Ratios to average net assets: (%) Expenses 1.23 1.23 1.22 1.22 1.25 Net investment 3.56 3.58 4.95 5.51/2 6.07 income Portfolio turnover 41.45 66.96 44.62 19.18 3.98 rate (%) Class C Year ended September 30, -------------------------------------------------------------------------- 2004 2003 2002/1 2001 2000 -------------------------------------------------------------------------- Per share data ($) Net asset value, beginning of year 6.78 6.97 6.91 6.61 6.60 --------------------------------------------------- Net investment .24 .25 .34 .37/2 .39 income/1 Net realized and unrealized (.05) (.11) .10 .33/2 .01 gains (losses) --------------------------------------------------- Total from investment operations .19 .14 .44 .70 .40 Distributions from net (.32) (.33) (.38) (.40) (.39) investment income Redemption fees -/3 - - - - --------------------------------------------------- NET ASSET VALUE, END 6.65 6.78 6.97 6.91 6.61 OF YEAR --------------------------------------------------- Total return (%)/4 2.91 2.00 6.53 10.96 6.36 Ratios/supplemental data Net assets, end of year 597,451 814,635 803,049 422,114 264,413 ($ x 1,000) Ratios to average net assets: (%) Expenses 1.23 1.23 1.21 1.22 1.25 Net investment 3.56 3.58 4.96 5.55/2 6.08 income Portfolio turnover 41.45 66.96 44.62 19.18 3.98 rate (%) Class R Year ended September 30, -------------------------------------------------------- 2004 2003 2002/5 -------------------------------------------------------- Per share data ($) Net asset value, beginning of year 6.81 6.99 6.81 --------------------------------- Income from investment operations: Net investment .25 .25 .25 income/1 Net realized and unrealized (.05) (.09) .22 gains --------------------------------- Total from investment operations .20 .16 .47 --------------------------------- Less distributions from net investment (.33) (.34) (.29) income --------------------------------- Redemption fees -/3 - - --------------------------------- NET ASSET VALUE, END 6.68 6.81 6.99 OF YEAR --------------------------------- Total return (%)/4 3.08 2.29 7.03 Ratios/supplemental data Net assets, end of year 59,431 54,042 14,042 ($ x 1,000) Ratios to average net assets: (%) Expenses 1.08 1.08 1.07/6 Net investment 3.71 3.73 5.10/6 income Portfolio turnover 41.45 66.96 44.62 rate (%) 1. Based on average daily shares outstanding. 2. Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide of Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ..................................... $(.008) Net realized and unrealized gains per share ......................... .008 Ratio of net investment income to average net assets ................ (.11)% 3. Amount is less than $0.001 per share. 4. Total return does not include sales charges, and is not annualized. 5. For the period January 1, 2002 (effective date) to September 30, 2002 for Class R. 6. Annualized. ADDITIONAL MANAGEMENT INFORMATION On September 20, 2004, Franklin Resources, Inc. announced that two of its subsidiaries, Franklin Advisers, Inc. (Advisers) and Franklin Templeton Alternative Strategies, Inc. (FTAS), reached an agreement with the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts (the State of Massachusetts) related to an administrative complaint filed on February 4, 2004. The administrative complaint concerned one instance of market timing that was also a subject of the August 2, 2004 settlement that Advisers reached with the Securities and Exchange Commission (SEC), as described below. Under the terms of the settlement consent order issued by the State of Massachusetts, Advisers and FTAS consented to the entry of a cease and desist order and agreed to pay a $5 million administrative fine to the State of Massachusetts (Massachusetts Consent Order). On November 19, 2004, the Franklin Resources, Inc. reached a second agreement with the State of Massachusetts regarding an administrative complaint filed on October 25, 2004 (the Second Complaint). The Second Complaint alleged that Franklin Resources, Inc.'s Form 8-K filing (in which it described the Massachusetts Consent Order) failed to state that Advisers and FTAS admitted the Statements of Fact portion of the Massachusetts Consent Order. As a result of the November 19, 2004 settlement with the State of Massachusetts, Franklin Resources, Inc. filed a new Form 8-K. The terms of the original settlement did not change and there was no monetary fine associated with this second settlement. On November 17, 2004, Franklin Resources, Inc. announced that its subsidiary, Franklin Templeton Distributors, Inc. (Distributors) (the principal underwriter of shares of the Franklin Templeton mutual funds), reached an agreement with the California Attorney General's Office (CAGO), resolving the issues resulting from the CAGO's investigation concerning marketing support payments to securities dealers who sell fund shares. Under the terms of the settlement with the CAGO, Distributors agreed to pay $2 million to the State of California as a civil penalty, $14 million to Franklin Templeton funds and $2 million to the CAGO for its investigative costs. On August 2, 2004, Franklin Resources, Inc. announced that Advisers (adviser to many of the funds within Franklin Templeton Investments, and an affiliate of the adviser to the other funds) reached a settlement with the SEC that resolved the issues resulting from an SEC investigation of market timing activity in the Franklin Templeton Investments funds. In connection with that agreement, the SEC issued an "Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order" (August Order). The SEC's August Order concerns the activities of a limited number of third parties that ended in 2000 and those that are the subject of the Massachusetts Consent Order described above. Under the terms of the SEC's August Order, pursuant to which Advisers neither admitted nor denied any of the findings contained therein, Advisers agreed to pay $50 million, of which $20 million is a civil penalty, to be distributed to shareholders of certain funds in accordance with a plan to be developed by an independent distribution consultant. Because the distribution methodology has not yet been developed, it is presently not possible to identify which funds or which shareholders of any particular fund will receive distributions, or the amount of those distributions. The August Order also required Advisers to, among other things: o Enhance and periodically review compliance policies and procedures, and establish a corporate ombudsman; o Establish a new internal position whose responsibilities shall include compliance matters related to conflicts of interests; and o Retain an independent distribution consultant to develop a plan to distribute the $50 million settlement to fund shareholders. On December 13, 2004, Franklin Resources, Inc. announced that Distributors and Advisers reached an agreement with the SEC, resolving the issues resulting from the SEC's investigation concerning marketing support payments to securities dealers who sell fund shares. In connection with that agreement, the SEC issued an "Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b) of the Securities and Exchange Act of 1934" (December Order). Under the terms of the SEC's December Order, in which Advisers and Distributors neither admitted nor denied any of the findings contained therein, they agreed to pay the funds a penalty of $20 million and disgorgement of $1 (one dollar) in accordance with a plan to be developed by an independent distribution consultant. Because the distribution methodology has not yet been developed, it is presently not possible to identify which particular funds will receive distributions, or the amount of those distributions. Advisers and Distributors also agreed to implement certain measures and undertakings relating to marketing support payments to broker-dealers for the promotion or sale of fund shares, including making additional disclosures in the Funds' Prospectus and Statement of Additional Information. Franklin Resources, Inc. and certain of its subsidiaries, in addition to most of the mutual funds within Franklin Templeton Investments and certain current or former officers, directors, and/or employees, have been named in private lawsuits (styled as shareholder class actions, or as derivative actions on behalf of either the named funds or Franklin Resources, Inc.) relating to the matters reported above. The lawsuits were filed in federal district courts in California, Florida, Illinois, Massachusetts, Nevada, New Jersey, and New York, and in state courts in Illinois. Many of those suits are now pending in a multi-district litigation in the United States District Court for the District of Maryland. Franklin Resources, Inc. believes that the claims made in each of the lawsuits are without merit and intends to defend vigorously against the allegations. It is possible that additional similar civil actions related to the matters disclosed above could be filed in the future. Franklin Resources, Inc. previously disclosed these issues as matters under investigation by government authorities and the subject of an internal company inquiry as well as private lawsuits in its regulatory filings and on its public website. Any further updates on these matters will be disclosed on Franklin Resources, Inc.'s website at franklintempleton.com under "Statement on Current Industry Issues." DISTRIBUTIONS AND TAXES Income and Capital Gain Distributions Each Fund intends to declare and pay an income dividend from its respective net investment income, as follows: o The Income and U.S. Government Securities Funds: monthly o The Utilities Fund: quarterly, and o The DynaTech and Growth Funds: at least annually. Capital gains, if any, may be distributed at least annually. The amount of any distribution will vary, and there is no guarantee a Fund will pay either income dividends or a capital gain distribution. ANNUAL STATEMENTS. Every January, you will receive a statement that shows the tax status of distributions you received the previous year, including the amount of any qualified dividend income subject to tax at capital gains rates and, for non-U.S. investors, the amount of your ordinary dividends that have been exempt from non-resident alien withholding taxes because they are interest-related or short-term capital gain dividends. (See the discussion below for "Non-U.S. investors.") Distributions declared in December but paid in January are taxable as if they were paid in December. AVOID "BUYING A DIVIDEND." If you invest in a Fund shortly before it makes a distribution, you may receive some of your investment back in the form of a taxable distribution. For example, if you buy 500 shares in the Fund on November 30th at the Fund's current NAV of $10 per share, and the Fund makes a distribution on December 1st of $1 per share, your shares will then have an NAV of $9 per share (disregarding any change in the Fund's market value), and you will have to pay a tax on what is essentially a return of your investment of $1 per share. This tax treatment is required even if you reinvest the $1 per share distribution in additional Fund shares. TAX CONSIDERATIONS In general, if you are a taxable investor, Fund distributions are taxable to you at either ordinary income or capital gains tax rates. This is true whether you reinvest your distributions in additional Fund shares or receive them in cash. DIVIDEND INCOME. Under the Jobs and Growth Tax Relief Reconciliation Act of 2003 (2003 Tax Act), a