Franklin Strategic Series

Transcription

1 SEPTEMBER 1, 2004 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, C & R Franklin Strategic Series Franklin Aggressive Growth Fund Franklin Flex Cap Growth Fund Franklin Small Cap Growth Fund II Franklin Small-Mid Cap Growth Fund

2 GOF P-11 SUPPLEMENT DATED JANUARY 1, 2005 TO THE CURRENTLY EFFECTIVE PROSPECTUS OF EACH OF THE LISTED FUNDS Franklin California Tax-Free Income Fund, Inc. Franklin California Tax-Free Trust Franklin California Insured Tax-Free Income Fund Franklin California Intermediate-Term Tax-Free Income Fund Franklin California Limited-Term Tax-Free Income Fund Franklin California Tax-Exempt Money Fund Franklin Capital Growth Fund Franklin Custodian Funds, Inc. Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund Franklin Federal Money Fund Franklin Federal Tax-Free Income Fund Franklin Floating Rate Trust Franklin Global Trust Fiduciary European Smaller Companies Fund Fiduciary Large Capitalization Growth and Income Fund Fiduciary Small Capitalization Equity Fund Fiduciary Core Fixed Income Fund Fiduciary Core Plus Fixed Income Fund Fiduciary High Income Fund Franklin International Smaller Companies Growth Fund Franklin Gold & Precious Metals Fund Franklin High Income Trust Franklin s AGE High Income Fund Franklin Investors Securities Trust Franklin Adjustable U.S. Government Securities Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Floating Rate Daily Access Fund Franklin Limited Maturity U.S. Government Securities Fund Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Total Return Fund Franklin Managed Trust Franklin Rising Dividends Fund Franklin Money Fund Franklin Municipal Securities Trust Franklin California High Yield Municipal Fund Franklin Tennessee Municipal Bond Fund Franklin Mutual Series Fund Inc. Mutual Beacon Fund Mutual Discovery Fund Mutual European Fund Mutual Financial Services Fund Mutual Qualified Fund Mutual Shares Fund Franklin Mutual Recovery Fund Franklin New York Tax-Free Income Fund Franklin New York Tax-Free Trust Franklin New York Insured Tax-Free Income Fund Franklin New York Intermediate-Term Tax-Free Income Fund Franklin New York Limited-Term Tax-Free Income Fund Franklin New York Tax-Exempt Money Fund Franklin Real Estate Securities Trust Franklin Real Estate Securities Fund Franklin Strategic Mortgage Portfolio Franklin Strategic Series Franklin Aggressive Growth Fund Franklin Biotechnology Discovery Fund Franklin Blue Chip Fund Franklin Flex Cap Growth Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Natural Resources Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II Franklin Strategic Income Fund Franklin Technology Fund Franklin U.S. Long-Short Fund Franklin Tax-Exempt Money Fund Franklin Tax-Free Trust Franklin Alabama Tax-Free Income Fund Franklin Arizona Tax-Free Income Fund Franklin Colorado Tax-Free Income Fund Franklin Connecticut Tax-Free Income Fund Franklin Double Tax-Free Income Fund Franklin Federal Intermediate-Term Tax-Free Income Fund Franklin Federal Limited-Term Tax-Free Income Fund Franklin Florida Insured Tax-Free Income Fund Franklin Florida Tax-Free Income Fund Franklin Georgia Tax-Free Income Fund Franklin High Yield Tax-Free Income Fund Franklin Insured Tax-Free Income Fund Franklin Kentucky Tax-Free Income Fund Franklin Louisiana Tax-Free Income Fund Franklin Maryland Tax-Free Income Fund Franklin Massachusetts Insured Tax-Free Income Fund Franklin Michigan Insured Tax-Free Income Fund Franklin Minnesota Insured Tax-Free Income Fund Franklin Missouri Tax-Free Income Fund Franklin New Jersey Tax-Free Income Fund Franklin North Carolina Tax-Free Income Fund Franklin Ohio Insured Tax-Free Income Fund Franklin Oregon Tax-Free Income Fund Franklin Pennsylvania Tax-Free Income Fund Franklin Virginia Tax-Free Income Fund Franklin Templeton Fund Allocator Series Franklin Templeton Conservative Target Fund Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Global Trust Franklin Templeton Hard Currency Fund Franklin Templeton International Trust Templeton Foreign Smaller Companies Fund Templeton Global Long-Short Fund Franklin Templeton Money Fund Trust Franklin Templeton Money Fund Franklin Value Investors Trust Franklin Balance Sheet Investment Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund Franklin Small Cap Value Fund Institutional Fiduciary Trust Franklin Cash Reserves Fund Franklin Structured Large Cap Core Equity Fund Franklin Structured Large Cap Growth Equity Fund Money Market Portfolio Templeton Developing Markets Trust Templeton Global Investment Trust Franklin Templeton Non-U.S. Dynamic Core Equity Fund Templeton International (Ex EM) Fund Templeton Global Opportunities Trust Templeton Institutional Funds, Inc. Emerging Fixed Income Markets Series Emerging Markets Series Foreign Equity Series Foreign Smaller Companies Series Franklin Templeton Non-U.S. Core Equity Series The prospectus is amended as follows: I. For the Templeton Institutional Funds, Inc. (Foreign Equity Series, Emerging Market Series, Foreign Smaller Companies Series and Franklin Templeton Non-U.S. Core Equity Series Funds): a. Effective March 1, 2005, all references to a 1% redemption fee shall be replaced with a 2% redemption fee. b. Under the section Qualified Investors the paragraph that begins with Any other investor, including a private investment vehicle is replaced with the following: Any other investor, including a private investment vehicle such as a family trust, or foundation. Minimum initial investment: $5 million. For minimum investment purposes accounts eligible for cumulative quantity discount or under a letter of intent may combine all eligible shares in Franklin Templeton funds for purposes of determining whether it meets the $5 million minimum, as long as $1 million is invested or to be invested in the Funds. Minimum investment: $100,000 initial investment of $1 million to be invested in the Funds. 1

3 II. For all Funds that offer Advisor Class shares, under the section Qualified Investors the paragraph that begins with Defined contribution plans such as employer stock, bonus, pension or profit sharing is replaced with the following: Defined contribution plans such as employer stock, bonus, pension or profit sharing plans that meet the requirements for qualification under section 401 of the Internal Revenue Code, including salary reduction plans qualified under section 401(k) of the Internal Revenue Code, and that are sponsored by an employer (i) with retirement plan assets of $100 million or more, or (ii) with retirement plan assets of $20 million or more and who has contracted for current participant level record keeping with the Defined Contribution Services (DCS) division of Franklin Templeton Investor Services or 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. No initial minimum investment. III. For all funds that offer Advisor Class, replace the paragraph that begins with Broker-dealers, registered investment advisors or certified financial planners with the following paragraph under the section Qualified Investors : A registered investment adviser (RIA) who buys through a broker-dealer or trust company sponsored mutual fund trading platform on behalf of clients who have entered into a comprehensive fee or other advisory fee arrangement with the RIA, provided that the RIA is not an affiliated or associated person of the firm sponsoring the mutual fund trading platform and such broker has entered into an agreement with Distributors that authorizes the sale of Fund shares through the trading platform. Minimum initial investment: $100,000 for an individual client or $250,000 for multiple clients. IV. For all funds that offer Advisor Class, replace the paragraph that begins with Trust companies and bank trust departments initially investing with the following paragraph under the section Qualified Investors : Trust companies and bank trust departments investing in Franklin Templeton funds assets held in a fiduciary, agency, advisory, custodial or similar capacity and over which the trust companies and bank trust departments or other plan fiduciaries or participants in the case of certain retirement plans, have full or shared investment discretion. Minimum initial investment: $1 million. V. For all Funds with Class R shares, the eligible investors under SALES CHARGES - Class R - Retirement Plans are replaced with the following. Retirement Plans Class R shares are available to the following investors: Employer Sponsored Retirement Plans Any trust or plan established as part of a qualified tuition program under Section 529 of the Internal Revenue Code Health Reimbursement Accounts and Health Savings Accounts, either as a direct investment or as a separate or managed account. VI. For all funds that are offered with an initial sales charge, the section Cumulative Quantity Discount is amended to read as follows: 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): You, individually; Your spouse or domestic partner, as recognized by applicable state law; You jointly with your spouse or domestic partner; 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; 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; 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 2

4 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: 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); Shares held through an administrator or trustee/custodian of an Employer Sponsored Retirement Plan (for example a 401(k) plan); Shares held in a 529 college savings plan; or 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. VII. For all Funds, except the money funds and Fiduciary High Income Fund, all references to a redemption fee assessed on Fund shares sold within five (5) New York Stock Exchange trading days following their purchase date is changed to a redemption fee assessed on Fund shares sold within seven (7) calendar days following their purchase date. VIII. For all Funds, except the Franklin Global Trust Funds, the following is added to the Investor Services section: 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 for additional information on this program. 3

5 IX. The following replaces the paragraph Selling Recently Purchased Shares under the section Selling Shares : 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. X. For the Franklin Mutual Series Fund Inc., the team responsible for the Funds management under the section Management is replaced with the following: The team responsible for the Funds management is: Anne E. Gudefin, CFA, Portfolio Manager of Franklin Mutual Ms. Gudefin has been a member of the management team of the Funds since 2000, when she joined Franklin Templeton Investments. Ms. Gudefin has been a portfolio manager for Mutual Qualified Fund since Previously, she was an analyst at Perry Capital. Todd J. Jonasz, Portfolio Manager of Franklin Mutual Mr. Jonasz has been a member of the management team of the Funds since 2002, when he joined Franklin Templeton Investments. He has been a portfolio manager for Mutual Financial Services Fund since Previously, he was a research analyst with Lazard Asset Management. Also, he was Vice President in Donaldson, Lufkin & Jenrette s equity research department. Charles M. Lahr, Assistant Portfolio Manager of Franklin Mutual Mr. Lahr has been as assistant portfolio manager for Mutual Beacon Fund since He joined Franklin Templeton Investments in Previously, he was a senior analyst for the State of Wisconsin Investment Board and also worked for U.S. Bancorp and the Principal Financial Group. F. David Segal CFA, Assistant Portfolio Manager of Franklin Mutual Mr. Segal has been as assistant portfolio manager for Mutual Discovery Fund since He joined Franklin Templeton Investments in Previously, he was an analyst in the Structured Finance Group of MetLife. Shawn M. Tumulty, Assistant Portfolio Manager of Franklin Mutual Mr. Tumulty has been an assistant portfolio manager for Mutual Qualified Fund since He joined Franklin Templeton Investments in Prior to joining Franklin Templeton Investments, Mr. Tumulty was an analyst and portfolio manager at Hamilton Partners Limited. Deborah A. Turner, CFA, Assistant Portfolio Manager of Franklin Mutual Ms. Turner has been an assistant portfolio manager for Mutual Shares Fund since She joined Franklin Templeton Investments in David J. Winters, CFA, President, Chief Executive Officer and Chief Investment Officer of Franklin Mutual Mr. Winters has been a member of the management team of the Funds since 1987, and is the portfolio manager with primary responsibility for the investments of Mutual Shares Fund, Mutual Beacon Fund, Mutual European Fund and Mutual Discovery Fund. He joined Franklin Templeton Investments in XI. The Management section regarding regulatory issues is revised as follows: On February 4, 2004, the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts filed an administrative complaint against Franklin Resources, Inc. and certain of its subsidiaries (the Company) claiming violations of the Massachusetts Uniform Securities Act (Massachusetts Act) with respect to an alleged arrangement to permit market timing (the Mass. Proceeding). On September 20, 2004, Franklin Resources, Inc. announced that an agreement had been reached by two of its subsidiaries, Franklin Advisers, Inc. (Advisers) and Franklin Templeton Alternative Strategies, Inc. (FTAS), with the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts (the State of Massachusetts) related to the Mass. Proceeding. Under the terms of the settlement consent order issued by the State of Massachusetts, Advisers and FTAS have consented to the entry of a cease and desist order and agreed to pay a $5 million administrative fine to the State of Massachusetts. The administrative complaint addressed 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 described below. On November 19, 2004, the Company reached a second agreement with the State of Massachusetts regarding an administrative complaint filed on October 25, The second complaint alleged that the Company s Form 8-K filing describing the original settlement failed to state the company had admitted the Statements of Fact portion of the settlement order when it stated, Franklin did not admit or deny engaging in any wrongdoing. As a result of the November 19, 2004 settlement with the State of Massachusetts, the Company 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. 4

6 On November 17, 2004, the Company announced that 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 has agreed to pay $2 million as a civil penalty, $14 million to Franklin Templeton funds and $2 million to the CAGO. The Company, in addition to most of the mutual funds within Franklin Templeton Investments, has been named in shareholder class actions related to the matter described above that were filed in the United States District Courts in California, Florida, Nevada, New Jersey and New York. These parties, as well as certain of the mutual funds trustees/ directors, have also been named in a shareholder class action filed in March 2004 in the United States District Court in New Jersey. This lawsuit alleges violations of certain provisions of the federal securities laws and state common law fiduciary obligations in connection with Rule 12b-1 fees and brokerage commissions paid by the mutual funds. These lawsuits seek damages of unspecified amounts. The Company believes that the claims made in the lawsuits are without merit and it intends to defend vigorously against the allegations. It is anticipated that additional similar civil actions related to the matters described above may be filed in the future. 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) had reached a settlement with the U.S. Securities and Exchange Commission (SEC) that resolved an SEC investigation of market timing activity in the Franklin Templeton Investments funds. As part of the settlement, on August 2, 2004, 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 (the 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 Mass. Proceeding described above. Under the terms of the SEC s August Order, Advisers, while neither admitting nor denying any of the findings therein, has agreed to pay $50 million, of which $20 million is a civil penalty, to be distributed to fund shareholders 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 say which particular funds will be determined to have been affected or which particular groups of fund shareholders will receive distributions or in what proportion and amounts. In the August Order, the SEC notes that the Company has generally sought to detect, discourage and prevent market timing in its funds and began to increase its efforts to control market timing in The August Order also requires Advisers to, among other things: Enhance and periodically review compliance policies and procedures, and establish a corporate ombudsman; Establish a new internal position whose responsibilities shall include compliance matters related to conflicts of interests; and Retain an Independent Distribution Consultant to develop a plan to distribute the $50 million settlement to fund shareholders. On December 13, 2004, the Company announced that it 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. The settlement agreement relates to an order (December Order) the SEC issued instituting administrative and cease-and-desist proceedings, making findings, and imposing remedial sanctions against Distributors and Advisers. In connection with this settlement, 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, and to make additional disclosures in the Funds Prospectuses and Statements of Additional Information. Under the terms of the SEC s December Order, Advisers and Distributors, while neither admitting nor denying any of the findings therein, agreed to pay $20 million as a civil penalty, and $1 as restitution to be distributed to Franklin Templeton 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 say which particular funds will be determined to have been affected or will receive distributions or in what proportion and amounts. These issues were previously disclosed by the Company as being under investigation by government authorities and the subject of an internal inquiry by the Company in its regulatory filings and on its public website. Any further updates on these matters will be disclosed on the Company s website at franklintempleton.com under Statement on Current Industry Issues. XII. For all funds that are offered with an initial sales charge, effective February 1, 2005, the section Reinstatement Privilege is replaced with the following: 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 5

7 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 (excepting Employer Sponsored Retirement Plans) paid a CDSC when you sold (1) Class B; 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. XIII. For all funds that offer B shares: The Boards of Directors/Trustees of all of the above-referenced funds have approved the termination of offering Class B shares (and Class B1 shares in the case of the Franklin Income Fund series of Franklin Custodian Funds, Inc.). The termination of the offering of Class B shares is effective March 1, 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) will not be permitted after February 28, 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. Please keep this supplement for future reference. 6

8 GOF P-9 SUPPLEMENT DATED OCTOBER 1, 2004 TO THE CURRENTLY EFFECTIVE PROSPECTUS OF EACH OF THE LISTED FUNDS Franklin California Tax-Free Income Fund, Inc. Franklin California Tax-Free Trust Franklin California Insured Tax-Free Income Fund Franklin California Intermediate-Term Tax-Free Income Fund Franklin California Limited-Term Tax-Free Income Fund Franklin California Tax-Exempt Money Fund Franklin Capital Growth Fund Franklin Custodian Funds, Inc. Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund Franklin Federal Money Fund Franklin Federal Tax-Free Income Fund Franklin Floating Rate Trust Franklin Gold & Precious Metals Fund Franklin Global Trust Fiduciary European Smaller Companies Fund Fiduciary Large Capitalization Growth and Income Fund Fiduciary Small Capitalization Equity Fund Fiduciary Core Fixed Income Fund Fiduciary Core Plus Fixed Income Fund Fiduciary High Income Fund Franklin International Smaller Companies Growth Fund Franklin High Income Trust Franklin s AGE High Income Fund Franklin Investors Securities Trust Franklin Adjustable U.S. Government Securities Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Floating Rate Daily Access Fund Franklin Short-Intermediate U.S. Government Securities Fund Franklin Total Return Fund Franklin Managed Trust Franklin Rising Dividends Fund Franklin Money Fund Franklin Municipal Securities Trust Franklin California High Yield Municipal Fund Franklin Tennessee Municipal Bond Fund Franklin Mutual Series Fund Inc. Mutual Beacon Fund Mutual Discovery Fund Mutual European Fund Mutual Financial Services Fund Mutual Qualified Fund Mutual Shares Fund Franklin Mutual Recovery Fund Franklin New York Tax-Free Income Fund Franklin New York Tax-Free Trust Franklin New York Insured Tax-Free Income Fund Franklin New York Intermediate-Term Tax-Free Income Fund Franklin New York Limited-Term Tax-Free Income Fund Franklin New York Tax-Exempt Money Fund Franklin Real Estate Securities Trust Franklin Real Estate Securities Fund Franklin Strategic Mortgage Portfolio Franklin Strategic Series Franklin Aggressive Growth Fund Franklin Biotechnology Discovery Fund Franklin Blue Chip Fund Franklin Flex Cap Growth Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Natural Resources Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II Franklin Strategic Income Fund Franklin Technology Fund Franklin U.S. Long-Short Fund Franklin Tax-Exempt Money Fund Franklin Tax-Free Trust Franklin Alabama Tax-Free Income Fund Franklin Arizona Tax-Free Income Fund Franklin Colorado Tax-Free Income Fund Franklin Connecticut Tax-Free Income Fund Franklin Double Tax-Free Income Fund Franklin Federal Intermediate-Term Tax-Free Income Fund Franklin Federal Limited-Term Tax-Free Income Fund Franklin Florida Insured Tax-Free Income Fund Franklin Florida Tax-Free Income Fund Franklin Georgia Tax-Free Income Fund Franklin High Yield Tax-Free Income Fund Franklin Insured Tax-Free Income Fund Franklin Kentucky Tax-Free Income Fund Franklin Louisiana Tax-Free Income Fund Franklin Maryland Tax-Free Income Fund Franklin Massachusetts Insured Tax-Free Income Fund Franklin Michigan Insured Tax-Free Income Fund Franklin Minnesota Insured Tax-Free Income Fund Franklin Missouri Tax-Free Income Fund Franklin New Jersey Tax-Free Income Fund Franklin North Carolina Tax-Free Income Fund Franklin Ohio Insured Tax-Free Income Fund Franklin Oregon Tax-Free Income Fund Franklin Pennsylvania Tax-Free Income Fund Franklin Virginia Tax-Free Income Fund 1 S109 Franklin Templeton Fund Allocator Series Franklin Templeton Conservative Target Fund Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton Global Trust Franklin Templeton Hard Currency Fund Franklin Templeton International Trust Templeton Foreign Smaller Companies Fund Templeton Global Long-Short Fund Franklin Templeton Money Fund Trust Franklin Templeton Money Fund Franklin Value Investors Trust Franklin Balance Sheet Investment Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund Franklin Small Cap Value Fund Institutional Fiduciary Trust Franklin Cash Reserves Fund Franklin Structured Large Cap Core Equity Fund Franklin Structured Large Cap Growth Equity Fund Money Market Portfolio Templeton China World Fund Templeton Developing Markets Trust Templeton Funds, Inc. Templeton Foreign Fund Templeton World Fund Templeton Global Investment Trust Franklin Templeton Non-U.S. Dynamic Core Equity Fund Templeton International (Ex EM) Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund, Inc. Templeton Income Trust Templeton Global Bond Fund Templeton Institutional Funds, Inc. Emerging Fixed Income Markets Series Emerging Markets Series Foreign Equity Series - Primary Shares Foreign Smaller Companies Series Franklin Templeton Non-U.S. Core Equity Series

9 The prospectus is amended as follows: I. The section DEALER COMPENSATION is revised as follows: A) For all Funds and Classes, except for Advisor or Z Class, Money Market Funds, and Franklin Floating Rate Trust, the first paragraph is replaced with the following: 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 Fund(s) 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 Statement of Additional Information. These fees are paid by the Fund s transfer agent from payments it receives under its agreement with the Fund. B) For all Funds and Classes, except for Advisor or Z Class, Money Market Funds, and Franklin Floating Rate Trust, the paragraph after the commission table entitled Market Timers is replaced with the following: 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. C) For all Funds and Classes, except for Advisor or Z Class and Money Market Funds, the following is added to the end of the section: Other dealer compensation. Distributors may make payments from 12b-1 or distribution fees received from the Fund(s) 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. 2

10 II. The first and third paragraphs under the section Management or Who Manages the Fund? are replaced with the following: On February 4, 2004, the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts filed an administrative complaint against Franklin Resources, Inc. and certain of its subsidiaries (the Company ) claiming violations of the Massachusetts Uniform Securities Act ( Massachusetts Act ) with respect to an alleged arrangement to permit market timing (the Mass. Proceeding ). On September 20, 2004, Franklin Resources, Inc. announced that an agreement has been reached by two of its subsidiaries, Franklin Advisers, Inc. ( Franklin Advisers ) and Franklin Templeton Alternative Strategies, Inc. ( FTAS ), with the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts (the State of Massachusetts ) related to the Mass. Proceeding. Under the terms of the settlement consent order issued by the State of Massachusetts, Franklin Advisers and FTAS have consented to the entry of a cease and desist order and agreed to pay a $5 million administrative fine to the State of Massachusetts. The administrative complaint addressed one instance of market timing that was also a subject of the August 2, 2004 settlement that Franklin Advisers reached with the Securities and Exchange Commission described below. On August 2, 2004, Franklin Resources, Inc. announced that Franklin Advisers, Inc. (adviser to many of the funds within Franklin Templeton Investments, and an affiliate of the adviser to the other funds) had reached a settlement with the U.S. Securities and Exchange Commission ( SEC ) that resolved an SEC investigation of market timing activity in the Franklin Templeton Investments funds. As part of the settlement, on August 2, 2004, the SEC issued an Order instituting administrative and cease-anddesist 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 (the Order ). The SEC s Order concerns the activities of a limited number of third parties that ended in 2000 and those that are the subject of the Mass. Proceeding described above. Under the terms of the SEC s Order, pursuant to which Franklin Advisers, Inc., neither admits nor denies any wrongdoing, Franklin Advisers, Inc. has agreed to pay $50 million, of which $20 million is a civil penalty, to be distributed to fund shareholders in accordance with a plan to be developed by an Independent Distribution Consultant ( IDC ). Because the IDC has not yet been retained and the distribution methodology has not yet been developed, it is presently not possible to say which particular funds will be determined to have been affected or which particular groups of fund shareholders will receive distributions or in what proportion and amounts. In the Order, the SEC notes that the Company has generally sought to detect, discourage and prevent market timing in its funds and began to increase its efforts to control market timing in The Order also requires Franklin Advisers to, among other things: Enhance and periodically review compliance policies and procedures, and establish a corporate ombudsman; Establish a new internal position whose responsibilities shall include compliance matters related to conflicts of interests; and Retain an Independent Distribution Consultant to develop a plan to distribute the $50 million settlement to fund shareholders. The Staff of the SEC has also informed the Company that it is considering recommending a civil action or proceeding against Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc. ( Distributors ) 3

11 (the principal underwriter of shares of the Franklin Templeton mutual funds) concerning payments to securities dealers who sell fund shares (commonly referred to as revenue sharing ). The staff of the California Attorney General s Office also has advised that the California Attorney General may bring a civil action against Franklin Resources, Inc. and Distributors arising from the same events. Even though the Company currently believes that the contemplated charges are unwarranted, it also believes that it is in the best interest of the Company and fund shareholders to resolve these issues voluntarily, to the extent the Company can reasonably do so. If it is found that the Company bears responsibility for any unlawful or improper conduct, the Company has committed to making the funds or their shareholders whole, as appropriate. These issues were previously disclosed by the Company as being under investigation by government authorities and the subject of an internal inquiry by the Company in its regulatory filings and on its public website. Any further updates on these matters will be disclosed on the Company s website at franklintempleton.com under Statement on Current Industry Issues. III. For funds that offer Class B shares, the paragraph Retirement Plans under the section Sales Charges-Class B is revised as follows: Class B shares are not available to Employer Sponsored Retirement Plans. IV. For Franklin Strategic Series funds, Franklin Real Estate Securities Fund, and Franklin Federal Tax-Free Income Fund, add the following paragraph under the section Sales Charges-Class B : Class B shares are not available to Employer Sponsored Retirement Plans. V. For all funds that offer online privileges: The ability to change or add a bank account online is no longer available. All references in the prospectus are modified accordingly. VI. For all funds that are offered with an initial sales charge: Effective November 1, 2004, investors may purchase Class B, Class C or Class R shares only for Fund accounts on which they have appointed an investment representative (financial advisor) of record. Unless eligible to purchase Class Z or 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, 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, 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, Class C or Class R share Fund accounts. These provisions do not apply to Employer Sponsored Retirement Plans. VII. For all funds that are offered with an initial sales charge, the first paragraph and the paragraph beginning with, If you paid a CDSC under Reinstatement Privilege are replaced with the following: Effective February 1, 2005, if you sell shares of a Franklin Templeton fund that were registered to you directly by the Fund s transfer agent or by a bank affiliate of the Fund s transfer agent you may reinvest all or a portion of the proceeds from that sale in Fund shares registered to you, or to you jointly with another, 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 4