portion of the income dividends paid to you by a Fund may be qualified dividends subject to taxation at the long-term capital gain rate of 15% for individuals (5% for individuals in the 10% and 15% federal rate brackets). In general, income dividends from portfolio investments in the stock of domestic corporations and qualified foreign corporations will be permitted this favored federal tax treatment. Income dividends from interest earned by a Fund on debt securities and dividends received from unqualified foreign corporations will continue to be taxed at the higher ordinary income tax rates. Distributions of qualified dividends will be eligible for these reduced rates of taxation only if you own your shares for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date of any dividend. DISTRIBUTIONS OF CAPITAL GAINS. Fund distributions of short-term capital gains are taxable to you as ordinary income. Fund distributions of long-term capital gains are taxable as long-term capital gains no matter how long you have owned your shares. Long-term capital gain distributions qualify for the 15% tax rate (5% for individuals in the 10% and 15% federal rate brackets). Sales of Fund shares. When you sell your shares in a Fund, you may realize a capital gain or loss. For tax purposes, an exchange of your Fund shares for shares of a different Franklin Templeton fund is the same as a sale. An exchange of your shares in one class in the Fund for shares of another class in the same Fund is not a taxable event, and no gain or loss will be reported on such a transaction. NON-U.S. INVESTORS. The United States imposes a withholding tax (at a 30% or lower treaty rate) on all Fund dividends of ordinary income. Capital gain dividends paid by a Fund from its net long-term capital gains are generally exempt from this withholding tax. The American Jobs Creation Act of 2004 (2004 Tax Act) amends these withholding tax provisions to exempt most dividends paid by a Fund from U.S. source interest income and short-term capital gains to the extent such income and gains would be exempt if earned directly by the non-U.S. investor. Under the new law, ordinary dividends designated as interest-related dividends (dividends that are designated as a payment out of qualified interest income) and short-term capital gain dividends generally will not be subject to a U.S. withholding tax, provided you properly certify your status as a non-U.S. investor. These exemptions from withholding are effective for distributions of income earned by a Fund in its fiscal years beginning on October 1, 2005 and ending on September 30, 2008. The 2004 Act also provides a partial exemption from U.S. estate tax for shares in a Fund held by the estate of a non-U.S. decedent. The amount treated as exempt is based on the proportion of assets in the Fund at the end of the quarter immediately preceding the decedent's death that would be exempt if held directly by the non-U.S. investor. This provision applies to decedents dying after December 31, 2004 and before January 1, 2008. BACKUP WITHHOLDING. If you do not provide a Fund with your proper taxpayer identification number and certain required certifications, you may be subject to backup withholding at a rate of 28% on any distributions of income, capital gains or proceeds from the sale of your shares. Each Fund also must withhold if the IRS instructs it to do so. Special U.S. tax certification requirements apply to non-U.S. investors. Non-U.S. investors who fail to meet these certification requirements will be subject to backup withholding on any dividends, distributions and redemption proceeds received from a Fund, including withholding on any interest-related dividends and short-term capital gain dividends during the exemption period discussed above. See the detailed information for non-U.S. investors contained in the section on "Distributions and Taxes" in the Statement of Additional Information, or contact Franklin Templeton Investments at 1-800/DIAL BEN for more information on these requirements. OTHER TAX INFORMATION. Fund distributions and gains from the sale of your Fund shares generally are subject to state and local taxes. You should consult your tax advisor about the federal, state, local or foreign tax consequences of your investment in a Fund. YOUR ACCOUNT The Board of Directors of the Fund has approved the termination of offering Class B shares(and Class B1 shares in the case of the Franklin Income Fund). Class B1 shares are currently closed to new investors. The termination of the offering of Class B shares is effective March 1, 2005. Existing shareholders of Class B shares (and Class B1 shares) may continue as Class B shareholders, continue to reinvest dividends into Class B shares (and Class B1 shares) and exchange their Class B shares for Class B shares of other Franklin Templeton funds as permitted by the current exchange privileges. New or additional investments into Class B (or Class B1) are not permitted. For Class B (or Class B1) shares outstanding on February 28, 2005 and Class B (or Class B1) shares acquired upon reinvestment of dividends, all Class B (or Class B1) share attributes, including the associated Rule 12b-1 fee, contingent deferred sales charge and conversion features, will continue. CHOOSING A SHARE CLASS Each class has its own sales charge and expense structure, allowing you to choose the class that best meets your situation. Your investment representative can help you decide. Investors may purchase Class C or Class R shares only for Fund accounts on which they have appointed an investment representative (financial advisor) of record. Unless a prospective investor is eligible to purchase Advisor Class shares, all purchases by a prospective investor to a Fund account that does not have an appointed investment representative (financial advisor) will be invested in Class A shares at the applicable offering price. Investors who have not appointed an investment representative (financial advisor) to existing Class B or B1, Class C or Class R share Fund accounts may not make additional purchases to those accounts but may exchange their shares to a Franklin Templeton fund that offers Class B or B1, Class C or Class R shares. Additional purchases by these existing investors will be invested in Class A shares at the applicable offering price. Dividend and capital gain distributions may continue to be reinvested in existing Class B or B1, Class C or Class R share Fund accounts. These provisions do not apply to Employer Sponsored Retirement Plans. CLASS A CLASS B & B1 Class C Class R -------------------------------------------------------------------- o Initial sales o No o No o No initial charge of initial initial sales charge 5.75% sales sales (DynaTech and charge charge Growth Funds), 4.25% (Income, Utilities and U.S. Government Securities Funds) or less o Deferred sales o Deferred o Deferred o Except for charge of 1% sales sales certain on purchases charge of charge of Employer of $1 million 4% on 1% on Sponsored or more sold shares you shares you Retirement within 18 sell sell Plans, months within the within 12 deferred sales first months charge of 1% year, on shares you declining sell within 18 to 1% months within six (charged at years and plan level eliminated based on after that initial investment) o Lower annual o Higher o Higher o Higher expenses than annual annual annual Class B, B1, C expenses expenses expenses than or R due to than than Class Class A due to lower Class A A due to higher distribution due to higher distribution fees higher distribution fees (lower distribution fees. No than Class B fees. conversion and Class Automatic to Class A C).No conversion shares, so conversion to to annual Class A Class A expenses shares, so shares do not annual after decrease. expenses do eight not decrease. years, reducing future annual expenses. SALES CHARGES - CLASS A - DYNATECH AND GROWTH FUNDS the sales charge makes up this % which equals this of the offering % of your net when you invest this amount price* investment* -------------------------------------------------------------------- Under $50,000 5.75 6.10 $50,000 but under $100,000 4.50 4.71 $100,000 but under $250,000 3.50 3.63 $250,000 but under $500,000 2.50 2.56 $500,000 but under $1 2.00 2.04 million SALES CHARGES - CLASS A - INCOME, UTILITIES AND U.S. GOVERNMENT SECURITIES FUNDS the sales charge makes up this % which equals this of the offering % of your net when you invest this amount price* investment* -------------------------------------------------------------------- Under $100,000 4.25 4.44 $100,000 but under $250,000 3.50 3.63 $250,000 but under $500,000 2.50 2.56 $500,000 but under $1 2.00 2.04 million *The dollar amount of the sales charge is the difference between the offering price of the shares purchased (which factors in the applicable sales charge in this table) and the net asset value of those shares. Since the offering price is calculated to two decimal places using standard rounding criteria, the number of shares purchased and the dollar amount of the sales charge as a percentage of the offering price and of your net investment may be higher or lower depending on whether there was a downward or upward rounding. SALES CHARGE REDUCTIONS AND WAIVERS QUANTITY DISCOUNTS. We offer two ways for you to combine your current purchase of Class A fund shares with other existing Franklin Templeton fund share holdings that might enable you to qualify for a lower sales charge with your current purchase. You can qualify for a lower sales charge when you reach certain "sales charge breakpoints." This Quantity Discount information is also available free of charge at www.franklintempleton.com/ retail/jsp_cm/fund_perf/pub/quantity_discount.jsp. This web page can also be reached at franklintempleton.com by clicking the "Funds & Performance" tab and then choosing "Quantity Discounts." [Begin callout] Franklin Templeton funds include all of the U.S. registered mutual funds of Franklin Templeton Investments, the Franklin Floating Rate Trust and the Franklin Mutual Recovery Fund. They do not include the Franklin Templeton Variable Insurance Products Trust and Templeton Capital Accumulator Fund. [End callout] 1. CUMULATIVE QUANTITY DISCOUNT - lets you combine certain existing holdings of Franklin Templeton fund shares - referred to as "cumulative quantity discount eligible shares" - with your current purchase of Class A shares to determine if you qualify for a sales charge breakpoint. Cumulative quantity discount eligible shares are shares: (i) Registered to (or held for): o You, individually; o Your spouse or domestic partner, as recognized by applicable state law; o You jointly with your spouse or domestic partner; o You jointly with another unrelated (not a spouse or domestic partner) person if that other person has not included the value of the shares as cumulative quantity discount eligible shares for purposes of that person's separate investments in Franklin Templeton fund shares; o A trustee/custodian of a Coverdell Education Savings account for which you are the identified responsible person on the records of the "current purchase broker-dealer" (as defined below) or its affiliate; o A trustee/custodian of your IRA (which includes a Roth IRA and an employer sponsored IRA such as a SIMPLE IRA) or your non-ERISA covered 403(b), if the shares are registered with the Fund (or in the current purchase broker-dealer's brokerage account) under your social security number or the