12 through a financial intermediary such as a broker-dealer, an investment advisor, a bank, an insurance company separate account, a sponsor of a 529 college savings plan, or an administrator or trustee/ custodian of an Employer Sponsored Retirement Plan, an employer sponsored IRA or a regular IRA. In order to take advantage of this Reinstatement Privilege, you must inform 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 (or Class B1 shares in Franklin Income Fund), 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 (excepting Employer Sponsored Retirement Plans) paid a CDSC when you sold (1) Class B or B1 shares; 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. VIII. For all funds that are offered with an initial sales charge, the section Sales charge waivers is replaced with the following: 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/ A list of available sales charge waivers also may be found in the Statement of Additional Information (SAI). IX. For all funds, effective February 1, 2005, all references regarding the ability to reinvest redemption proceeds or income distributions within 365 days are revised to 90 days. X. The following is added to the Investor Services section: Valued Investor Program. You may be eligible for the Valued Investor Program (VIP) if the total combined value of Franklin Templeton fund shares held directly with the funds in your name or the name of a legal entity over which you have exclusive control, in the name of your spouse, and in the names of your children or grandchildren who are under the age of 21 exceeds $250,000. Franklin Templeton VIP shareholders enjoy enhanced service and transaction capabilities. Please contact Shareholder Services at 1-800/ for additional information on this program. XI. For all funds, except money funds, the section Exchange limit guidelines under Exchanging Shares - Exchange Privilege is deleted. XII. For all funds that offer Class R shares, revise the paragraph under the bullet point that begins with Investors who open a Franklin Templeton IRA Rollover as follows: Investors who open a Franklin Templeton IRA Rollover with less than $1 million other than a current or former Franklin Templeton employee or as the result of a spousal rollover or a QDRO or with direct rollover proceeds from a DCS Plan. 5

13 XIII. For all funds that offer Advisor or Z Class and for Franklin Structured Large Cap Core Equity and Franklin Structured Large Cap Growth Equity Funds: In the Qualified Investors section the bullet point regarding Officers, trustees, directors and full-time employees is added or replaced with the following: Current and former officers, trustees, directors, full-time employees of Franklin Templeton Investments, and their family members. Minimum initial investment: $100 ($50 for accounts with an automatic investment plan). XIV. For all funds that are offered with an initial sales charge, the section titled Quantity Discounts is amended to read as follows: 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 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): you, individually or jointly with another; your spouse or domestic partner, as recognized by applicable state law; 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; 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; any entity over which you 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 are the custodian, a trust on which you are the trustee, a business account [not to include retirement plans] for your solely owned business on which you are the authorized signer); and (ii) Held directly in Franklin Templeton fund accounts, and/or indirectly in brokerage accounts, 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 6

14 shares by their current net asset value. 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: 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); Shares held through an administrator or trustee/custodian of an Employer Sponsored Retirement Plan (for example a 401(k) plan); Shares held in a 529 college savings plan; and 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 Statement of Additional Information for more LOI details. To sign up for these programs, complete the appropriate section of your account application. XV. For the Franklin Floating Rate Trust: Item 7 of the qualifying list of entities that may buy Common Shares without an Early Withdrawal Charge, on page 44, is replaced with the following: 7. Current and former officers, trustees, directors and full-time employees of the Franklin Templeton funds or Franklin Templeton Investments, and their family members, consistent with our then-current policies. The minimum initial investment is $100. XVI. For Templeton Developing Markets Trust: Effective May 1, 2004, all references in the prospectus to the redemption fee on shares sold within 5 New York Stock Exchange trading days following their purchase date is 2%. XVII. For Templeton Foreign Fund and Templeton World Fund: Effective December 1, 2004, all references in the prospectus to the redemption fee will increase to 2% on shares sold within 5 New York Stock Exchange trading days following their purchase date. XVIII. For Franklin Strategic Series - Franklin Aggressive Growth Fund: The Franklin Aggressive Growth Fund s best quarterly disclosure under the Performance section on page 7 is replaced with the following: Best Quarter: Q % Please keep this supplement for future reference. 7

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16 FSS1 P-1 SUPPLEMENT DATED SEPTEMBER 1, 2004 TO THE PROSPECTUS OF FRANKLIN STRATEGIC SERIES (Franklin Aggressive Growth Fund, Franklin Flex Cap Growth Fund, Franklin Small Cap Growth Fund II, Franklin Small-Mid Cap Growth Fund) dated September 1, 2004 The prospectus is amended as follows: I. The Franklin Aggressive Growth Fund s best quarter disclosure under the Performance section on page 7 is replaced with the following: Best Quarter: Q % Please keep this supplement for future reference.

17 Contents THE FUNDS INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING Franklin Aggressive Growth Fund Franklin Flex Cap Growth Fund Franklin Small Cap Growth Fund II Franklin Small-Mid Cap Growth Fund Additional Management Information Distributions and Taxes YOUR ACCOUNT INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES Choosing a Share Class Buying Shares Investor Services Selling Shares Exchanging Shares Account Policies Questions FOR MORE INFORMATION WHERE TO LEARN MORE ABOUT EACH FUND Back Cover 2 1

18 FRANKLIN AGGRESSIVE GROWTH FUND FRANKLIN AGGRESSIVE GROWTH FUND Goal and Strategies Goal The Fund s investment goal is capital appreciation. Main Investment Strategies Under normal market conditions, the Fund invests primarily in equity securities of companies demonstrating accelerating growth, increasing profitability, or aboveaverage growth or growth potential as compared with the overall economy. 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, any income paid to stockholders, the value of its assets, and general market conditions. Common stocks and preferred stocks are examples of equity securities. The Fund invests in companies that the manager believes have the potential for capital appreciation. When suitable opportunities are available, the Fund may invest in initial public offerings of securities, and may also invest a small portion of its assets in private or illiquid securities, such as late stage venture capital financings. A significant portion of the Fund s investments is in smaller and midsize companies. The Fund s manager is a research driven, fundamental investor, pursuing an aggressive growth strategy. As a bottom-up investor focusing primarily on individual securities, the manager chooses companies that it believes have clear indicators of future earnings growth, and present the best trade-off between that potential earnings growth, business risk and valuation. 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. In choosing individual equity investments, the Fund s manager also considers sectors that have exceptional growth potential and fast growing, innovative companies within these sectors. Consequently, the Fund, from time to time, may have significant positions in particular sectors such as technology (including electronic technology, technology services, biotechnology and health care technology). 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, money market fund shares, high-grade commercial paper, bank obligations, repurchase agreements 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. The Fund invests primarily in companies demonstrating accelerating growth, increasing profitability, or above-average growth or growth potential. 2 3

19 FRANKLIN AGGRESSIVE GROWTH FUND 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. Aggressive Growth Style Investing The Fund s manager uses an aggressive growth strategy in choosing the Fund s investments. As a result, an investment in the Fund involves a greater degree of risk and its share price may be more volatile than an investment in a conservative equity fund or a growth fund investing entirely in proven growth stocks. The prices of aggressive growth stocks are based largely on projections of the issuer s future earnings and revenues and product development and may assume favorable economic conditions. If a company s earnings or revenues fall short of expectations, or if its products do not come on line on a timely basis, its stock price may fall dramatically. Aggressive growth stocks may be more expensive relative to their current earnings or assets compared to value or other stocks, and if their valuations return to more typical norms, their prices may moderate or fall. Prices of these companies securities historically have been more volatile than other securities, especially over the short term, and they may be more negatively affected than other companies by market or economic downturns. 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. Because the securities the Fund holds fluctuate in price, the value of your investment in the Fund will go up and down. This means you could lose money over short or even extended periods. 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. Initial public offerings (IPOs) of securities issued by unseasoned companies with little or no operating history are risky and their prices are highly volatile, but they can result in very large gains in their initial trading. Attractive IPOs are often oversubscribed and may not be available to the Fund, or only in very limited quantities. Thus, when the Fund s size is smaller, any gains from IPOs will have an exaggerated impact of the Fund s performance than when the Fund is larger. Although IPO investments have had a positive impact on the Fund s performance in the past, there can be no assurance that the Fund will have favorable IPO investment opportunities in the future. Sector Focus - Technology Companies To the extent that the Fund has significant investments in one or a few sectors, it bears more risk than a fund which always maintains broad sector diversification. Technology company stocks can be subject to abrupt or erratic price movements and have been volatile, especially over the short term, due to the rapid pace of product change and development affecting such companies, which may make a company s products or services obsolete in a short period of time. Technology companies are subject to significant competitive pressures, such as new market entrants, aggressive pricing, and tight profit margins. Electronic technology and technology services companies. These companies face the risks that new services, equipment or technologies will not be accepted by consumers and businesses or will become rapidly obsolete. These factors can 4 5

20 FRANKLIN AGGRESSIVE GROWTH FUND affect the profitability of technology companies and, as a result, the value of their securities. Biotechnology and health technology companies. The biotechnology and health technology industries are subject to extensive government regulation. These industries will be affected by government regulatory requirements, regulatory approval for new drugs and medical products, patent considerations, product liability, and similar matters. For example, in the past several years, the U.S. Congress has considered legislation concerning health care reform and changes to the U.S. Food and Drug Administration s (FDA) approval process, which would, if enacted, affect the biotechnology and health technology industries. As these factors impact these industries, the value of your shares may fluctuate significantly over relatively short periods of time. Portfolio Turnover Because of the Fund s aggressive growth strategy, the Fund s portfolio turnover rate may be higher than that of other mutual funds. High 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. More detailed information about the Fund, its policies and risks can be found in the Fund s Statement of Additional Information (SAI). 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 four calendar years. The table shows how the Fund s average annual total returns compare to those of a broadbased securities market index. Of course, past performance (before or after taxes) cannot predict or guarantee future results. CLASS A ANNUAL TOTAL RETURNS 1 50% 43.94% 40% 30% 20% 10% 0% % % % -10% -20% -30% -40% Year Best Quarter: Q % Worst Quarter: Q % AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 2003 Franklin Aggressive Growth Fund - Class A 2 Since Inception 1 Year (06/23/99) Return Before Taxes 35.65% 4.62% Return After Taxes on Distributions 35.65% 4.40% Return After Taxes on Distributions and Sale of Fund Shares 23.17% 3.87% S&P 500 Index % -2.88% 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. Russell 3000 Growth Index % -6.94% (indices reflect no deduction for fees, expenses, or taxes) 6 7

21 FRANKLIN AGGRESSIVE GROWTH FUND Since Inception 1 Year (06/23/99) Franklin Aggressive Growth Fund - Class B % 5.00% S&P 500 Index % -2.88% Russell 3000 Growth Index % -6.94% Since Inception 1 Year (06/23/99) Franklin Aggressive Growth Fund - Class C % 5.08% S&P 500 Index % -2.88% Russell 3000 Growth Index % -6.94% 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. As of June 30, 2004, the Fund s year-to-date return was 5.27% for Class A. 2. Figures reflect sales charges. All Fund performance assumes reinvestment of dividends and capital gains. 3. Source: Standard & Poor s Micropal. The unmanaged Standard & Poor s (S&P) 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index, with each stock s weight in the index proportionate to its market value. 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 Russell 3000 Growth Index is a market capitalization weighted index that measures the performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values. The stocks in this index are also members of either the Russell 1000 Growth or the Russell 2000 Growth indexes. The index 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. Since Inception 1 Year (06/23/99) Franklin Aggressive Growth Fund - Class R % 5.78% S&P 500 Index % -2.88% Russell 3000 Growth Index % -6.94% 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. 8 9

22 FRANKLIN AGGRESSIVE GROWTH FUND 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 price 5.75% 4.00% 1.00% 1.00% Load imposed on purchases 5.75% None None None Maximum deferred sales charge (load) None % % 1.00% Redemption fee on shares sold within 5 New York Stock Exchange trading days following their purchase date % 2.00% 2.00% 2.00% Please see Choosing a Share Class on page 64 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 % 0.50% 0.50% 0.50% Distribution and service (12b-1) fees 0.33% 1.00% 1.00% 0.50% Other expenses 0.81% 0.81% 0.81% 0.81% Total annual Fund operating expenses % 2.31% 2.31% 1.81% Management fee reduction % -0.02% -0.02% -0.02% Net annual Fund operating expenses % 2.29% % 1.79% 1. There is a 1% contingent deferred sales charge that applies to investments of $1 million or more (see page 65) and purchases by certain retirement plans without an initial sales charge. 2. Declines to zero after six years. 3. 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. 4. 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 Trustees and an exemptive order by the Securities and Exchange Commission. 5. Class B net annual Fund operating expenses differ from the ratio of expenses to average net assets shown on page 14 due to a timing difference between the end of the 12b-1 plan year and the Fund s fiscal year end. 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: You invest $10,000 for the periods shown; Your investment has a 5% return each year; and 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 $730 1 $1,057 $1,406 $2,386 Class B $632 $1,015 $1,425 $2,458 2 Class C 3 $332 $715 $1,225 $2,626 Class R $282 $563 $970 $2,105 If you do not sell your shares: Class B $232 $715 $1,225 $2,458 2 Class C 3 $232 $715 $1,225 $2,626 Class R $182 $563 $970 $2, 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, The actual costs were $429, $808, $1,313 and $2,699, respectively, if you sell your shares at the end of the period or $330, $808, $1,313 and $2,699, respectively, if you do not sell your shares

23 FRANKLIN AGGRESSIVE GROWTH FUND Management Franklin Advisers, Inc. (Advisers), One Franklin Parkway, San Mateo, CA , is the Fund s investment manager. Together, Advisers and its affiliates manage over $347 billion in assets. The team responsible for the Fund s management is: ROBERT DEAN CFA, Vice President of Advisers Mr. Dean has been a manager of the Fund since March He joined Franklin Templeton Investments in February CONRAD B. HERRMANN CFA, Senior Vice President of Advisers Mr. Herrmann has been a manager of the Fund since its inception. He joined Franklin Templeton Investments in The Fund pays Advisers a fee for managing the Fund s assets. For the fiscal year ended April 30, 2004, management fees, before any reduction, were 0.50% of the Fund s average net assets. Under an agreement by the manager to reduce its fees to reflect reduced services resulting from the Fund s investment in a Franklin Templeton money fund, the Fund paid 0.48% of its average daily net assets to the manager for its services. This reduction is required by the Fund s Board of Trustees and an exemptive order by the Securities and Exchange Commission. Financial Highlights This table presents the Fund s financial performance since its inception. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in the Fund assuming reinvestment of dividends and capital gains. This information has been audited by PricewaterhouseCoopers LLP, whose report, along with the Fund s financial statements, are included in the annual report, which is available upon request. CLASS A Year ended April 30, Per share data ($) Net asset value, beginning of year Net investment loss 2 (.15) (.13) (.15) (.17) (.15) Net realized and unrealized gains (losses) 3.22 (2.76) (2.76) (9.74) Total from investment operations 3.07 (2.89) (2.91) (9.91) Distributions from net investment income (.02) Distributions from net realized gains (.01) (.47) Total distributions (.01) (.49) Net asset value, end of year Total return (%) (23.33) (19.02) (39.31) Ratios/supplemental data Net assets, end of year ($ x 1,000) 86,983 67, , , ,976 Ratios to average net assets: (%) Expenses Expenses excluding waiver and payments by affiliate Net investment loss (1.26) (1.35) (1.12) (.77) (.68) 4 Portfolio turnover rate (%)

24 FRANKLIN AGGRESSIVE GROWTH FUND CLASS B Year ended April 30, Per share data ($) Net asset value, beginning of year Net investment loss 2 (.22) (.19) (.23) (.31) (.30) Net realized and unrealized gains (losses) 3.14 (2.71) (2.74) (9.69) Total from investment operations 2.92 (2.90) (2.97) (10.00) Distributions from net investment income 5 Distributions from net realized gains (.01) (.47) Total Distributions (.01) (.47) Net asset value, end of year Total return (%) (23.77) (19.58) (39.73) Ratios/supplemental data Net assets, end of year ($ x 1,000) 18,059 13,100 20,259 27,587 33,613 Ratios to average net assets: (%) Expenses Expenses excluding waiver and payments by affiliate CLASS C Year ended April 30, Per share data ($) Net asset value, beginning of year Net investment loss 2 (.22) (.19) (.23) (.31) (.30) Net realized and unrealized gains (losses) 3.13 (2.71) (2.73) (9.66) Total from investment operations 2.91 (2.90) (2.96) (9.97) Distributions from net realized gains (.01) (.47) Net asset value, end of year Total return (%) (23.81) (19.55) (39.71) Ratios/supplemental data Net assets, end of year ($ x 1,000) 30,054 25,660 40,877 60,294 80,473 Ratios to average net assets: (%) Expenses Expenses excluding waiver and payments by affiliate Net investment loss (1.93) (2.03) (1.77) (1.41) (1.34) 4 Portfolio turnover rate (%) Net investment income (loss) (1.92) (2.02) (1.78) (1.42) (1.31) 4 Portfolio turnover rate (%)

25 FRANKLIN FLEX CAP GROWTH FUND CLASS R Year ended April 30, Per share data ($) Net asset value, beginning of year Net investment loss 2 (.17) (.14) (.06) Net realized and unrealized gains (losses) 3.21 (2.77) (1.31) Total from investment operations 3.04 (2.91) (1.37) Net asset value, end of year Total return (%) (23.51) (9.96) Ratios/supplemental data Net assets, end of year ($ x 1,000) 1, Ratios to average net assets: (%) Expenses Net investment loss (1.43) (1.53) (1.48) 4 Portfolio turnover rate (%) For the period June 23, 1999 (effective date) to April 30, Based on average daily shares outstanding. 3. Total return does not include sales charges, and is not annualized. 4. Annualized. 5. Includes distribution of net investment income in the amount of $ For the period January 1, 2002 (effective date) to April 30, FRANKLIN FLEX CAP GROWTH FUND Goal and Strategies Goal The Fund s investment goal is capital appreciation. Main Investment Strategies Under normal market conditions, the Fund invests primarily in equity securities of companies that the manager believes have the potential for capital appreciation. The Fund has the flexibility to invest in companies located, headquartered, or operating inside and outside the United States, across the entire market capitalization spectrum from small, emerging growth companies to well-established, largecap companies. When suitable opportunities are available, the Fund may invest in initial public offerings of securities, and may also invest a small portion of its assets in private or illiquid securities, such as late stage venture capital financings. A substantial portion of the Fund s investments may be in smaller and mid-size companies. The Fund may also invest a substantial portion of its assets in equity securities of companies headquartered or conducting a substantial portion of their operations in, or generating a substantial portion of their revenue from business within, the state of California. 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, any income paid to stockholders, the value of its assets, and general market conditions. Common stocks and preferred stocks are examples of equity securities. The Fund invests primarily in equity securities of companies across the entire market capitalization spectrum that the manager believes have the potential for capital appreciation

26 FRANKLIN FLEX CAP GROWTH FUND The Fund s manager is a research driven, fundamental investor, pursuing a growth strategy. As a bottom-up investor focusing primarily on individual securities, the manager chooses companies that have clear drivers of future earnings growth and present the best trade-off between that potential earnings growth, business risk, and valuation. 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. Competitive advantages such as a particular product niche, proven technology, sound financial profits and records, strong management, and industry leadership are all factors the manager believes point to strong growth potential. In choosing individual equity investments, the Fund s manager considers sectors that have growth potential and fast growing, innovative companies within these sectors. In evaluating sector weightings in the Fund s investment portfolio, the manager considers, but may deviate from, the relative weightings of sectors in the Russell 3000 Growth Index. The Fund, from time to time, may have significant positions in particular sectors such as electronic technology, technology services, biotechnology, health care technology and financial services. 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, money market fund shares, high-grade commercial paper, bank obligations, repurchase agreements 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. In addition, rising interest rates generally have a dampening effect on the stock market. Growth Style Investing Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. Growth stocks may be more expensive relative to their current earnings or assets compared to value or other stocks, and if earnings growth expectations moderate, their valuations may return to more typical norms, causing their stock prices to fall. Prices of these companies securities may be more volatile than other securities, particularly over the short term. 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. Because the securities the Fund holds fluctuate in price, the value of your investment in the Fund will go up and down. This means you could lose money over short or even extended periods

27 FRANKLIN FLEX CAP GROWTH FUND 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. Diversification The Fund is a non-diversified fund. It may invest a greater portion of its assets in the securities of one issuer than a diversified fund. The Fund may be more sensitive to economic, business, political or other changes affecting similar issuers or securities, which may result in greater fluctuation in the value of the Fund s shares. The Fund, however, intends to meet certain tax diversification requirements. California Since a substantial portion of the Fund s investments may be in equity securities of California companies, the Fund s performance is dependent on economic, political and other conditions within California. Sector Focus - Technology Companies To the extent that the Fund has significant investments in one or a few sectors, it bears more risk than a fund which maintains broad sector diversification. Technology company stocks can be subject to abrupt or erratic price movements and have been volatile, especially over the short term, due to the rapid pace of product change and development affecting such companies, which may make a company s products or services obsolete in a short period of time. Technology companies are subject to significant competitive pressures, such as new market entrants, aggressive pricing, and tight profit margins. similar matters. For example, in the past several years, the U.S. Congress has considered legislation concerning health care reform and changes to the U.S. Food and Drug Administration s (FDA) approval process, which would, if enacted, affect the biotechnology and health technology industries. As these factors impact these industries, the value of your shares may fluctuate significantly over relatively short periods of time. Sector Focus - Financial Services Companies The Fund may have significant investments in the financial services sector, which includes such issuers as commercial banks, thrift institutions, insurance companies and finance companies. As a result, general market and economic conditions as well as other risks specific to the financial services industry may impact the Fund s investments and its performance. For example, changes in interest rates and the existence of extensive government regulation can have a negative effect on the profitability of financial services companies. In addition, the financial services industry is undergoing rapid change as existing distinctions between banking, insurance and brokerage businesses become blurred, companies continue to consolidate, new products and structures develop and its regulatory framework changes. These changes are likely to have a significant impact on companies in the financial services industry and the Fund s investments in such companies, but it is not possible to predict whether the effect will be beneficial or adverse. More detailed information about the Fund, its policies and risks can be found in the Fund s Statement of Additional Information (SAI). Electronic technology and technology services companies. These companies face the risks that new services, equipment or technologies will not be accepted by consumers and businesses or will become rapidly obsolete. These factors can affect the profitability of technology companies and, as a result, the value of their securities. Biotechnology and health technology companies. The biotechnology and health technology industries are subject to extensive government regulation. These industries will be affected by government regulatory requirements, regulatory approval for new drugs and medical products, patent considerations, product liability, and 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

28 FRANKLIN FLEX CAP GROWTH FUND 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 1 100% 80% 60% 40% 20% 0% -20% -40% 16.53% 47.63% 30.43% 15.71% 10.72% 95.17% -7.04% % % 40.48% Year Best Quarter: Q % Worst Quarter: Q % AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 2003 Franklin Flex Cap Growth Fund - Class A 2 1 Year 5 Years 10 Years Return Before Taxes 32.42% 6.72% 14.81% Return After Taxes on Distributions 32.42% 6.37% 13.25% Return After Taxes on Distributions and Sale of Fund Shares 21.07% 5.70% 12.25% S&P 500 Index % -0.57% 11.06% Russell 3000 Growth Index % -4.69% 8.81% (indices reflect no deduction for fees, expenses, or taxes) Since Inception 1Year 5 Years (1/1/99) Franklin Flex Cap Growth Fund - Class B % 6.86% 6.86% S&P 500 Index % -0.57% -0.57% Russell 3000 Growth Index % -4.69% -4.69% Since Inception 1Year 5 Years (9/3/96) Franklin Flex Cap Growth Fund - Class C % 6.97% 10.25% S&P 500 Index % -0.57% 9.20% Russell 3000 Growth Index % -4.69% 6.10% 1 Year 5 Years 10 Years Franklin Flex Cap Growth Fund - Class R 2, % 7.73% 15.12% S&P 500 Index % -0.57% 11.06% Russell 3000 Growth Index % -4.69% 8.81% 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

29 FRANKLIN FLEX CAP GROWTH FUND 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. As of June 30, 2004, the Fund s year-to-date return was 5.64% for Class A. 2. Figures reflect sales charges. All Fund performance assumes reinvestment of dividends and capital gains. 3. Source: Standard & Poor s Micropal. The unmanaged Standard & Poor s (S&P) 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index, with each stock s weight in the Index proportionate to its market value. 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 Russell 3000 Growth Index is a market capitalization weighted index that measures the performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values. The stocks in this index are also members of either the Russell 1000 Growth or the Russell 2000 Growth indexes. The index 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 price 5.75% 4.00% 1.00% 1.00% Load imposed on purchases 5.75% None None None Maximum deferred sales charge (load) None % % 1.00% Redemption fee on shares sold within 5 New York Stock Exchange trading days following their purchase date % 2.00% 2.00% 2.00% Please see Choosing a Share Class on page 64 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% Distribution and service (12b-1) fees 0.25% 1.00% 1.00% 0.50% Other expenses 0.31% 0.31% 0.31% 0.31% Total annual Fund operating expenses % 1.78% 1.78% 1.28% Management fee reduction % -0.02% -0.02% -0.02% Net annual Fund operating expenses % 1.76% 1.76% 1.26% 1. There is a 1% contingent deferred sales charge that applies to investments of $1 million or more (see page 65) and purchases by certain retirement plans without an initial sales charge. 2. Declines to zero after six years. 3. 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. 4. 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 Trustees and an exemptive order by the Securities and Exchange Commission

30 FRANKLIN FLEX CAP GROWTH FUND 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: You invest $10,000 for the periods shown; Your investment has a 5% return each year; and 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 $672 1 $878 $1,101 $1,740 Class B $579 $854 $1,154 $1,875 2 Class C 3 $279 $554 $954 $2,073 Class R $228 $400 $692 $1,523 If you do not sell your shares: Class B $179 $554 $954 $1,875 2 Class C 3 $179 $554 $954 $2,073 Class R $128 $400 $692 $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, The actual costs were $376, $649, $1,045 and $2,152, respectively, if you sell your shares at the end of the period or $277, $649, $1,045 and $2,152, respectively, if you do not sell your shares. Management Franklin Advisers, Inc. (Advisers), One Franklin Parkway, San Mateo, CA , is the Fund s investment manager. Together, Advisers and its affiliates manage over $347 billion in assets. The team responsible for the Fund s management is: CONRAD B. HERRMANN CFA, Senior Vice President of Advisers Mr. Herrmann has been a manager of the Fund since He joined Franklin Templeton Investments in RAYMOND CHAN CFA, Portfolio Manager of Advisers Mr. Chan has been a manager of the Fund since He joined Franklin Templeton Investments in MATT MOBERG CPA, Vice President of Advisers Mr. Moberg has been a manager of the Fund since He joined Franklin Templeton Investments in The Fund pays Advisers a fee for managing the Fund s assets. For the fiscal year ended April 30, 2004, management fees, before any reduction, were 0.47% of the Fund s average 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 0.45% of its average daily net assets to the manager for its services. This reduction is required by the Fund s Board of Trustees and an exemptive order by the Securities and Exchange Commission