trustee/custodian is providing IRA custody services for clients of the current purchase broker-dealer as an affiliate of, or under contract with, the firm; or o Any entity over which you or your spouse or domestic partner have individual or shared authority, as principal, to buy and sell shares for the account (for example, an UGMA/UTMA for a child on which you or your spouse or domestic partner are the custodian, a trust on which you or your spouse or domestic partner are the trustee, a business account [not to include retirement plans] for your solely owned business (or the solely owned business of your spouse or domestic partner) on which you (or your spouse or domestic partner) are the authorized signer); that are (ii) in one or more accounts maintained by the transfer agent for the Franklin Templeton funds on which your "current purchase broker-dealer" (as defined below) is the broker-dealer of record or one or more brokerage accounts maintained with your "current purchase broker-dealer." Your current purchase broker-dealer is the broker-dealer (financial advisor) for the Fund account (or brokerage account) that will hold the shares from your current purchase. If you do not select a broker-dealer (financial advisor) for your current purchase, we will consider the distributor of the Fund's shares to be your current purchase broker-dealer for purposes of identifying cumulative quantity discount eligible shares that might be combined with your current purchase. If you believe there are cumulative quantity discount eligible shares that can be combined with your current purchase to achieve a sales charge breakpoint, you must, at the time of your purchase (including at the time of any future purchase) specifically identify those shares to your current purchase broker-dealer. The value of cumulative quantity discount eligible shares equals the cost or current value of those shares, whichever is higher. The current value of shares is determined by multiplying the number of shares by their highest current public offering price. You should retain any records necessary to substantiate historical share costs because your current purchase broker-dealer may not have or maintain this information. If there are cumulative quantity discount eligible shares that would qualify for combining with your current purchase and you do not tell your current purchase broker-dealer at the time of your current purchase or any future purchase, you may not receive the benefit of a reduced sales charge that might otherwise be available. Franklin Templeton fund shares held as follows cannot be combined with your current purchase for purposes of the Cumulative Quantity Discount: o Shares held indirectly through financial intermediaries other than your current purchase broker-dealer (for example, shares held in a different broker-dealer's brokerage account or with a bank, an insurance company separate account or an investment advisor); or o Shares held through an administrator or trustee/custodian of an Employer Sponsored Retirement Plan (for example, a 401(k) plan); or o Shares held in a 529 college savings plan; or o Shares held directly in a Franklin Templeton fund account on which the broker-dealer (financial advisor) of record is different than your current purchase broker-dealer. Franklin Templeton fund assets held in multiple Employer Sponsored Retirement Plans may be combined in order to qualify for sales charge breakpoints at the plan level if the plans are sponsored by the same employer. 2. LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar amount of "cumulative quantity discount eligible shares" (as defined in the "Cumulative Quantity Discount" section above) over a 13-month period and lets you receive the same sales charge as if all shares had been purchased at one time. We will reserve 5% of your total intended purchase in Class A shares registered in your name until you fulfill your LOI to cover any additional sales charge that may apply if you do not buy the amount stated in your LOI. Please refer to the SAI for more LOI details. To sign up for these programs, complete the appropriate section of your account application. SALES CHARGE WAIVERS. Class A shares may be purchased without an initial sales charge or CDSC by certain investors or for certain payments. If you would like information about available sales charge waivers, call your investment representative or call Shareholder Services at 1-800/632-2301. A list of available sales charge waivers also may be found in the SAI. INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a lump sum or through our cumulative quantity discount or letter of intent programs, you can buy Class A shares without an initial sales charge. However, there is a 1% contingent deferred sales charge (CDSC) on any shares you sell within 18 months of purchase. The way we calculate the CDSC is the same for each class (please see page 92). DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows DynaTech and Growth Funds to pay distribution fees of up to 0.25% per year and Income, Utilities and U.S. Government Securities Funds to pay distribution fees of up to 0.15% per year to those who sell and distribute Class A shares and provide other services to shareholders. Because these fees are paid out of Class A's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. SALES CHARGES - CLASS B & b1 if you sell your shares this % is deducted within this many years after from your proceeds buying them as a CDSC ------------------------------------------------------ 1 Year 4 2 Years 4 3 Years 3 4 Years 3 5 Years 2 6 Years 1 7 Years 0 With Class B and B1 shares, there is no initial sales charge. However, there is a CDSC if you sell your shares within six years, as described in the table above. The way we calculate the CDSC is the same for each class (please see page 92). After eight years, your Class B and B1 shares automatically convert to Class A shares, lowering your annual expenses from that time on. MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares with any single purchase request is $99,999. A purchase request of $100,000 or more will be rejected since a reduced sales charge is available on Class A share purchases and Class A's annual expenses are lower. Investors considering cumulative purchases over $100,000 should consider whether Class A shares would be more advantageous and consult with their financial advisor. RETIREMENT PLANS Class B and B1 shares are not available to Employer Sponsored Retirement Plans. DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows the Dynatech Fund, Growth Fund and Income Fund to pay distribution and other fees of up to 1% per year and Utilities Fund and U.S. Government Securities Fund to pay distribution and other fees up to 0.65% per year for the sale of Class B shares and for services provided to shareholders. Class B1 has a distribution plan that allows Income Fund to pay distribution and other fees of up to 0.65% per year for the sale of Class B1 shares and for services provided to shareholders. Because these fees are paid out of Class B and Class B1's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. SALES CHARGES - CLASS C ------------------------------------------------------ With Class C shares, there is no initial sales charge. We place any investment of $1 million or more in Class A shares, since Class A's annual expenses are lower. CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C shares you sell within 12 months of purchase. The way we calculate the CDSC is the same for each class (please see page 92). DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows DynaTech and Growth Funds to pay distribution and other fees of up to 1% per year and Income, Utilities and U.S. Government Securities Funds to pay distribution and other fees of up to 0.65% per year for the sale of Class C shares and for services provided to shareholders. Because these fees are paid out of Class C's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. SALES CHARGES - CLASS R ------------------------------------------------------ With Class R shares, there is no initial sales charge. RETIREMENT PLANS Class R shares are available to the following investors: o Employer Sponsored Retirement Plans o Any trust or plan established as part of a qualified tuition program under Section 529 of the Internal Revenue Code o Health Reimbursement Accounts and Health Savings Accounts, either as a direct investment or as a separate or managed account. A "Qualified Retirement Plan" is an employer sponsored pension or profit sharing plan that qualifies under section 401(a) of the Internal Revenue Code, including 401(k), money purchase pension, profit sharing and defined benefit plans. An "Employer Sponsored Retirement Plan" is a Qualified Retirement Plan, ERISA covered 403(b) and certain non-qualified deferred compensation arrangements that operate in a similar manner to a Qualified Retirement Plan, such as 457 plans and executive deferred compensation arrangements, but not including employer sponsored IRAs. A "DCS Plan" is an Employer Sponsored Retirement Plan that (i) has contracted for current participant level record keeping with the Defined Contribution Services (DCS) division of Franklin Templeton Investor Services; or (ii) is receiving current DCS services by contracting with the entity identified in DCS promotional material for participant level record keeping related to those DCS services. MAXIMUM PURCHASE AMOUNT The maximum lump sum amount you may invest in Class R share IRA Rollovers is $999,999. We place any investment of $1 million or more in Class A shares since Class A's annual expenses are lower. There is no maximum purchase amount for Qualified plans. CDSC Except for Employer Sponsored Retirement Plans that (i) are DCS Plans; (ii) have contracted with an affiliate of Distributors for plan trustee services; or (iii) first purchase fund shares after January 1, 2003, there is a 1% contingent deferred sales charge (CDSC) on any Class R shares sold within 18 months of purchase. The CDSC is applied at the plan level based on initial investment for Employer Sponsored Retirement Plans. The way we calculate the CDSC is the same for each class (please see below). DISTRIBUTION AND SERVICE (12B-1) FEES Class R has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows the Funds to pay distribution and other fees of up to 0.50% per year for the sale of Class R shares and for services provided to shareholders. Because these fees are paid out of Class R's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B, B1, C & R The CDSC for each class is based on the current value of the shares being sold or their net asset value when purchased, whichever is less. There is no CDSC on shares you acquire by reinvesting your dividends or capital gain distributions. [Begin callout] The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your shares will age one month on that same date the next month and each following month. For example, if you buy shares on the 18th of the month, they will age one month on the 18th day of the next month and each following month. [End callout] To keep your CDSC as low as possible, each time you place a request to sell shares we will first sell any shares in your account that are not subject to a CDSC. If there are not enough of these to meet your request, we will sell the shares in the order they were purchased. We will use this same method if you exchange your shares into another Franklin Templeton fund (please see page 105 for exchange information). REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton fund that were held indirectly for your benefit in an account with your investment representative's firm or your bank's trust department or that were registered to you directly by the Fund's transfer agent (or, to an affiliated custodian or trustee of the Fund's transfer agent), you may reinvest all or a portion of the proceeds from that sale within 90 days of the sale without an initial sales charge. This Reinstatement Privilege does not apply to: (i) a purchase of Fund shares made through a regularly scheduled automatic investment plan such as a purchase by a regularly scheduled payroll deduction or transfer from a bank account, or (ii) a purchase of Fund shares with proceeds from the sale of Franklin Templeton fund shares that were held indirectly through an Employer Sponsored Retirement Plan that is not a DCS Plan or a non-Franklin Templeton individual or employer sponsored IRA. In order to take advantage of this Reinstatement Privilege, you must inform your investment representative or the Fund's transfer agent of this privilege at the time of your investment. The proceeds from the earlier sale must also be invested within the same share class as that of the sold shares, except proceeds from the sale of Class B shares, Class C shares or Class R shares will be reinvested in Class A shares if at the time of investment you have not appointed an investment representative (financial advisor) of record for the Fund account(s) in which the purchased shares will be held. Proceeds from the earlier sale of Class Z shares may also be invested in Class A shares under this Reinstatement Privilege. If you paid a CDSC when you sold your Class A, C or R shares, we will credit back to you the CDSC paid on the amount you are reinvesting within 90 days of the sale by adding it to the amount of your reinvestment (for example, if you are reinvesting $10,000 within 90 days of an earlier $10,000 sale on which you paid a $100 CDSC, the amount of your reinvestment will equal $10,100). The new shares issued with your reinvestment WILL BE subject to any otherwise applicable CDSC. If, however, you (except Employer Sponsored Retirement Plans) paid a CDSC when you sold (1) Class B or B1; or (2) Class C or R shares held at the time of sale in a Franklin Templeton fund account without an investment representative (financial advisor) appointed by you and invest the proceeds from that sale in Class A shares within 90 days of the sale, you will not be credited with any CDSC paid at the time of sale. In this case, the new Class A shares issued with your reinvestment WILL NOT BE subject to any otherwise applicable CDSC. Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) also may be reinvested without an initial sales charge if you reinvest them within 90 days from the date the CD matures, including any rollover. This privilege does not apply to shares you buy and sell under our exchange program. Shares purchased with the proceeds from a money fund may be subject to a sales charge. BUYING SHARES MINIMUM INVESTMENTS ------------------------------------------------------------------ Initial ------------------------------------------------------------------ Regular accounts $1,000 ------------------------------------------------------------------ Automatic investment plans $50 ------------------------------------------------------------------ UGMA/UTMA accounts $100 ------------------------------------------------------------------ Employer Sponsored Retirement Plans no minimum ------------------------------------------------------------------ IRAs, IRA rollovers, Coverdell Education $250 Savings Plans or Roth IRAs ------------------------------------------------------------------ Broker-dealer sponsored wrap account programs $250 ------------------------------------------------------------------ Current and former full-time employees, $100 officers, trustees and directors of Franklin Templeton entities, and their family members ------------------------------------------------------------------ Please note that you may only buy shares of a fund eligible for sale in your state or jurisdiction. ACCOUNT APPLICATION If you are opening a new account, please complete and sign the enclosed account application. Make sure you indicate the share class you have chosen. If you do not indicate a class, we will place your purchase in Class A shares. To save time, you can sign up now for services you may want on your account by completing the appropriate sections of the application (see "Investor Services" on page 98). For example, if you would like to link one of your bank accounts to your Fund account so that you may use electronic funds transfer to and from your bank account to buy and sell shares, please complete the bank information section of the application. We will keep your bank information on file for future purchases and redemptions. We do not accept cash, credit card convenience checks, non-bank money orders or travelers checks as forms of payment to purchase shares. BUYING SHARES ---------------------------------------------------------------------- OPENING AN ACCOUNT ADDING TO AN ACCOUNT ---------------------------------------------------------------------- THROUGH YOUR Contact your Contact your investment INVESTMENT investment representative REPRESENTATIVE representative ---------------------------------------------------------------------- If you have another Before requesting a BY PHONE/ONLINE Franklin Templeton telephone or online fund account with your purchase into an (Up to $100,000 per bank account existing account, shareholder per day) information on file, please make sure we you may open a new have your bank account 1-800/632-2301 account by phone. At information on file. If this time, a new we do not have this franklintempleton.com account may not be information, you will opened online. need to send written Note: (1) certain instructions with your account types are To make a same day bank's name and address not available for investment, your phone and a voided check or online account order must be received savings account deposit access and (2) the and accepted by us by slip. If the bank and amount may be 1:00 p.m. Pacific time Fund accounts do not higher for members or the close of the have at least one of the Valued New York Stock common owner, your Investor Program. Exchange, whichever is written request must be Please see page 100 earlier. signed by all fund and for more bank account owners, information and each individual regarding must have his or her eligibility. signature guaranteed. To make a same day investment, your phone or online order must be received and accepted by us by 1:00 p.m. Pacific time or the close of the New York Stock Exchange, whichever is earlier. ---------------------------------------------------------------------- Make your check Make your check payable BY MAIL payable to the Fund. to the Fund. Include your account number on Mail the check and the check. your signed application to Fill out the deposit Investor Services. slip from your account statement. If you do not have a slip, include a note with your name, the Fund name, and your account number. Mail the check and deposit slip or note to Investor Services. ---------------------------------------------------------------------- Call to receive a Call to receive a wire wire control number control number and wire BY WIRE and wire instructions. instructions. 1-800/632-2301 To make a same day wire (or 1-650/312-2000 Wire the funds and investment, the wired collect) mail your signed funds must be received application to and accepted by us by Investor Services. 1:00 p.m. Pacific time Please include the or the close of the New wire control number or York Stock Exchange, your new account whichever is earlier. number on the application. To make a same day wire investment, the wired funds must be received and accepted by us by 1:00 p.m. Pacific time or the close of the New York Stock Exchange, whichever is earlier. ---------------------------------------------------------------------- Call Shareholder Call Shareholder BY EXCHANGE Services at Services at 1-800/632-2301, or 1-800/632-2301, or send franklintempleton.com send signed written signed written instructions. You instructions. You also also may place an may place an online online exchange order. exchange order. The automated telephone system (Please see page 105 cannot be used to open for information on a new account. exchanges.) (Please see page 105 for information on exchanges.) ---------------------------------------------------------------------- FRANKLIN TEMPLETON INVESTOR SERVICES, P.O. BOX 997151, SACRAMENTO, CA 95899-9983 CALL TOLL-FREE: 1-800/632-2301 (MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME) OR VISIT US ONLINE 24 HOURS A DAY, 7 DAYS A WEEK, AT FRANKLINTEMPLETON.COM INVESTOR SERVICES AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in a Fund by automatically transferring money from your checking or savings account each month to buy shares. To sign up, visit us online at franklintempleton.com or complete the appropriate section of your account application and mail it to Investor Services. If you are opening a new account, please include the minimum initial investment (please see page 95) with your application. AUTOMATIC PAYROLL DEDUCTION You may invest in a Fund automatically by transferring money from your paycheck to the Fund by electronic funds transfer. If you are interested, indicate on your application that you would like to receive an Automatic Payroll Deduction Program kit. AUTOMATED TELEPHONE SYSTEM Our automated system offers around-the-clock access to information about your account or any Franklin Templeton fund. This service is available by dialing any of the following numbers from a touch-tone phone: SHAREHOLDER SERVICES 1-800/632-2301 ADVISOR SERVICES 1-800/524-4040 RETIREMENT SERVICES 1-800/527-2020 DISTRIBUTION OPTIONS You may reinvest distributions you receive from the Fund in an existing account in the same share class* of the Fund or another Franklin Templeton fund. Initial sales charges and CDSCs will not apply to reinvested distributions. You also can have your distributions deposited in a bank account, or mailed by check. Deposits to a bank account may be made by electronic funds transfer. If you received a distribution and chose to return it to purchase additional shares, you will not be charged an initial sales charge if you invest the distribution within 90 days of the distribution date. [Begin callout] For retirement plans for which Franklin Templeton Bank & Trust is the trustee or custodian, special forms may be needed to receive distributions in cash. Please call 1-800/527-2020 for information. [End callout] Please indicate on your application the distribution option you have chosen, otherwise we will reinvest your distributions in the same share class of the Fund. *Class B and C shareholders may reinvest their distributions in Class A shares of any Franklin Templeton money fund. DCS Plans may direct distributions to Class A shares if Class R shares are not offered by that fund. RETIREMENT PLANS Franklin Templeton Investments offers a variety of retirement plans for individuals and businesses. These plans require separate applications and their policies and procedures may be different than those described in this prospectus. For more information, including a free