31 FRANKLIN FLEX CAP GROWTH FUND 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 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 April 30, Per share data ($) Net asset value, beginning of year Net investment income (loss) 1 (.09) (.08) (.09).05 Net realized and unrealized gains (losses) 8.29 (5.07) (3.25) (13.47) Total from investment operations 8.20 (5.15) (3.34) (13.47) Distributions from net investment income (.19) (.08) Distributions from net realized gains (2.44) Total distributions (2.63) (.08) Net asset value, end of year Total return (%) (16.77) (9.81) (27.84) Ratios/supplemental data Net assets, end of year ($ x 1,000) 1,456,685 1,025,348 1,398,753 1,680,032 2,025,864 Ratios to average net assets: (%) Expenses Net investment income (.29) (.31) (.29).11 Portfolio turnover rate (%) CLASS B Year ended April 30, Per share data ($) Net asset value, beginning of year Net investment loss 1 (.31) (.26) (.32) (.33) (.28) Net realized and unrealized gains (losses) 7.99 (4.94) (3.19) (13.25) Total from investment operations 7.68 (5.20) (3.51) (13.58) Distributions from net investment income (.19) (.07) Distributions from net realized gains (2.44) Total distributions (2.63) (.07) Net asset value, end of year Total return (%) (17.38) (10.50) (28.36) Ratios/supplemental data Net assets, end of year ($ x 1,000) 134,589 92, , ,847 63,960 Ratios to average net assets: (%) Expenses Net investment loss (1.04) (1.06) (1.05) (.76) (.61) Portfolio turnover rate (%)

32 FRANKLIN FLEX CAP GROWTH FUND CLASS C Year Ended April 30, Per share data ($) Net asset value, beginning of year Net investment loss 1 (.31) (.26) (.32) (.34) (.25) Net realized and unrealized gains (losses) 8.01 (4.95) (3.20) (13.27) Total from investment operations 7.70 (5.21) (3.52) (13.61) Distributions from net investment income (.02) Distributions from net realized gains (2.44) Total distributions (2.44) (.02) Net asset value, end of year Total return (%) 2 (31.09) (17.38) (10.51) (28.39) Ratios/supplemental data Net assets, end of year ($ x 1,000) 298, , , , ,192 Ratios to average net assets: (%) Expenses Net investment loss (1.04) (1.06) (1.04) (.74) (.64) Portfolio turnover rate (%) CLASS R Year Ended April 30, Per share data ($) Net asset value, beginning of year Net investment loss 1 (.18) (.16) (.12) Net realized and unrealized gains (losses) 8.26 (5.03) (1.04) Total from investment operations 8.08 (5.19) (1.16) Net asset value, end of year Total return (%) (16.92) (3.64) Ratios/supplemental data Net assets, end of year ($ x 1,000) 44,988 15, Ratios to average net assets: (%) Expenses Net investment income (loss) (.54) (.56) (1.21) 4 Portfolio turnover rate (%) Based on average daily shares outstanding. 2. Total return does not include sales charges, and is not annualized. 3. For the period January 1, 2002 (effective date) to April 30, Annualized

33 FRANKLIN SMALL CAP GROWTH FUND II FRANKLIN SMALL CAP GROWTH FUND II Effective July 9, 2002, the Fund is closed to new investors. If you are a shareholder of record at that time, you will be able to continue to add to your existing account through new purchases, including purchases through reinvestment of dividends or capital gains distributions, and exchanges. In addition, existing retirement plans and wrap programs with an existing account with full investment discretion may be able to add new participants. Goal and Strategies Goal The Fund s investment goal is long-term capital growth. Main Investment Strategies Under normal market conditions, the Fund invests at least 80% of its net assets in the equity securities of small cap companies. Shareholders will be given 60 days advance notice of any change to this policy. For this Fund, small cap companies are companies with market capitalizations not exceeding (i) $1.5 billion or (ii) the highest market capitalization in the Russell 2000 Index, whichever is greater, at the time of purchase. That index consists of 2,000 small companies that have publicly traded securities, and its largest company had a market capitalization of $1.9 billion as of June 30, Market capitalization is defined as share price multiplied by the number of common stock shares outstanding. The manager may continue to hold an investment for further capital growth opportunities even if, through market appreciation, the company s market capitalization exceeds these small cap measures. The Fund invests most of its assets in common stocks of small cap U.S. companies. In addition to the Fund s main investments, the Fund may invest in equity securities of larger companies. When suitable opportunities are available, the Fund may invest in initial public offerings of securities and may also invest a small portion of its assets in private or illiquid securities, such as late stage venture capital financings. 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, any income paid to stockholders, the value of its assets, and general market conditions. Common stocks and preferred stocks are examples of equity securities. The Fund s manager is a research driven, fundamental investor, pursuing a growth strategy. As a bottom-up investor focusing primarily on individual securities, the manager chooses companies that it believes have clear indicators of future earnings growth, and present the best trade-off between that potential earnings growth, business risk and valuation. 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. In choosing individual equity investments, the Fund s manager also considers sectors that have growth potential and fast growing, innovative companies within these sectors. Consequently, the Fund, from time to time, may have significant positions in particular sectors such as electronic technology and technology services. 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, money market fund shares, high-grade commercial paper, bank obligations, repurchase agreements 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

34 FRANKLIN SMALL CAP GROWTH FUND II 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. Growth Style Investing Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. Growth stocks may be more expensive relative to their current earnings or assets compared to value or other stocks, and if their valuations return to more typical norms, their prices may moderate or fall. Prices of these companies securities may be more volatile than other securities, particularly over the short term. Smaller Companies While smaller companies may offer substantial opportunities for capital growth, they also involve substantial risks and should be considered speculative. Historically, smaller 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 companies, the lower degree of liquidity in the markets for such securities, and the greater sensitivity of smaller companies to changing economic conditions. In addition, smaller companies may lack depth of management, be unable to generate funds necessary for growth or development, or be developing or marketing Because the securities the Fund holds fluctuate in price, the value of your investment in the Fund will go up and down. This means you could lose money over short or even extended periods. new products or services for which markets are not yet established and may never become established. Initial public offerings (IPOs) of securities issued by unseasoned companies with little or no operating history are risky and their prices are highly volatile, but they can result in very large gains in their initial trading. Attractive IPOs are often oversubscribed and may not be available to the Fund, or only in very limited quantities. Thus, when the Fund s size is smaller, any gains from IPOs will have an exaggerated impact on the Fund s reported performance than when the Fund is larger. Although IPO investments have had a positive impact on the Fund s performance in the past, there can be no assurance that the Fund will have favorable IPO investment opportunities in the future. Sector Focus - Technology Companies To the extent that the Fund has significant investments in one or a few sectors, it bears more risk than a fund which maintains broad sector diversification. Conversely, the performance of the Fund may be negatively impacted by limiting its exposure to certain sectors, such as biotechnology, should such sectors experience greater growth than the sectors in which the Fund more heavily invests. Technology company stocks can be subject to abrupt or erratic price movements and have been volatile, especially over the short term, due to the rapid pace of product change and development affecting such companies. Technology companies are subject to significant competitive pressures, such as new market entrants, aggressive pricing, and tight profit margins. Electronic technology and technology service companies. These companies also face the risks that new services, equipment or technologies will not be accepted by consumers and businesses or will become rapidly obsolete. These factors can affect the profitability of technology companies and, as a result, the value of their securities. Liquidity Reduced liquidity affecting an individual security or an entire market may have an adverse impact on market price and the Fund s ability to sell particular securities 34 35

35 FRANKLIN SMALL CAP GROWTH FUND II when necessary to meet the Fund s liquidity needs or in response to a specific economic event. More detailed information about the Fund, its policies and risks can be found in the Fund s Statement of Additional Information (SAI). 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 three 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 50% 48.47% 40% 30% 20% 10% 0% -10% -20% -30% -3.33% % Year Best Quarter: Q % Worst Quarter: Q % AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 2003 Franklin Small Cap Growth Fund II - Class A 2 Since Inception 1 Year (5/1/00) Return Before Taxes 39.90% 0.13% Return After Taxes on Distributions 39.90% 0.13% Return After Taxes on Distributions and Sale of Fund Shares 25.93% 0.11% 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. S&P 500 Index % -5.60% Russell 2000 Growth Index % -7.80% (indices reflect no deduction for fees, expenses, or taxes) 36 37

36 FRANKLIN SMALL CAP GROWTH FUND II Since Inception 1 Year (5/1/00) Franklin Small Cap Growth Fund II - Class B % 0.30% S&P 500 Index % -5.60% Russell 2000 Growth Index % -7.80% Since Inception 1 Year (5/1/00) Franklin Small Cap Growth Fund II - Class C % 0.83% S&P 500 Index % -5.60% Russell 2000 Growth Index % -7.80% 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. As of June 30, 2004, the Fund s year-to-date return was 5.72% for Class A. 2. Figures reflect sales charges. All Fund performance assumes reinvestment of dividends and capital gains. 3. Source: Standard & Poor s Micropal. The unmanaged Standard & Poor s (S&P) 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index, with each stock s weight in the index proportionate to its market value. In 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 Russell 2000 Growth Index is a market capitalization weighted index that measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. 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. Since Inception 1 Year (5/1/00) Franklin Small Cap Growth Fund II - Class R 2, % 1.56% S&P 500 Index % -5.60% Russell 2000 Growth Index % -7.80% 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

37 FRANKLIN SMALL CAP GROWTH FUND II 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 price 5.75% 4.00% 1.00% 1.00% Load imposed on purchases 5.75% None None None Maximum deferred sales charge (load) None % % 1.00% Redemption fee on shares sold within 5 New York Stock Exchange trading days following their purchase date % 2.00% 2.00% 2.00% Please see Choosing a Share Class on page 64 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% Distribution and service (12b-1) fees 0.25% 1.00% 1.00% 0.50% Other expenses 0.46% 0.46% 0.46% 0.46% Total annual Fund operating expenses % 1.93% 1.93% 1.43% Management fee reduction % -0.01% -0.01% -0.01% Net annual Fund operating expenses % % 1.92% 1.42% 1. There is a 1% contingent deferred sales charge that applies to investments of $1 million or more (see page 65) and purchases by certain retirement plans without an initial sales charge. 2. Declines to zero after six years. 3. 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. 4. 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 Trustees and an exemptive order by the Securities and Exchange Commission. 5. Class A net annual Fund operating expenses differ from the ratio of expenses to average net assets shown on page 43 due to a timing difference between the end of the 12b-1 plan year and the Fund s fiscal year end. 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: You invest $10,000 for the periods shown; Your investment has a 5% return each year; and 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 $687 1 $925 $1,182 $1,914 Class B $595 $903 $1,237 $2,048 2 Class C 3 $295 $603 $1,037 $2,243 Class R $245 $449 $776 $1,702 If you do not sell your shares: Class B $195 $603 $1,037 $2,048 2 Class C 3 $195 $603 $1,037 $2,243 Class R $145 $449 $776 $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, The actual costs were $392, $697, $1,126 and $2,321, respectively, if you sell your shares at the end of the period or $293, $697, $1,126 and $2,321, respectively, if you do not sell your shares

38 FRANKLIN SMALL CAP GROWTH FUND II Management Franklin Advisers, Inc. (Advisers), One Franklin Parkway, San Mateo, CA , is the Fund s investment manager. Together, Advisers and its affiliates manage over $347 billion in assets. The team responsible for the Fund s management is: MICHAEL MCCARTHY, Senior Vice President of Advisers Mr. McCarthy has been a manager of the Fund since its inception. He joined Franklin Templeton Investments in ZACK PERRY CFA, Portfolio Manager of Advisers Mr. Perry has been a manager of the Fund since March He joined Franklin Templeton Investments in BRAD CARRIS, Portfolio Manager of Advisers Mr. Carris has been a manager of the Fund since March He joined Franklin Templeton Investments in Previously, he was a manager with Andersen Consulting. The Fund pays Advisers a fee for managing the Fund s assets. For the fiscal year ended April 30, 2004, management fees, before any reduction, were 0.47% of the Fund s average net assets. Under an agreement by the manager to reduce its fees to reflect reduced services resulting from the Fund s investment in a Franklin Templeton money fund, the Fund paid 0.46% of its average daily net assets to the manager for its services. This reduction is required by the Fund s Board of Trustees and an exemptive order by the Securities and Exchange Commission. Financial Highlights This table presents the Fund s financial performance since its inception. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in the Fund assuming reinvestment of dividends and capital gains. This information has been audited by PricewaterhouseCoopers LLP, whose report, along with the Fund s financial statements, are included in the annual report, which is available upon request. CLASS A Year ended April 30, Per share data ($) Net asset value, beginning of year Net investment loss 1 (.07) (.06) (.06) (.04) Net realized and unrealized gains (losses) 3.16 (2.27) (.42).31 Total from investment operations 3.09 (2.33) (.48).27 Net asset value, end of year Total return (%) (23.80) (4.67) 2.70 Ratios/supplemental data Net assets, end of year ($ x 1,000) 908, ,642 1,076, ,452 Ratios to average net assets: (%) Expenses Net investment loss (.70) (.76) (.63) (.36) Portfolio turnover rate (%)

39 FRANKLIN SMALL CAP GROWTH FUND II CLASS B Year ended April 30, Per share data ($) Net asset value, beginning of year Net investment loss 1 (.15) (.10) (.12) (.11) Net realized and unrealized gains (losses) 3.09 (2.23) (.42).31 Total from investment operations 2.94 (2.33) (.54).20 Net asset value, end of year Total return (%) (24.12) (5.29) 2.00 Ratios/supplemental data Net assets, end of year ($ x 1,000) 122,004 96, , ,640 Ratios to average net assets: (%) Expenses Net investment loss (1.54) (1.41) (1.26) (1.03) Portfolio turnover rate (%) CLASS C Year ended April 30, Per share data ($) Net asset value, beginning of year Net investment loss 1 (.15) (.10) (.12) (.11) Net realized and unrealized gains (losses) 3.09 (2.24) (.42).32 Total from investment operations 2.94 (2.34) (.54).21 Net asset value, end of year Total return (%) (24.20) (5.29) 2.10 Ratios/supplemental data Net assets, end of year ($ x 1,000) 200, , , ,053 Ratios to average net assets: (%) Expenses Net investment loss (1.54) (1.41) (1.26) (1.03) Portfolio turnover rate (%) CLASS R Year ended April 30, Per share data ($) Net asset value, beginning of year Net investment loss 1 (.10) (.07) (.03) Net realized and unrealized gains (losses) 3.14 (2.27) (.06) Total from investment operations 3.04 (2.34) (.09) Net asset value, end of year Total return (%) (23.90) (.91) Ratios/supplemental data Net assets, end of year ($ x 1,000) 4,542 2, Ratios to average net assets: (%) Expenses Net investment loss (1.04) (.91) (1.05) 4 Portfolio turnover rate (%) Based on average daily shares outstanding. 2. Total return does not include sales charges and is not annualized. 3. For the period January 1, 2002 (effective date) to April 30, Annualized

40 FRANKLIN SMALL-MID CAP GROWTH FUND FRANKLIN SMALL-MID CAP GROWTH FUND Goal and Strategies Goal The Fund s investment goal is long-term capital growth. Main Investment Strategies Under normal market conditions, the Fund invests at least 80% of its net assets in the equity securities of small cap and mid cap companies. Shareholders will be given 60 days advance notice of any change to this policy. For this Fund, mid cap companies are companies with market capitalizations not exceeding $8.5 billion and small cap companies are companies with market capitalizations not exceeding (i) $1.5 billion or (ii) the highest market capitalization in the Russell 2000 Index, whichever is greater, at the time of purchase. The Russell 2000 Index consists of 2,000 small companies that have publicly traded securities, and its largest company had a market capitalization of $1.92 billion as of June 30, Market capitalization is defined as share price multiplied by the number of common stock shares outstanding. In most instances, the manager intends to continue to hold an investment for further capital growth opportunities even if, through market appreciation, the company s market capitalization exceeds the small or mid cap measures described above. In addition to the Fund s main investments, the Fund may invest in equity securities of larger companies. When suitable opportunities are available, the Fund may also invest in initial public offerings of securities and may invest a small portion of its assets in private or illiquid securities, such as late stage venture capital financings. The Fund invests most of its assets in common stocks of mid and small cap U.S. companies. 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, any income paid to stockholders, the value of its assets, and general market conditions. Common stocks and preferred stocks are examples of equity securities. The Fund s manager is a research driven, fundamental investor, pursuing a growth strategy. As a bottom-up investor focusing primarily on individual securities, the manager chooses companies that it believes have clear indicators of future earnings growth, and present the best trade-off between that potential earnings growth, business risk and valuation. 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. In choosing equity investments, the Fund s manager considers such factors as the financial strength of the company, the expertise of management, the growth potential of the company within the industry, and the growth potential of the industry itself. Consequently, the Fund, from time to time, may have significant positions in particular sectors such as electronic technology and technology services. 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, money market fund shares, high-grade commercial paper, bank obligations, repurchase agreements 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

41 FRANKLIN SMALL-MID CAP GROWTH FUND 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. Growth Style Investing Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. Growth stocks may be more expensive relative to their current earnings or assets compared to value or other stocks, and if their valuations return to more typical norms, their prices may moderate or fall. Prices of these companies securities may be more volatile than other securities, particularly over the short term. 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. Initial public offerings (IPOs) of securities issued by unseasoned companies with little or no operating history are risky and their prices are highly volatile, but they can result in very large gains in their initial trading. Attractive IPOs are often oversubscribed and may not be available to the Fund, or only in very limited quantities. Thus, when the Fund s size is smaller, any gains from IPOs will have an exaggerated impact on the Fund s reported performance than when the Fund is larger. Although IPO investments have had a positive impact on the Fund s performance in the past, there can be no assurance that the Fund will have favorable IPO investment opportunities in the future. Sector Focus - Technology Companies To the extent that the Fund has significant investments in one or a few sectors, it bears more risk than a fund which maintains broad sector diversification. Technology company stocks can be subject to abrupt or erratic price movements and have been volatile, especially over the short term, due to the rapid pace of product change and development affecting such companies. Technology companies are subject to significant competitive pressures, such as new market entrants, aggressive pricing, and tight profit margins. Electronic technology companies. These companies also face the risks that new equipment or technologies will not be accepted by consumers and businesses or will become rapidly obsolete. These factors can affect the profitability of technology companies and, as a result, the value of their securities. Liquidity Reduced liquidity affecting an individual security or an entire market may have an adverse impact on market price and the Fund s ability to sell particular securities when necessary to meet the Fund s liquidity needs or in response to a specific economic event. More detailed information about the Fund, its policies and risks can be found in the Fund s Statement of Additional Information (SAI). Because the securities the Fund holds fluctuate in price, the value of your investment in the Fund will go up and down. This means you could lose money over short or even extended periods. 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

42 FRANKLIN SMALL-MID CAP GROWTH FUND 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. Since Inception 1 Year (7/1/02) Franklin Small-Mid Cap Growth Fund - Class B % 12.14% S&P 500 Index % 10.03% Russell Midcap Growth Index 4, % 18.52% Russell 2500 Growth Index % 18.03% CLASS A ANNUAL TOTAL RETURNS 1 100% 80% 60% 42.20% 40% 27.07% 20% 15.78% 9.22% -0.02% 0% 97.08% -9.80% % % 37.68% Since Inception 1Year 5 Years (10/2/95) Franklin Small-Mid Cap Growth Fund - Class C % 5.48% 8.14% S&P 500 Index % -0.57% 9.86% Russell Midcap Growth Index 4, % 2.01% 8.16% Russell 2500 Growth Index % 3.83% 6.43% -20% -40% Year Best Quarter: Q % Worst Quarter: Q % AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 2003 Franklin Small-Mid Cap Growth Fund - Class A 2 1 Year 5 Years 10 Years Return Before Taxes 29.76% 5.24% 11.42% Return After Taxes on Distributions 29.76% 5.09% 10.25% Return After Taxes on Distributions and Sale of Fund Shares 19.34% 4.45% 9.37% S&P 500 Index % -0.57% 11.06% Russell Midcap Growth Index 4, % 2.01% 9.40% Russell 2500 Growth Index % 3.83% 8.04% (indices reflect no deduction for fees, expenses, or taxes) 1 Year 5 Years 10 Years Franklin Small-Mid Cap Growth Fund - Class R 2, % 6.21% 11.74% S&P 500 Index % -0.57% 11.06% Russell Midcap Growth Index 4, % 2.01% 9.40% Russell 2500 Growth Index % 3.83% 8.04% 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

43 FRANKLIN SMALL-MID CAP GROWTH FUND 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. As of June 30, 2004, the Fund s year-to-date return was 4.37% for Class A. 2. Figures reflect sales charges. All Fund performance assumes reinvestment of dividends and capital gains. 3. Source: Standard & Poor s Micropal. The unmanaged Standard & Poor s (S&P) 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index, with each stock s weight in the index proportionate to its market value. It includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund s portfolio. 4. The Russell Midcap Growth Index is replacing the Russell 2500 Growth Index as the Fund s benchmark. The manager believes the composition of the Russell Midcap Growth Index better reflects the Fund s holdings. 5. Source: Standard & Poor s Micropal. The Russell Midcap Growth Index is an unmanaged market capitalization weighted index that measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth Index. It includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund s portfolio. 6. Source: Standard & Poor s Micropal. The Russell 2500 Growth Index is an unmanaged group of those Russell 2500 companies with higher price-to-book ratios and higher forecasted growth values. It includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund s portfolio. 7. 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 price 5.75% 4.00% 1.00% 1.00% Load imposed on purchases 5.75% None None None Maximum deferred sales charge (load) None % % 1.00% Redemption fee on shares sold within 5 New York Stock Exchange trading days following their purchase date % 2.00% 2.00% 2.00% Please see Choosing a Share Class on page 64 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% Distribution and service (12b-1) fees 0.25% 1.00% 1.00% 0.50% Other expenses 0.28% 0.28% 0.28% 0.28% Total annual Fund operating expenses % 1.74% 1.74% 1.24% Management fee reduction % -0.01% -0.01% -0.01% Net annual Fund operating expenses % 1.73% 1.73% % 1. There is a 1% contingent deferred sales charge that applies to investments of $1 million or more (see page 65) and purchases by certain retirement plans without an initial sales charge. 2. Declines to zero after six years. 3. 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. 4. 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 Trustees and an exemptive order by the Securities and Exchange Commission. 5. Class C net annual Fund operating expenses differ from the ratio of expenses to average net assets shown on page 57 due to a timing difference between the end of the 12b-1 plan year and the Fund s fiscal year end

44 FRANKLIN SMALL-MID CAP GROWTH FUND 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: You invest $10,000 for the periods shown; Your investment has a 5% return each year; and 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 $274 $539 $928 $2,019 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 $174 $539 $928 $2,019 Class R $125 $390 $676 $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, The actual costs were $371, $633, $1,019 and $2,099, respectively, if you sell your shares at the end of the period or $272, $633, $1,019 and $2,099, respectively, if you do not sell your shares. Management Franklin Advisers, Inc. (Advisers), One Franklin Parkway, San Mateo, CA , is the Fund s investment manager. Together, Advisers and its affiliates manage over $347 billion in assets. The team responsible for the Fund s management is: EDWARD B. JAMIESON, Executive Vice President of Advisers Mr. Jamieson has been a manager of the Fund since He joined Franklin Templeton Investments in MICHAEL MCCARTHY, Senior Vice President of Advisers Mr. McCarthy has been a manager of the Fund since He joined Franklin Templeton Investments in The Fund pays Advisers a fee for managing the Fund s assets. For the fiscal year ended April 30, 2004, management fees, before any reduction, were 0.46% of the Fund s average 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 0.45% of its average daily net assets to the manager for its services. This reduction is required by the Fund s Board of Trustees and an exemptive order by the Securities and Exchange Commission

45 FRANKLIN SMALL-MID CAP GROWTH FUND 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 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 April 30, Per share data ($) Net asset value, beginning of year Net investment income (loss) 1 (.14) (.09) (.06) Net realized and unrealized gains (losses) 6.69 (5.62) (5.16) (10.98) Total from investment operations 6.55 (5.71) (5.22) (10.86) Distributions from net investment income (.08) (.24) (.04) Distributions from net realized gains (.23) (.26) Total distributions (.08) (.47) (.30) Net asset value, end of year Total return (%) (19.79) (15.28) (24.00) Ratios/supplemental data Net assets, end of year ($ x 1,000) 7,355,269 5,791,141 7,784,125 9,606,125 11,199,559 Ratios to average net assets: (%) Expenses Net investment income (loss) (.51) (.41) (.18) Portfolio turnover rate (%) CLASS B Year ended April 30, Per share data ($) Net asset value, beginning of year Net investment loss 1 (.36) (.23) Net realized and unrealized gains (losses) 6.64 (1.10) Total from investment operations 6.28 (1.33) Net asset value, end of year Total return (%) (5.47) Ratios/supplemental data Net assets, end of year ($ x 1,000) 26,161 7,601 Ratios to average net assets: (%) Expenses Net investment loss (1.26) (1.16) 4 Portfolio turnover rate (%) CLASS C Year ended April 30, Per share data ($) Net asset value, beginning of year Net investment loss 1 (.34) (.26) (.27) (.19) (.19) Net realized and unrealized gains (losses) 6.46 (5.46) (5.05) (10.75) Total from investment operations 6.12 (5.72) (5.32) (10.94) Less distributions from net realized gains (.23) (.26) Net asset value, end of year Total return (%) 2 (27.36) (20.36) (15.92) (24.61) Ratios/supplemental data Net assets, end of year ($ x 1,000) 762, , ,940 1,263,169 1,667,870 Ratios to average net assets: (%) Expenses Net investment loss (1.24) (1.16) (.92) (.45) (.52) Portfolio turnover rate (%)