retirement plan brochure or application, please call Retirement Services at 1-800/527-2020. TELEPHONE/ONLINE PRIVILEGES You will automatically receive telephone/online privileges when you open your account, allowing you to obtain or view your account information, and conduct a number of transactions by phone or online, including: buy, sell, or exchange shares of most funds; use electronic funds transfer to buy or sell shares of most funds; change your address; and, add or change account services (including distribution options, systematic withdrawal plans and automatic investment plans). To view your account information or request online transactions, you will first need to register for these services at the shareholder section of our website at franklintempleton.com. You will be asked to accept the terms of an online agreement(s) and establish a password for online services. If you are registered for online services, you may enroll online in Franklin Templeton's electronic delivery program for your shareholder documents. This will allow you to receive electronic delivery (through our website) of most funds' prospectuses, annual/semiannual reports to shareholders, and proxy statements, as well as your account(s) statements and trade confirmations, and discontinue receiving your paper copies through the U.S. mail. Using our shareholder website means you are consenting to sending and receiving personal financial information over the Internet, so you should be sure you are comfortable with the risks. As long as we follow reasonable security procedures and act on instructions we reasonably believe are genuine, we will not be responsible for any losses that may occur from unauthorized requests. We will request passwords or other information, and also may record calls. To help safeguard your account, keep your password confidential, and verify the accuracy of your confirmation statements immediately after you receive them. Contact us immediately if you believe someone has obtained unauthorized access to your account or password. For transactions done over the Internet, we recommend the use of an Internet browser with 128-bit encryption. Certain methods of contacting us (such as by phone or by Internet) may be unavailable or delayed during periods of unusual market activity. Of course, you can decline telephone buy, sell, or exchange privileges on your account application, or choose not to register for online privileges. If you have telephone/online privileges on your account and want to discontinue them, please contact us for instructions. You may reinstate these privileges at any time in writing, including online registration with respect to online privileges. NOTE: We discourage you from including confidential or sensitive information in any Internet communication to us. If you do choose to send email (encrypted or not) to us over the Internet, you are accepting the associated risks of lack of confidentiality. SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your shares and receive regular payments from your account. A CDSC may apply to withdrawals that exceed certain amounts. Certain terms and minimums apply. To sign up, visit us online at franklintempleton.com or complete the appropriate section of your application. VALUED INVESTOR PROGRAM You may be eligible for the Valued Investor Program (VIP) if you are currently eligible for the $250,000 sales charge breakpoint based solely on shares registered directly with the Franklin Templeton funds' transfer agent and excluding shares held indirectly through brokerage accounts. Franklin Templeton VIP shareholders enjoy enhanced service and transaction capabilities. Please contact Shareholder Services at 1-800/632-2301 for additional information on this program. SELLING SHARES You can sell your shares at any time. Please keep in mind that a contingent deferred sales charge (CDSC) may apply. SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be made over the phone, online, or with a simple letter. Sometimes, however, to protect you and a Fund we will need written instructions signed by all registered owners, with a signature guarantee for each owner, if: [Begin callout] A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a signature guarantee at most banks and securities dealers. A notary public CANNOT provide a signature guarantee. [End callout] o you are selling more than $100,000 worth of shares o you want your proceeds paid to someone who is not a registered owner o you want to send your proceeds somewhere other than the address of record, or preauthorized bank or brokerage firm account We also may require a signature guarantee on instructions we receive from an agent, not the registered owners, or when we believe it would protect a Fund against potential claims based on the instructions received. The amount may be higher for members of the Valued Investor Program. Please see page 100 for more information regarding eligibility. SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased, we may delay sending you the proceeds until your check, draft or wire/electronic funds transfer has cleared, which may take seven business days or more. REDEMPTION PROCEEDS Your redemption check will be sent within seven days after we receive your request in proper form. We are not able to receive or pay out cash in the form of currency. Redemption proceeds may be delayed if we have not yet received your signed account application. RETIREMENT PLANS You may need to complete additional forms to sell shares in a Franklin Templeton Bank & Trust retirement plan. For participants under age 591/2, tax penalties may apply. Call Retirement Services at 1-800/527-2020 for details. SELLING SHARES --------------------------------------------------------------- TO SELL SOME OR ALL OF YOUR SHARES --------------------------------------------------------------- THROUGH YOUR Contact your investment representative INVESTMENT REPRESENTATIVE --------------------------------------------------------------- Send written instructions and endorsed share certificates (if you hold share BY MAIL certificates) to Investor Services. Corporate, partnership or trust accounts may need to send additional documents. Specify the Fund, the account number and the dollar value or number of shares you wish to sell. If you own both Class A, B and B1 shares, also specify the class of shares, otherwise we will sell your Class A shares first. Be sure to include all necessary signatures and any additional documents, as well as signature guarantees if required. A check will be mailed to the name(s) and address on the account, or otherwise according to your written instructions. --------------------------------------------------------------- As long as your transaction is for $100,000 or less, you do not hold share BY PHONE/ONLINE certificates and you have not changed your address by phone or online within 1-800/632-2301 the last 15 days, you can sell your shares by phone or online. The amount franklintempleton.com may be higher for members of the Valued Investor Program. Please see page 100 for more information regarding eligibility. A check will be mailed to the name(s) and address on the account. Written instructions, with a signature guarantee, are required to send the check to another address or to make it payable to another person. --------------------------------------------------------------- You can call, write, or visit us online to have redemption proceeds sent to a BY ELECTRONIC FUNDS bank account. See the policies at left TRANSFER (ACH) for selling shares by mail, phone, or online. Before requesting to have redemption proceeds sent to a bank account, please make sure we have your bank account information on file. If we do not have this information, you will need to send written instructions with your bank's name and a voided check or savings account deposit slip. If the bank and Fund accounts do not have at least one common owner, you must provide written instructions signed by all fund and bank account owners, and each individual must have his or her signature guaranteed. If we receive your request in proper form by 1:00 p.m. Pacific time, proceeds sent by ACH generally will be available within two to three business days. --------------------------------------------------------------- Obtain a current prospectus for the fund you are considering. Prospectuses BY EXCHANGE are available online at franklintempleton.com. Call Shareholder Services at the number below or send signed written instructions. You also may place an exchange order online. See the policies at left for selling shares by mail, phone, or online. If you hold share certificates, you will need to return them to the Fund before your exchange can be processed. --------------------------------------------------------------- FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151, SACRAMENTO, CA 95899-9983 CALL TOLL-FREE: 1-800/632-2301 (MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME) OR VISIT US ONLINE 24 HOURS A DAY, 7 DAYS A WEEK, AT FRANKLINTEMPLETON.COM EXCHANGING SHARES EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton funds within the same class,* generally without paying any additional sales charges. If you exchange shares held for less than six months, however, you may be charged the difference between the initial sales charge of the two funds if the difference is more than 0.25%. If you exchange shares from a money fund or another fund that does not have a sales charge, a sales charge may apply no matter how long you have held the shares. [Begin callout] An EXCHANGE is really two transactions: a sale of one fund and the purchase of another. In general, the same policies that apply to purchases and sales apply to exchanges, including minimum investment amounts. Exchanges also have the same tax consequences as ordinary sales and purchases. [End callout] Generally exchanges may only be made between identically registered accounts, unless you send written instructions with a signature guarantee. Any CDSC will continue to be calculated from the date of your initial investment and will not be charged at the time of the exchange. The purchase price for determining a CDSC on exchanged shares will be the price you paid for the original shares. If you exchange shares subject to a CDSC into a Class A money fund, the time your shares are held in the money fund will not count towards the CDSC holding period. If you exchange your Class B or B1 shares for the same class of shares of another Franklin Templeton fund, the time your shares are held in that fund will count towards the eight-year period for automatic conversion to Class A shares. DCS Plans may exchange Class R shares for Class A shares of another Franklin Templeton fund if that fund does not offer Class R shares. *Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange into Class A without any sales charge. Advisor Class shareholders of another Franklin Templeton fund also may exchange into Class A of DynaTech Fund without any sales charge. Advisor Class shareholders who exchange their shares for Class A shares of DynaTech Fund and later decide they would like to exchange into another fund that offers Advisor Class may do so. REJECTED EXCHANGES. If a Fund rejects an exchange request involving the sale of Fund shares, the rejected exchange request will also mean rejection of the request to purchase shares of another fund with the proceeds of the sale. Of course, you may generally redeem shares of the Fund at any time. EXCHANGES THROUGH FINANCIAL INTERMEDIARIES. If you are investing indirectly in a Fund through a financial intermediary such as a broker-dealer, a bank, an insurance company separate account, an investment advisor, an administrator or trustee of an IRS recognized tax-deferred savings plan such as a 401(k) retirement plan and a 529 college savings plan that maintains a master account (an Omnibus Account) with the Fund for trading on behalf of its customers, different exchange and/or transfer limit guidelines and restrictions may apply. The financial intermediary through whom you are investing may choose to adopt different trading restrictions designed to discourage short-term or excessive trading. Consult with your financial intermediary (or, in the case of a 401(k) retirement plan, your plan sponsor) to determine what trading restrictions, including exchange/transfer limitations, may be applicable to you. FUND EXCHANGE PRIVILEGE CHANGES/WAIVER. Each Fund may terminate or modify (temporarily or permanently) this exchange privilege in the future. You will receive 60 days' notice of any material changes, unless otherwise provided by law. OTHER FUNDS' EXCHANGE PRIVILEGES. If there is a conflict between the exchange privileges of two funds involved in an exchange transaction, the stricter policy will apply to the transaction. Other Franklin Templeton funds may have different exchange restrictions. Check each fund's prospectus for details. MARKET TIMING TRADING POLICY The Funds' board has adopted the following policies and procedures with respect to market timing (Market Timing Trading Policy). MARKET TIMING GENERALLY. Each Fund discourages and does not intend to accommodate short-term or frequent purchases and redemptions of Fund shares, often referred to as "market timing." It intends to seek to restrict or reject such trading or take other action, as described below, if in the judgment of the Fund manager or transfer agent such trading may interfere with the efficient management of the Fund's portfolio, may materially increase the Fund's transaction costs, administrative costs or taxes, or may otherwise be detrimental to the interests of the Fund and its shareholders. MARKET TIMING CONSEQUENCES. If information regarding your trading activity in each Fund or in any other Franklin Templeton fund or non-Franklin Templeton fund is brought to the attention of the Fund's manager or transfer agent and based on that information the Fund or its manager or transfer agent in their sole discretion conclude that your trading may be detrimental to the Fund as described in this Market Timing Trading Policy, the Fund may temporarily or permanently bar your future purchases into the Fund or, alternatively, may limit the amount, number or frequency of any future purchases and/or the method by which you may request future purchases and redemptions (including purchases and/or redemptions by an exchange or transfer between the Fund and any other mutual fund). In considering an investor's trading activity, each Fund may consider, among other factors, the investor's trading history both directly and, if known, through financial intermediaries, in the Fund, in other Franklin Templeton funds, in non-Franklin Templeton mutual funds, or in accounts under common control or ownership (see, for example, "Investment by Asset Allocators" in the Statement of Additional Information). MARKET TIMING THROUGH FINANCIAL INTERMEDIARIES. You are an investor subject to this Market Timing Trading Policy whether you are a direct shareholder of each Fund or you are investing indirectly in the Fund through a financial intermediary (such as a broker-dealer, a bank, trust company, an insurance company separate account, an investment advisor, or an administrator or trustee of an IRS recognized tax-deferred savings plan such as a 401(k) retirement plan and a 529 college savings plan) that maintains an Omnibus Account with the Fund for trading on behalf of its customers. While each Fund will encourage financial intermediaries to apply the Fund's Market Timing Trading Policy to their customers who invest indirectly in the Fund, the Fund is limited in its ability to monitor the trading activity or enforce the Fund's Market Timing Trading Policy with respect to customers of financial intermediaries. For example, should it occur, the Fund may not be able to detect market timing that may be facilitated by financial intermediaries or made difficult to identify in the Omnibus Accounts used by those intermediaries for aggregated purchases, exchanges and redemptions on behalf of all their customers. More specifically, unless the financial intermediaries have the ability to apply the Fund's Market Timing Trading Policy to their customers (for example, participants in a 401(k) retirement plan) through such methods as implementing short-term trading limitations or restrictions, assessing the Fund's redemption fee and monitoring trading activity for what might be market timing, the Fund may not be able to determine whether trading by customers of financial intermediaries is contrary to the Fund's Market Timing Trading Policy. RISKS FROM MARKET TIMERS. Depending on various factors, including the size of each Fund, the amount of assets the portfolio manager typically maintains in cash or cash equivalents, the dollar amount and number and frequency of trades and the types of securities in which the Fund typically invests, short-term or frequent trading may interfere with the efficient management of the Fund's portfolio, increase the Fund's transaction costs, administrative costs and taxes and/or impact Fund performance. In addition, if the nature of a Fund's portfolio holdings exposes the Fund to "arbitrage market timers," the value of the Fund's shares may be diluted if redeeming shareholders receive proceeds (and buying shareholders receive shares) based upon net asset values which do not reflect appropriate fair value prices. Arbitrage market timing occurs when an investor seeks to take advantage of the possible delay between the change in the value of a mutual fund's portfolio holdings and the reflection of the change in the fund's net asset value per share. Each Fund is currently using several methods to reduce the risks associated with market timing. These methods include: o committing staff to selectively review on a continuing basis recent trading activity in order to identify trading activity that may be contrary to the Fund's Market Timing Trading Policy; o assessing a redemption fee for short-term trading; o seeking the cooperation of financial intermediaries to assist the Fund in identifying market timing activity. Though these methods involve judgments that are inherently subjective and involve some selectivity in their application, the Fund seeks to make judgments and applications that are consistent with the interests of the Fund's shareholders. There is no assurance that the Fund or its agents will gain access to any or all information necessary to detect market timing in Omnibus Accounts. While the Fund will seek to take actions (directly and with the assistance of financial intermediaries) that will detect market timing, the Fund cannot represent that such trading activity can be minimized or completely eliminated. REVOCATION OF MARKET TIMING TRADES. Transactions placed in violation of the Funds' Market Timing Trading Policy are not necessarily deemed accepted by a Fund and may be cancelled or revoked by the Fund following receipt by the Fund. REDEMPTION FEE REDEMPTION FEE ASSESSMENT. A short-term trading redemption fee may be assessed on any Fund shares in a Fund account that are sold (by redemption, whether voluntary or involuntary, or exchange) within seven (7) calendar days following their purchase date. This redemption fee will equal 2% of the amount redeemed (using standard rounding criteria) and shares held the longest will be treated as being redeemed first and shares held shortest as being redeemed last. The redemption fee may be collected by deduction from the redemption proceeds or, if assessed after the redemption transaction, by billing you. This redemption fee is imposed to discourage short-term trading and is paid to the Fund to help offset any cost associated with such short-term trading. This redemption fee is not intended to accommodate short-term trading and the Fund will monitor the assessment of redemption fees against your account. Based on the frequency of redemption fees assessed against your account in the Fund and/or in your other Franklin Templeton fund accounts, the Fund manager or transfer agent may in its sole discretion determine that your trading activity may be detrimental to the Fund as described in the Fund's "Market Timing Trading Policy" section and elect to (i) reject or limit the amount, number, frequency or method for requesting future purchases into the Fund and/or (ii) reject or limit the amount, number, frequency or method for requesting future exchanges or redemptions out of the Fund. REDEMPTIONS THROUGH FINANCIAL INTERMEDIARIES. You are an investor subject to this 2% short-term trading redemption fee whether you are a direct shareholder of the Fund or you are investing indirectly in the Fund through a financial intermediary such as a broker-dealer, a bank, an insurance company separate account, an investment advisor, an administrator or trustee of an IRS recognized tax-deferred savings plan such as a 401(k) retirement plan and a 529 college savings plan that maintains an Omnibus Account with the Fund for trading on behalf of its customers. Currently, only certain intermediaries have the ability to collect the Fund's redemption fee on the Fund's behalf from their customers' accounts. Even in the case of these intermediaries who are collecting the redemption fee, due to policy, operational and/or systems' requirements and limitations, these intermediaries may use criteria and methods for tracking, applying and/or calculating the fee that may differ in some respects from that of the Fund. The Fund will continue to encourage all financial intermediaries to develop the capability to begin assessing the redemption fee from their customers who invest in the Fund. If you are investing in Fund shares through a financial intermediary, you should contact your financial intermediary (or, in the case of a 401(k) retirement plan, your plan sponsor) for more information on any differences in how the redemption fee is applied to your investments in the Fund. WAIVER/EXCEPTIONS/CHANGES. Each Fund reserves the right to waive the redemption fee at its discretion if the Fund's transfer agent believes such waiver is consistent with the best interests of the Fund and to the extent permitted or required by applicable law. The Fund's transfer agent may also, at its discretion and upon receipt of shareholder's written request, waive the redemption fee because of a bona fide and unanticipated financial emergency. The redemption fee does not apply to redemptions by other mutual funds, Omnibus Account owners and certain comprehensive fee programs where investment instructions are given at the firm level of Fund approved broker-dealers on behalf of their clients invested in Franklin Templeton funds. In addition, the Fund reserves the right to modify or eliminate the redemption fee or waivers at any time. You will receive 60 days' notice of any material changes, unless otherwise provided by law. LIMITATIONS ON COLLECTION. Currently, each Fund is very limited in its ability