46 FRANKLIN STRATEGIC SERIES CLASS R Year ended April 30, Per share data ($) Net asset value, beginning of year Net investment loss 1 (.22) (.17) (.12) Net realized and unrealized gains (losses) 6.66 (5.58) (2.23) Total from investment operations 6.44 (5.75) (2.35) Net asset value, end of year Total return (%) (19.96) (7.54) Ratios/supplemental data Net assets, end of year ($ x 1,000) 41,404 15,309 1,253 Ratios to average net assets: (%) Expenses Net investment loss (.76) (.66) (1.26) 4 Portfolio turnover rate (%) Based on average daily shares outstanding. 2. Total return does not include sales charges, and is not annualized. 3. For the period July 1, 2002 (effective date) to April 30, Annualized. 5. For the period January 1, 2002 (effective date) to April 30, Additional Management Information On February 4, 2004, the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts filed an administrative complaint against Franklin Resources, Inc. and certain of its subsidiaries (the Company ) claiming violations of the Massachusetts Uniform Securities Act ( Massachusetts Act ) with respect to an alleged arrangement to permit market timing (the Mass. Proceeding ). On February 17, 2004, the Company filed an Answer denying all violations of the Massachusetts Act. Hearings on this matter are presently scheduled in the coming months. The Company, in addition to most of the mutual funds within Franklin Templeton Investments, has been named in shareholder class actions related to the matter described above that were filed in the United States District Courts in California, Florida, Nevada, New Jersey and New York. These parties, as well as certain of the mutual funds trustees/directors, have also been named in a shareholder class action filed in March 2004 in the United States District Court in New Jersey. This lawsuit alleges violations of certain provisions of the federal securities laws and state common law fiduciary obligations in connection with Rule 12b-1 fees and brokerage commissions paid by the mutual funds. These lawsuits seek damages of unspecified amounts. The Company believes that the claims made in the lawsuits are without merit and it intends to defend vigorously against the allegations. It is anticipated that additional similar civil actions related to the matters described above may be filed in the future. On August 2, 2004, Franklin Resources, Inc. announced that Franklin Advisers, Inc. (adviser to many of the funds within Franklin Templeton Investments, and an affiliate of the adviser to the other funds) had reached a settlement with the U.S. Securities and Exchange Commission ( SEC ) that resolved an SEC investigation of market timing activity in the Franklin Templeton Investments funds. As part of the settlement, on August 2, 2004, 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 (the Order ). The SEC s Order concerns the activities of 58 59

47 FRANKLIN STRATEGIC SERIES a limited number of third parties that ended in 2000 and those that are the subject of the Mass. Proceeding described above. Under the terms of the SEC s Order, pursuant to which Franklin Advisers, Inc., neither admits nor denies any wrongdoing, Franklin Advisers has agreed to pay $50 million, of which $20 million is a civil penalty, to be distributed to fund shareholders in accordance with a plan to be developed by an Independent Distribution Consultant ( IDC ). Because the IDC has not yet been retained and the distribution methodology has not yet been developed, it is presently not possible to say which particular funds will be determined to have been affected or which particular groups of fund shareholders will receive distributions or in what proportion and amounts. These issues were previously disclosed by the Company as being under investigation by government authorities and the subject of an internal inquiry by the Company in its regulatory filings and on its public website. Any further updates on these matters will be disclosed on the Company s website at franklintempleton.com under Statement on Current Industry Issues. In the Order, the SEC notes that the Company has generally sought to detect, discourage and prevent market timing in its funds and began to increase its efforts to control market timing in The Order also requires Franklin Advisers to, among other things: Enhance and periodically review compliance policies and procedures, and establish a corporate ombudsman; Establish a new internal position whose responsibilities shall include compliance matters related to conflicts of interests; and Retain an Independent Distribution Consultant to develop a plan to distribute the $50 million settlement to fund shareholders. The Staff of the SEC has also informed the Company that it is considering recommending a civil action or proceeding against Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc. (Distributors) (the principal underwriter of shares of the Franklin Templeton mutual funds) concerning payments to securities dealers who sell fund shares (commonly referred to as revenue sharing ). The staff of the California Attorney General s Office also has advised that it is authorized to bring a civil action against Distributors arising from the same events. Even though the Company currently believes that the contemplated charges are unwarranted, it also believes that it is in the best interest of the Company and fund shareholders to resolve these issues voluntarily, to the extent the Company can reasonably do so. If it is found that the Company bears responsibility for any unlawful or improper conduct, the Company has committed to making the funds or their shareholders whole, as appropriate

48 FRANKLIN STRATEGIC SERIES Distributions and Taxes Income and Capital Gain Distributions Each Fund intends to make a distribution at least annually from its net investment income and any net realized capital gains. The amount of any distribution will vary, and there is no guarantee a Fund will pay either an income dividend 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. 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. 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. 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. 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. Other Tax Information Fund distributions and gains from the sale of your Fund shares generally are subject to state and local taxes. Non-U.S. investors may be subject to U.S. withholding or estate tax, and are subject to special U.S. tax certification requirements. You should consult your tax advisor about the federal, state, local or foreign tax consequences of your investment in a Fund. Dividend income. 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 62 63

49 FRANKLIN STRATEGIC SERIES YOUR ACCOUNT Class A Class B Class C Class R Initial sales charge of 5.75% or less No initial sales charge No initial sales charge No initial sales charge 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. Effective November 1, 2004, investors who do not have an investment representative may not purchase Class B, Class C or Class R shares. Unless eligible to purchase Class Z or Advisor Class shares, all purchases by a prospective investor who does not have an investment representative will be placed in Class A shares or will be returned if we are unable to contact such investor. Existing investors who do not have an investment representative may not make additional purchases in their Class B, Class C or Class R shares accounts, but may exchange their shares to a Franklin Templeton Fund that offers Class B, Class C or Class R shares. Additional purchases by these existing investors will be placed in Class A shares. Dividend and capital gain distributions may continue to be reinvested in existing Class B, Class C or Class R shares accounts. These provisions do not apply to Employer Sponsored Retirement Plans. Deferred sales charge of 1% on purchases of $1 million or more sold within 18 months Lower annual expenses than Class B, C or R due to lower distribution fees Deferred sales charge of 4% on shares you sell within the first year, declining to 1% within six years and eliminated after that Higher annual expenses than Class A due to higher distribution fees. Automatic conversion to Class A shares after eight years, reducing future annual expenses. Deferred sales charge of 1% on shares you sell within 12 months Higher annual expenses than Class A due to higher distribution fees. No conversion to Class A shares, so annual expenses do not decrease. Except for certain Employer Sponsored Retirement Plans, deferred sales charge of 1% on shares you sell within 18 months (charged at plan level based on initial investment) Higher annual expenses than Class A due to higher distribution fees (lower than Class B and Class C). No conversion to Class A shares, so annual expenses do not decrease. SALES CHARGES - Class A the sales charge makes up which equals this % when you invest this amount this % of the offering price* of your net investment* Under $50, $50,000 but under $100, $100,000 but under $250, $250,000 but under $500, $500,000 but under $1 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. 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 (see page 70), you can buy Class A 64 65

50 FRANKLIN STRATEGIC SERIES 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 69). Distribution and Service (12b-1) Fees Class A has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows Aggressive Growth Fund and Small Cap Fund II to pay distribution fees of up to 0.35% per year to those who sell and distribute Class A shares and provide other services to shareholders. For Flex Cap Fund and Small-Mid Cap Fund, Class A has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows each Fund to pay distribution fees of up to 0.25% 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. 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. Distribution and Service (12b-1) Fees Class B has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows each Fund to pay distribution and other fees of up to 1% per year for the sale of Class B shares and for services provided to shareholders. Because these fees are paid out of Class B 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 if you sell your shares within this % is deducted from this many years after buying them your proceeds 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 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 69). After eight years, your Class B shares automatically convert to Class A shares, lowering your annual expenses from that time on. 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 69). Distribution and Service (12b-1) Fees Class C has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows each Fund to pay distribution and other fees of up to 1% 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

51 FRANKLIN STRATEGIC SERIES 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: Employer Sponsored Retirement Plans Any trust or plan established as part of a qualified tuition program under Section 529 of the Internal Revenue Code Investors who open a Franklin Templeton IRA Rollover with less than $1 million other than a current or former Franklin Templeton employee or as the result of a spousal rollover or a QDRO. 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 each Fund 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, 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. 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 82 for exchange information). 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

52 FRANKLIN STRATEGIC SERIES Sales Charge Reductions and Waivers If you qualify for any of the sales charge reductions or waivers below, please let us know at the time you make your investment to help ensure you receive the lower sales charge. Quantity discounts. We offer several ways for you to combine your purchases in Franklin Templeton funds to take advantage of the lower sales charges for large purchases of Class A shares. Cumulative Quantity Discount - lets you combine all of your shares in Franklin Templeton funds for purposes of calculating the sales charge. You also may combine the shares of your spouse, and your children or grandchildren, if they are under the age of 21. Certain company and retirement plan accounts also may be included. Letter of Intent (LOI) - expresses your intent to buy a stated dollar amount of shares 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 a portion of your shares to cover any additional sales charge that may apply if you do not buy the amount stated in your LOI. To sign up for these programs, complete the appropriate section of your account application. Reinstatement privilege. If you sell shares of a Franklin Templeton fund, you may reinvest some or all of the proceeds within 365 days of the sale without an initial sales charge. The proceeds must be reinvested within the same share class, except proceeds will be reinvested in Class A shares if the proceeds are: (1) from the sale of Class B shares; or (2) from the sale of Class C or R shares held of record at the time of sale in an account without an identified investment representative (excepting R shares sold by an Employer Sponsored Retirement Plan). Franklin Templeton funds include all of the U.S. registered mutual funds of Franklin Templeton Investments, except Franklin Templeton Variable Insurance Products Trust and Templeton Capital Accumulator Fund. 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 365 days of the sale by adding it to the amount of your reinvestment (for example, if you are reinvesting $10,000 within 365 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 (excepting Employer Sponsored Retirement Plans) paid a CDSC when you sold (1) Class B shares; or (2) Class C or R shares held of record at the time of sale in an account without an identified investment representative and reinvest the proceeds from that sale in Class A shares within 365 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 365 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. Sales charge waivers. Class A shares may be purchased without an initial sales charge or CDSC by various individuals, institutions and retirement plans or by investors who reinvest certain distributions and proceeds within 365 days. The CDSC for each class may be waived for certain redemptions and distributions. If you would like information about available sales charge waivers, call your investment representative or call Shareholder Services at 1-800/ For information about retirement plans, you may call Retirement Services at 1-800/ A list of available sales charge waivers also may be found in the Statement of Additional Information (SAI). Group investment program. Allows established groups of 11 or more investors to invest as a group. For sales charge purposes, the group s investments are added together. There are certain other requirements and the group must have a purpose other than buying Fund shares at a discount

53 FRANKLIN STRATEGIC SERIES Buying Shares Effective July 9, 2002, the Small Cap Growth Fund II is closed to new investors. If you are a shareholder of record at that time, you will be able to continue to add to your existing account through new purchases, including purchases through reinvestment of dividends or capital gains distributions, and exchanges. In addition, existing retirement plans and wrap programs with an existing account with full investment discretion may be able to add new participants. Please also keep in mind that if you sell all the shares in your account, your account will be closed and you will not be able to buy additional Fund shares or to reopen your account. The Fund reserves the right to modify this policy at any time. MINIMUM INVESTMENTS Initial Regular accounts $1,000 $50 Automatic investment plans $50 $50 UGMA/UTMA accounts $100 $50 Employer Sponsored Retirement Plans no minimum $25 IRAs, IRA rollovers, Coverdell Education Savings Plans or Roth IRAs $250 $50 Broker-dealer sponsored wrap account programs $250 $50 Current and former full-time employees, officers, trustees and directors of Franklin Templeton entities, and their immediate family members $100 $50 Additional Please note that you may only buy shares of a fund eligible for sale in your state or jurisdiction

54 FRANKLIN STRATEGIC SERIES 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 76). 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 investment representative By Phone/Online (Up to $100,000 per shareholder per day) 1-800/ franklintempleton.com Note: (1) certain account types are not available for online account access and (2) the amount may be higher for members of the Valued Investor Program. Please see page 78 for more information regarding eligibility. By Mail Contact your investment representative If you have another Franklin Templeton fund account with your bank account information on file, you may open a new account by phone. At this time, a new account may not be opened online. To make a same day investment, your phone 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 payable to the Fund. Mail the check and your signed application to Investor Services. Contact your investment representative Before requesting a telephone or online purchase into an existing 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 address and a voided check or savings account deposit slip. If the bank and Fund accounts do not have at least one common owner, your written request must be signed by all fund and bank account owners, and each individual must have his or her 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 payable to the Fund. Include your account number on the check. Fill out the deposit 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. Franklin Templeton Investor Services P.O. Box , Sacramento, CA Call toll-free: 1-800/ (Monday through Friday 5:30 a.m. to 5:00 p.m., Pacific time Saturday 6:30 a.m. to 2:30 p.m., Pacific time) or visit us online 24 hours a day, 7 days a week, at franklintempleton.com By Wire 1-800/ (or 1-650/ collect) Call to receive a wire control number and wire instructions. Wire the funds and mail your signed application to Investor Services. Please include the wire control number or your new account 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 to receive a wire control number and wire instructions. 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. By Exchange TeleFACTS 1-800/ (around-the-clock access) franklintempleton.com Call Shareholder Services at 1-800/ , or send signed written instructions. You also may place an online exchange order. The automated telephone system cannot be used to open a new account. (Please see page 82 for information on exchanges.) Call Shareholder Services at 1-800/ , or send signed written instructions. You also may place an online exchange order. (Please see page 82 for information on exchanges.) 74 75

55 FRANKLIN STRATEGIC SERIES 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 73) with your application. Automatic Payroll Deduction You may invest in a Fund automatically by transferring money from your paycheck to a 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/ Advisor Services 1-800/ Retirement Services 1-800/ Distribution Options You may reinvest distributions you receive from a 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 if you reinvest your distributions within 365 days. 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. *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. 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. 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/ 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. 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/ for information