to ensure that the redemption fee is assessed by financial intermediaries on behalf of their customers. For example, where a financial intermediary is not able to determine if the redemption fee applies and/or is not able to assess or collect the fee, or omits to collect the fee at the time of a redemption, the Fund will not receive the redemption fees. Further, if Fund shares are redeemed by a financial intermediary at the direction of its customer(s), the Fund may not know: (1) whether a redemption fee is applicable; and/or (2) the identity of the customer who should pay the redemption fee. INVOLUNTARY REDEMPTIONS Each Fund reserves the right to close your account if the account value falls below the Fund's minimum account level, or you are deemed to engage in activities that are illegal (such as late trading) or otherwise believed to be detrimental to the Fund (such as market timing), to the fullest extent permitted by law. ACCOUNT POLICIES CALCULATING SHARE PRICE When you buy shares, you pay the "offering price" for the shares. The "offering price" is determined by dividing the net asset value per share (NAV) by an amount equal to 1 minus the sales charge applicable to the purchase (expressed in decimals), calculated to two decimal places using standard rounding criteria. The number of Fund shares you will be issued will equal the amount invested divided by the applicable offering price for those shares, calculated to three decimal places using standard rounding criteria. For example, if the NAV per share is $10.25 and the applicable sales charge for the purchase is 5.75%, the offering price would be calculated as follows: 10.25 divided by 1.00 minus 0.0575 [10.25/0.9425] equals 10.87533, which, when rounded to two decimal points, equals 10.88. The offering price per share would be $10.88. When you sell shares, you receive the NAV minus any applicable CDSC. The value of a mutual fund is determined by deducting the fund's liabilities from the total assets of the portfolio. The net asset value per share is determined by dividing the total net asset value of each fund's share class by the applicable number of shares outstanding per share class. Each Fund calculates the NAV per share each business day at the close of trading on the New York Stock Exchange (NYSE) (normally 1:00 p.m. Pacific time). The Fund does not calculate the NAV on days the NYSE is closed for trading, which include New Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. When determining its NAV, each Fund values cash and receivables at their realizable amounts, and records interest as accrued and dividends on the ex-dividend date. The Fund generally utilizes two independent pricing services to assist in determining a current market value for each security. If market quotations are readily available for portfolio securities listed on a securities exchange or on the Nasdaq National Market System, the Fund values those securities at the last quoted sale price or the official closing price of the day, respectively, or, if there is no reported sale, within the range of the most recent quoted bid and ask prices. The Fund values over-the-counter portfolio securities within the range of the most recent bid and ask prices. If portfolio securities trade both in the over-the-counter market and on a stock exchange, the Fund values them according to the broadest and most representative market as determined by the manager. Requests to buy and sell shares are processed at the NAV next calculated after we receive your request in proper form. Generally, trading in corporate bonds, U.S. government securities and money market instruments is substantially completed each day at various times before the close of the NYSE. The value of these securities used in computing the NAV is determined as of such times. Occasionally, events affecting the values of these securities may occur between the times at which they are determined and the close of the NYSE that will not be reflected in the computation of the NAV. The Fund relies on third-party pricing vendors to monitor for events materially affecting the value of these securities during this period. If an event occurs the third-party pricing vendors will provide revised values to the Fund. FAIR VALUATION - INDIVIDUAL SECURITIES Each Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available (such as certain restricted or unlisted securities and private placements) or which may not be reliably priced (such as in the case of trade suspensions or halts, price movement limits set by certain foreign markets, and thinly traded or illiquid securities). Some methods for valuing these securities may include: fundamental analysis (earnings multiple, etc.), 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. The application of fair value pricing procedures represents a good faith determination based upon specifically applied procedures. There can be no assurance that the Fund could obtain the fair value assigned to a security if it were able to sell the security at approximately the time at which the Fund determines its NAV per share. SECURITY VALUATION - U.S. PASS-THROUGH, CMO, ABS, MBS The Income and U.S. Government Securities Funds invest in mortgage pass-through securities. Mortgage pass-through securities (such as Ginnie Mae, Fannie Mae and Freddie Mac), other mortgage-backed securities (MBS), collateralized mortgage obligations (CMO's) and asset-backed securities (ABS), generally trade in the over-the-counter market rather than on a securities exchange. Each Fund may value these portfolio securities by utilizing quotations from bond dealers, information with respect to bond and note transactions and may rely on independent pricing services. The Fund's pricing services use valuation models or matrix pricing to determine current value. In general, they use 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, maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves. Matrix pricing is considered a form of fair value pricing. SECURITY VALUATION - CORPORATE DEBT SECURITIES (ALL FUNDS EXCEPT U.S. GOVERNMENT SECURITIES FUND) Corporate debt securities generally trade in the over-the-counter market rather than on a securities exchange. Each Fund may value these portfolio securities by utilizing quotations from bond dealers, information with respect to bond and note transactions and may rely on independent pricing services to assist in determining a current market value for each security. The Fund's pricing services may utilize independent quotations from bond dealers and bond market activity to determine current value. SECURITY VALUATION - OPTIONS (ALL FUNDS, EXCEPT U.S. GOVERNMENT SECURITIES FUND) Each Fund values portfolio securities underlying actively traded call options at their market price as determined above. The current market value of any option the Fund holds is its last sale price on the relevant exchange before the Fund values its assets. If there are no sales that day or if the last sale price is outside the bid and ask prices, the Fund values options within the range of the current closing bid and ask prices if the Fund believes the valuation fairly reflects the contract's market value. SECURITY VALUATION - FOREIGN SECURITIES - COMPUTATION OF U.S. EQUIVALENT VALUE (ALL FUNDS, EXCEPT U.S. GOVERNMENT SECURITIES FUND) Each Fund generally determines the value of a foreign security as of the close of trading on the foreign stock exchange on which the security is primarily traded, or as of the close of trading on the NYSE, if earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE (generally 1:00 p.m. Pacific time) on the day that the value of the foreign security is determined. 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. Occasionally events (such as repatriation limits or restrictions) 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 board. ACCOUNTS WITH LOW BALANCES If the value of your account falls below $500 ($50 for employee and UGMA/UTMA accounts) because you sell some of your shares, we may mail you a notice asking you to bring the account back up to its applicable minimum investment amount. If you choose not to do so within 30 days, we may close your account and mail the proceeds to the address of record. You will not be charged a CDSC if your account is closed for this reason. STATEMENTS, REPORTS AND PROSPECTUSES You will receive quarterly account statements that show all your account transactions during the quarter. You also will receive written notification after each transaction affecting your account (except for distributions and transactions made through automatic investment or withdrawal programs, which will be reported on your quarterly statement). You also will receive a Fund's financial reports every six months as well as an annual updated prospectus. To reduce Fund expenses, we try to identify related shareholders in a household and send only one copy of the financial reports and prospectus. This process, called "householding," will continue indefinitely unless you instruct us otherwise. If you prefer not to have these documents householded, please call us at 1-800/632-2301. At any time you may view current prospectuses and financial reports on our website. If you choose, you may receive your statements, financial reports and prospectuses through electronic delivery (please see "Telephone/Online Privileges" on page 99). INVESTMENT REPRESENTATIVE ACCOUNT ACCESS If there is a dealer or other investment representative of record on your account, he or she will be able to obtain your account information, conduct transactions for your account, and also will receive copies of all notifications and statements and other information about your account directly from the Fund. STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or nominee name account of one dealer to another, as long as both dealers have an agreement with Franklin Templeton Distributors, Inc. We will process the transfer after we receive authorization in proper form from your delivering securities dealer. JOINT ACCOUNTS Unless you specify a different registration, shares issued to two or more owners are registered as "joint tenants with rights of survivorship" (shown as "Jt Ten" on your account statement). To make any ownership changes to jointly owned shares, or to sever a joint tenancy in jointly owned shares, all owners must agree in writing. JOINT ACCOUNT RISK WITH TELEPHONE/ONLINE PRIVILEGES You will automatically receive telephone/online privileges when you open your account. If your account has more than one registered owner, telephone/online privileges allow a Fund to accept online registration for online services (including electronic delivery of shareholder documents) and transaction instructions online or by telephone from only one registered owner. This means that ANY ONE REGISTERED OWNER ON YOUR ACCOUNT, ACTING ALONE AND WITHOUT THE CONSENT OF ANY OTHER REGISTERED OWNER, may give a Fund instructions by telephone, online or in writing (subject to any limitations in telephone or online privileges) to: o Exchange shares from a jointly registered Fund account requiring all registered owner signatures into an identically registered money fund account that only requires one registered owner's signature to redeem shares; o Redeem Fund shares and direct the redemption proceeds to a bank account that may or may not be owned by you and, if owned by you jointly with someone else, only requires one person to withdraw funds by check or otherwise; o Add/Change the bank account to which Fund share redemption proceeds may be sent, which bank account may not be owned by you; o Purchase Fund shares by debiting a bank account that may be owned by you; and o Add/Change the bank account that may be debited for Fund share purchases, which new account may be owned by you. If you do NOT want another registered owner on your account to be able to issue these kinds of instructions to a Fund without your consent, you must instruct the Fund to deny/terminate online privileges and the ability to issue such instructions by telephone so that these types of instructions will only be accepted in writing signed by all account owners. This decision will apply to any other fund into which you may exchange your jointly owned Fund shares. Any later decision to permit these types of instructions by telephone and/or online will need to be given to a Fund in a written instruction signed by all registered owners. ADDITIONAL POLICIES Please note that the Fund maintains additional policies and reserves certain rights, including: o The Fund may restrict, reject or cancel any purchase orders, including an exchange request. o The Fund may modify, suspend, or terminate telephone/online privileges at any time. o The Fund may make material changes to or discontinue the exchange privilege on 60 days' notice or as otherwise provided by law. o The Fund may stop offering shares completely or may offer shares only on a limited basis, for a period of time or permanently. o Normally, redemptions are processed by the next business day, but may take up to seven days to be processed if making immediate payment would adversely affect the Fund. o In unusual circumstances, we may temporarily suspend redemptions or postpone the payment of proceeds, as allowed by federal securities laws. o For redemptions over a certain amount, the Fund may pay redemption proceeds in securities or other assets rather than cash if the manager determines it is in the best interest of the Fund, consistent with applicable law. o You may only buy shares of a fund (including the purchase side of an exchange) eligible for sale in your state or jurisdiction. o To permit investors to obtain the current price, dealers are responsible for transmitting all orders to the Fund promptly. DEALER COMPENSATION Qualifying dealers who sell Fund shares may receive sales commissions and other payments. These are paid by Franklin Templeton Distributors, Inc. (Distributors) from sales charges received from purchasing or redeeming shareholders, from distribution and service (12b-1) fees from the Funds and from Distributors' other financial resources. Dealers may also receive shareholder servicing fees for servicing investors who indirectly hold Franklin Templeton fund shares through dealer-maintained brokerage accounts as more fully described under "Shareholder Servicing and Transfer Agent" in the SAI. These fees are paid by the Fund's transfer agent from payments it receives under its agreement with the Fund. DYNATECH AND GROWTH FUNDS CLASS A CLASS B CLASS C CLASS R ----------------------------------------------------------------------- COMMISSION (%) --- 4.00 1.00/3 1.00/5 Investment under $50,000 5.00 --- --- --- $50,000 but under $100,000 3.75 --- --- --- $100,000 but under $250,000 2.80 --- --- --- $250,000 but under $500,000 2.00 --- --- --- $500,000 but under $1 1.60 --- --- --- million $1 million or more up to 1.00/1 --- --- --- 12b-1 FEE TO DEALER 0.25/1 0.25/2 1.00/4 0.35/5 UTILITIES AND U.S. GOVERNMENT SECURITIES FUNDS CLASS A CLASS B CLASS C CLASS R ----------------------------------------------------------------------- COMMISSION (%) --- 3.00 1.00/3 1.00/5 Investment under $100,000 4.00 --- --- --- $100,000 but under $250,000 2.80 --- --- --- $250,000 but under $500,000 2.00 --- --- --- $500,000 but under $1 1.60 --- --- --- million $1 million or more up to 0.75/1 --- --- --- 12B-1 FEE TO DEALER 0.15/1 0.15/2 0.65/4 0.35/5 INCOME FUND CLASS A CLASS B CLASS B1 CLASS C CLASS R --------------------------------------------------------------------------- COMMISSION (%) --- 4.00 3.00 1.00/3 1.00/5 Investment under $100,000 4.00 --- --- --- --- $100,000 but under $250,000 2.80 --- --- --- --- $250,000 but under $500,000 2.00 --- --- --- --- $500,000 but under $1 1.60 --- --- --- --- million $1 million or more up to 0.75/1 --- --- --- --- 12B-1 FEE TO DEALER 0.15/1 0.25/2 0.15/2 0.65/4 0.35/5 A dealer commission of up to 1% may be paid on Class A NAV purchases by certain retirement plans.1 A dealer commission of up to 0.25% may be paid on Class A NAV purchases by certain trust companies and bank trust departments, eligible governmental authorities, and broker-dealers or others on behalf of clients participating in comprehensive fee programs. If any dealer commissions are paid in connection with a purchase which is subsequently rejected or results in any trading restriction placed on the purchaser as a result of a determination by the Fund's manager or transfer agent that the purchase may be connected with trading activity that may be detrimental to the Fund as described in the Fund's "Market Timing Trading Policy," the dealer shall, upon demand, refund such commissions to Distributors. 1. For purchases at NAV where Distributors paid a prepaid commission, dealers may start to receive the 12b-1 fee in the 13th month after purchase. For purchases at NAV where Distributors did not pay a prepaid commission, dealers may start to receive the 12b-1 fee at the time of purchase. 2. Dealers may be eligible to receive up to 0.25% for the DynaTech, Growth and Income Class B Funds and 0.15% for Income Class B1, Utilities and U.S. Government Securities Funds from the date of purchase. After eight years, Class B and Class B1 shares convert to Class A shares and dealers may then receive the 12b-1 fee applicable to Class A. 3. Commission includes advance of the first year's 12b-1 service fee of 0.25% for DynaTech and Growth Funds and 0.15% for Income, Utilities and U.S. Government Securities Funds. For purchases at NAV, Distributors may pay a prepaid commission. 4. Dealers may be eligible to receive up to 0.25% for DynaTech and Growth Funds and 0.15% for Income, Utilities and U.S. Government Securities Funds at the time of purchase and may be eligible to receive 1.00% for DynaTech and Growth Funds and 0.65% for Income, Utilities and U.S. Government Securities Funds starting in the 13th month. During the first 12 months, the full 12b-1 fee will be paid to Distributors to partially offset the commission and the prepaid service fee paid at the time of purchase. For purchases at NAV where Distributors did not pay a prepaid commission, dealers may start to receive the 12b-1 fee at the time of purchase. 5. Dealers may be eligible to receive a 12b-1 fee of 0.35% starting in the 13th month. During the first 12 months, the full 12b-1 fee will be paid to Distributors to partially offset the commission paid at the time of purchase. Starting in the 13th month, Distributors will receive 0.15%. Dealers may be eligible to receive the full 0.50% 12b-1 fee starting at the time of purchase if Distributors did not pay a prepaid commission. OTHER DEALER COMPENSATION. Distributors may make payments from 12b-1 fees received from the Fund and from its other financial resources, to certain dealers who have sold shares of the Franklin Templeton mutual funds. In the case of any one dealer, marketing support payments will not exceed the sum of 0.10% of that dealer's current year's total sales of Franklin Templeton mutual funds, and 0.05% (or 0.03%) of the total assets of equity (or fixed income) funds attributable to that dealer, on an annual basis. Distributors makes these payments in connection with the qualifying dealers' efforts to educate financial advisors about the Franklin Templeton funds. A number of factors will be considered in determining payments, including the qualifying dealer's sales, assets and redemption rates, and the quality of the dealer's relationship with Distributors. Distributors will, on an annual basis, determine the advisability of continuing these payments. To the extent permitted by SEC and NASD rules and other applicable laws and regulations, Distributors may pay or allow other promotional incentives or payments to dealers. Sale of Fund shares, as well as shares of other funds in Franklin Templeton Investments, is not considered a factor in the selection of broker-dealers to execute the Fund's portfolio transactions. Accordingly, the allocation of portfolio transactions for execution by broker-dealers that sell Fund shares is not considered marketing support payments to such broker-dealers. You can find further details in the SAI about the payments made by Distributors and the services provided by your financial advisor. Your financial advisor may charge you additional fees or commissions other than those disclosed in this prospectus. You can ask your financial advisor for information about any payments it receives from Distributors and any services it provides, as well as about fees and/or commissions it charges. QUESTIONS If you have any questions about a Fund or your account, you can write to us at P.O. Box 997151, Sacramento, CA 95899-9983. You also can call us at one of the following numbers. For your protection and to help ensure we provide you with quality service, all calls may be monitored or recorded. TELEPHONE HOURS (PACIFIC TIME, DEPARTMENT NAME NUMBER MONDAY THROUGH FRIDAY) -------------------------------------------------------------------- Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m. FUND INFORMATION 1-800/DIAL BEN(R) 5:30 A.M. TO 5:00 P.M. (1-800/342-5236) RETIREMENT SERVICES 1-800/527-2020 5:30 A.M. TO 5:00 P.M. ADVISOR SERVICES 1-800/524-4040 5:30 A.M. TO 5:00 P.M. INSTITUTIONAL 1-800/321-8563 6:00 A.M. TO 4:00 P.M. SERVICES TDD (HEARING 1-800/851-0637 5:30 A.M. TO 5:00 P.M. IMPAIRED) AUTOMATED TELEPHONE 1-800/632-2301 (around-the-clock access) SYSTEM 1-800/524-4040 1-800/527-2020 FOR MORE INFORMATION You can learn more about each Fund in the following documents: ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS Includes a discussion of recent market conditions and Fund strategies that significantly affected Fund performance during its last fiscal year, financial statements, detailed performance information, portfolio holdings and, in the annual report only, the independent auditor's report. STATEMENT OF ADDITIONAL INFORMATION (SAI) Contains more information about each Fund, its investments and policies. It is incorporated by reference (is legally a part of this prospectus). For a free copy of the current annual/semiannual report or the SAI, please contact your investment representative or call us at the number below. You also can view the current annual/semiannual report online at franklintempleton.com. You also can obtain information about each Fund by visiting the SEC's Public Reference Room in Washington, DC (phone 1-202/942-8090) or the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this information, after paying a duplicating fee, by writing to the SEC's Public Reference Section, Washington, DC 20549-0102 or by electronic request at the following email address: publicinfo@sec.gov. [Insert FRANKLIN(R) TEMPLETON(R) INVESTMENTS logo] One Franklin Parkway, San Mateo, CA 94403-1906 1-800/DIAL BEN(R) (1-800/342-5236) TDD (Hearing Impaired) 1-800/851-0637 franklintempleton.com GAIN FROM OUR PERSPECTIVE(R) Investment Company Act file #811-0537 FCF P 02/05