56 FRANKLIN STRATEGIC SERIES 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 (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 the total combined value of Franklin Templeton fund shares held directly with the funds in your name or the name of a legal entity over which you have exclusive control, in the name of your spouse, and in the names of your children or grandchildren who are under the age of 21 exceeds $250,000. Franklin Templeton VIP shareholders enjoy enhanced service and transaction capabilities. Please contact Shareholder Services at 1-800/ 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. Please also keep in mind that for the Small Cap Growth Fund II, if you sell all the shares in your account, your account will be closed and you will not be able to buy additional Fund shares or to reopen your account. The Fund reserves the right to modify this policy at any time. 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 the Fund we will need written instructions signed by all registered owners, with a signature guarantee for each owner, if: you are selling more than $100,000 worth of shares you want your proceeds paid to someone who is not a registered owner 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 the Fund against potential claims based on the instructions received. The amount may be higher for members of the Valued Investor Program. Please see page 78 for more information regarding eligibility. 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

57 FRANKLIN STRATEGIC SERIES 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. A certified or cashier s check may clear in less time. 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 , tax penalties may apply. Call Retirement Services at 1-800/ for details. SELLING SHARES To sell some or all of your shares Through your investment representative Contact your investment representative By Mail Send written instructions and endorsed share certificates (if you hold share 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 and B 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. By Phone/Online 1-800/ franklintempleton.com As long as your transaction is for $100,000 or less, you do not hold share certificates and you have not changed your address by phone or online within the last 15 days, you can sell your shares by phone or online. The amount may be higher for members of the Valued Investor Program. Please see page 78 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. By Electronic Funds Transfer (ACH) You can call, write, or visit us online to have redemption proceeds sent to a bank account. See the policies at left 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. By Exchange Obtain a current prospectus for the fund you are considering. Prospectuses 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 , Sacramento, CA Call toll-free: 1-800/ (Monday through Friday 5:30 a.m. to 5:00 p.m., Pacific time Saturday 6:30 a.m. to 2:30 p.m., Pacific time) or visit us online 24 hours a day, 7 days a week, at franklintempleton.com 80 81

58 FRANKLIN STRATEGIC SERIES 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. 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 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. Exchange limit guideline. This exchange privilege is not intended to facilitate short-term or other excessive trading. In order to limit short-term or other excessive trading you generally may make up to eight (8) exchanges out of your Fund *Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange into Class A without any sales charge. 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. account to an account in a different Franklin Templeton fund during any calendar year (a single request to exchange out of your Fund account to accounts in two different Franklin Templeton funds will count as two exchanges out of your Fund account). Regularly scheduled exchanges or transfers resulting from automatic rebalancing plans or similar arrangements will not be counted for purposes of this exchange limit guideline. Each Fund may (but is not required to) reject any exchange request that exceeds this exchange limit guideline and may temporarily suspend or permanently terminate your exchange privileges, or may limit the amount, number or frequency of your exchanges, or may limit the methods you may use to request exchanges if you exceed or seek to exceed this exchange limit guideline. Even if you don t exceed this exchange limit guideline, each Fund at all times reserves the right to restrict, reject or cancel any exchange transactions, for no reason or any reason, without notice. For example, the Fund may refuse any sale of Fund shares through an exchange by any investor or group if, in the manager s judgment, the trade (1) may interfere with the efficient management of the Fund s portfolio, (2) may appear to be connected with a strategy of market timing (as described in the Market Timing Trading Policy section), or (3) may have the potential of otherwise adversely affecting the Fund. In making a decision to reject an exchange request, the 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. 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 a Fund at any time. Exchanges through financial intermediaries. If 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 a master account (Omnibus Account) with the Funds for trading on behalf of its customers, different exchange and/or transfer limit guidelines and restrictions may apply. The financial intermediary 82 83

59 FRANKLIN STRATEGIC SERIES through whom you are investing may choose to adopt these exchange limit guidelines or, alternatively, may 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 limit guideline and exchange privilege in the future. You will receive 60 days notice of any material changes, unless otherwise provided by law. The Fund reserves the right to waive the exchange limit guideline at its discretion if the Fund s manager believes such waiver is not inconsistent with the best interests of the Fund. The exchange limit guideline does not apply to mutual funds, Omnibus Accounts 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. 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 Market timing generally. Each Fund discourages short-term or excessive trading, often referred to as market timing, and 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 the Fund s transfer agent and based on that information the Fund or its agents 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. Market timing through financial intermediaries. You are an investor subject to this policy whether you are a direct shareholder of a Fund or 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 an Omnibus Account with the Fund for trading on behalf of its customers. While the 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 the Fund, the amount of assets the portfolio manager typically maintains in cash 84 85

60 FRANKLIN STRATEGIC SERIES or cash equivalents and the dollar amount and number and frequency of trades, short-term or excessive 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 the Fund s portfolio holdings expose the Fund to investors who engage in the type of market timing trading that seeks to take advantage of possible delays between the change in the value of a mutual fund s portfolio holdings and the reflection of the change in the net asset value of the fund s shares, sometimes referred to as arbitrage market timing, there is the possibility that such trading, under certain circumstances, may dilute the value of Fund shares 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 timers may seek to exploit possible delays between the change in the value of a mutual fund s portfolio holdings and the net asset value of the fund s shares in funds that hold significant investments in foreign securities because certain foreign markets close several hours ahead of the U.S. markets, and in funds that hold significant investments in small-cap securities, high-yield (junk) bonds and other types of investments which may not be frequently traded. The Fund is currently using several methods to reduce the risk of market timing. These methods include: limiting annual exchange activity per fund account, committing staff to selectively review on a continuing basis recent trading activity in order to identify trading activity that may be contrary to this market timing trading policy; and assessing a redemption fee for short-term trading 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 completely eliminated. Revocation of market timing trades. Transactions placed in violation of the Fund s market timing trading policy or exchange limit guidelines are not necessarily deemed accepted by the Fund and may be cancelled or revoked by the Fund on the next business day 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 five (5) New York Stock Exchange trading 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 even if any such request would not exceed the exchange limit guideline described in this prospectus. 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 86 87

61 FRANKLIN STRATEGIC SERIES 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. mediary 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. Waiver/Exceptions/Changes. The 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 assess or collect the redemption fee on all shares redeemed by Fund investors serviced by the Fund s transfer agent (due to systems limitations which we anticipate being resolved within 180 days of the effective date of this policy) or by financial intermediaries on behalf of their customers. For example, where a financial inter

62 FRANKLIN STRATEGIC SERIES Account Policies Calculating Share Price Each Fund calculates its net asset value per share (NAV) each business day at the close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific time). Each class s NAV is calculated by dividing its net assets by the number of its shares outstanding. Each Fund s assets are generally valued at their market value. If market prices are unavailable, or if an event occurs after the close of the trading market that materially affects the values, assets may be valued at their fair value. If the Fund holds securities listed primarily on a foreign exchange that trades on days when the Fund is not open for business, the value of your shares may change on days that you cannot buy or sell shares. Requests to buy and sell shares are processed at the NAV next calculated after we receive your request in proper form. 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 When you buy shares, you pay the offering price. The offering price is the NAV plus any applicable sales charge. When you sell shares, you receive the NAV minus any applicable contingent deferred sales charge (CDSC). through automatic investment or withdrawal programs, which will be reported on your quarterly statement). You also will receive the Funds 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/ 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 77). 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 the Fund to accept online registration for online services (including 90 91

63 FRANKLIN STRATEGIC SERIES 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 the Fund instructions by telephone, online or in writing (subject to any limitations in telephone or online privileges) to: 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; 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; Add/Change the bank account to which Fund share redemption proceeds may be sent, which bank account may not be owned by you; Purchase Fund shares by debiting a bank account that may be owned by you; and 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 the 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 the Fund in a written instruction signed by all registered owners. Additional Policies Please note that the Funds maintain additional policies and reserve certain rights, including: The Funds may restrict, reject or cancel any purchase orders, including an exchange request. The Funds may modify, suspend, or terminate telephone/online privileges at any time. The Funds may make material changes to or discontinue the exchange privilege on 60 days notice or as otherwise provided by law. The Funds may stop offering shares completely or may offer shares only on a limited basis, for a period of time or permanently. 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 a Fund. In unusual circumstances, we may temporarily suspend redemptions or postpone the payment of proceeds, as allowed by federal securities laws. For redemptions over a certain amount, each 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. You may only buy shares of a fund (including the purchase side of an exchange) eligible for sale in your state or jurisdiction. To permit investors to obtain the current price, dealers are responsible for transmitting all orders to a 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 dealermaintained brokerage accounts as more fully described under Shareholder Servicing and Transfer Agent in the Statement of Additional Information. These fees are paid by each Fund s transfer agent from payments it receives under its agreement with the Fund

64 FRANKLIN STRATEGIC SERIES Class A Class B Class C Class R Commission (%) Investment under $50, $50,000 but under $100, $100,000 but under $250, $250,000 but under $500, $500,000 but under $1 million 1.60 $1 million or more up to b-1 fee to dealer , 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 each 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. The Aggressive Growth Fund and Small Cap Fund II may each pay up to 0.35% to Distributors or others, out of which 0.10% generally will be retained by Distributors for its distribution expenses. 3. Dealers may be eligible to receive up to 0.25% from the date of purchase. After eight years, Class B shares convert to Class A shares and dealers may then receive the 12b-1 fee applicable to Class A. 4. Commission includes advance of the first year s 0.25% 12b-1 service fee. For purchases at NAV, Distributors may pay a prepaid commission. 5. Dealers may be eligible to receive up to 0.25% at the time of purchase and may be eligible to receive 1% 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. 6. 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 or distribution fees received from the Funds 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, with certain limited exceptions, 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 average net assets of equity (or fixed income) funds attributable to that dealer, on an annual basis. Distributors makes these payments in connection with qualifying dealers efforts to educate financial advisers 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 Funds 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 adviser. Your financial adviser may charge you additional fees or commissions other than those disclosed in this prospectus. You can ask your financial adviser for information about any payments it receives from Distributors and any services it provides, as well as about fees and/or commissions it charges

65 Questions If you have any questions about the Funds or your account, you can write to us at P.O. Box , Sacramento, CA 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. Hours (Pacific time, Department Name Telephone Number Monday through Friday) Shareholder Services 1-800/ :30 a.m. to 5:00 p.m. 6:30 a.m. to 2:30 p.m. (Saturday) Fund Information 1-800/DIAL BEN 5:30 a.m. to 5:00 p.m. (1-800/ ) 6:30 a.m. to 2:30 p.m. (Saturday) Retirement Services 1-800/ :30 a.m. to 5:00 p.m. Advisor Services 1-800/ :30 a.m. to 5:00 p.m. Institutional Services 1-800/ :00 a.m. to 4:00 p.m. TDD (hearing impaired) 1-800/ :30 a.m. to 5:00 p.m. Automated Telephone System 1-800/ (around-the-clock access) 1-800/ / FRANKLIN TEMPLETON INVESTMENTS Literature Request. For a brochure and prospectus, which contains more complete information, including charges, expenses and risks, call Franklin Templeton Investments at 1-800/DIAL BEN (1-800/ ). Please read the prospectus carefully before investing or sending money. To ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service departments. These calls can be identified by the presence of a regular beeping tone. INTERNATIONAL Mutual European Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund GLOBAL Franklin Global Aggressive Growth Fund Franklin Global Growth Fund Mutual Discovery Fund Templeton Capital Accumulator Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II 1 VALUE Franklin Balance Sheet Investment Fund 2 Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund 2 Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund 3 Mutual Shares Fund BLEND Franklin Blue Chip Fund Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund 4 SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Franklin Technology Fund Mutual Financial Services Fund ASSET ALLOCATION Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund Target Funds Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund 5 Franklin s AGE High Income Fund Franklin Federal Money Fund 5, 6 Franklin Floating Rate Daily Access Fund Franklin Floating Rate Trust 3 Franklin Income Fund Franklin Money Fund 5, 6 Franklin Short-Intermediate U.S. Government Securities Fund 5 Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund 5 Templeton Global Bond Fund TAX-FREE INCOME 7 National Funds Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund 8 Tax-Exempt Money Fund 5, 6 Limited-Term Funds California Limited-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Limited-Term Tax-Free Income Fund Intermediate-Term Funds California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund State-Specific 7 Alabama Arizona California 9 Colorado Connecticut Florida 9 Georgia Kentucky Louisiana Maryland Massachusetts 8 Michigan 8 Minnesota 8 Missouri New Jersey New York 9 North Carolina Ohio 8 Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 2. The fund is only open to existing shareholders as well as select retirement plans. 3. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. 4. Upon reaching approximately $350 million in assets, the fund intends to close to all investors. 5. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 6. No assurance exists that the fund s $1.00 per share price will be maintained. It is possible to lose money by investing in the fund. 7. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. 8. Portfolio of insured municipal securities. 9. These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and limited-term, intermediate-term and money market portfolios (CA and NY). 10. The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 96 NOT PART OF THE PROSPECTUS. 02/04

66 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 the 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/ ) or the EDGAR Database on the SEC s Internet site at You can obtain copies of this information, after paying a duplicating fee, by writing to the SEC s Public Reference Section, Washington, DC or by electronic request at the following address: [email protected]. One Franklin Parkway, San Mateo, CA /DIAL BEN (1-800/ ) TDD (Hearing Impaired) 1-800/ franklintempleton.com < GAIN FROM OUR PERSPECTIVE > Investment Company Act file # FSS1 P 09/04 30% Total Recycled Fiber