Franklin Templeton Variable Insurance Products Trust REPORT · 2012-08-29 · 6. The industrials...

JUNE 30 , 2012

Franklin TempletonVariable Insurance Products Trust

SEMIANNUALREPORT

FRANKLIN TEMPLETON VARIABLE INSURANCEPRODUCTS TRUST SEMIANNUAL REPORTTABLE OF CONTENTS

Important Notes to Performance Information . . . . . . . . . . . . . . . . . . . . . . . iFund Summary

Franklin Small Cap Value Securities Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . FSV-1*Prospectus Supplement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FSV-7

Index Descriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1Shareholder Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SI-1

*Not part of the semiannual report

NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE

NATIONALLIFE S 08/12

IMPORTANT NOTES TOPERFORMANCE INFORMATION

Performance data is historical and cannot predict or guarantee futureresults. Principal value and investment return will fluctuate with marketconditions, and you may have a gain or loss when you withdraw yourmoney. Inception dates of the funds may have preceded the effectivedates of the subaccounts, contracts, or their availability in all states.

When reviewing the index comparisons, please keep in mind thatindexes have a number of inherent performance differentials over thefunds. First, unlike the funds, which must hold a minimum amount ofcash to maintain liquidity, indexes do not have a cash component.Second, the funds are actively managed and, thus, are subject tomanagement fees to cover salaries of securities analysts or portfoliomanagers in addition to other expenses. Indexes are unmanaged and donot include any commissions or other expenses typically associatedwith investing in securities. Third, indexes often contain a different mixof securities than the fund to which they are compared. Additionally,please remember that indexes are simply a measure of performance andcannot be invested in directly.

i

FRANKLIN SMALL CAP VALUE SECURITIES FUND

This semiannual report for Franklin Small Cap ValueSecurities Fund covers the period ended June 30, 2012.

Performance Summary as of 6/30/12

Franklin Small Cap Value Securities Fund – Class 2 delivered a+1.37% total return for the six-month period ended 6/30/12.

Performance reflects the Fund’s Class 2 operating expenses, but does notinclude any contract fees, expenses or sales charges. If they had been

included, performance would be lower. These charges and deductions,

particularly for variable life policies, can have a significant effect on contract

values and insurance benefits. See the contract prospectus for a complete

description of these expenses, including sales charges.

Franklin Small Cap ValueSecurities Fund – Class 2

Performance data representpast performance, whichdoes not guarantee futureresults. Investment returnand principal value willfluctuate, and you mayhave a gain or loss whenyou sell your shares.Current performance maydiffer from figures shown.

FSV-1

Fund Goal and Main Investments: Franklin Small Cap Value Securities Fund

seeks long-term total return. Under normal market conditions, the Fund

invests at least 80% of its net assets in investments of small capitalization

companies. For this Fund, small capitalization companies are those with

market capitalizations under $3.5 billion at the time of purchase. The Fund

invests generally in equity securities of companies that the manager believes

are undervalued and have the potential for capital appreciation.

Performance Overview

You can find the Fund’s six-month total return in the PerformanceSummary. The Fund underperformed its benchmark, the Russell 2500

TM

Value Index, which rose 8.15% for the same period.1 Please note theFund employs a bottom-up stock selection process, and the managersinvest in securities without regard to benchmark comparisons.

Economic and Market Overview

The U.S. economy, as measured by gross domestic product, grew mod-estly during the six-month period ended June 30, 2012. In the firstquarter, personal income and spending rose, while federal, state andlocal government spending declined. The national unemployment ratefor June 2012 stood at 8.2%, compared with 8.5% at the start of theperiod.2 Jobless claims touched a four-year low in February amid robustjob creation; however, hiring slowed during the remainder of the periodand jobless claims at period-end reached January’s level. Industrialproduction and manufacturing activity continued to increase, but themanufacturing sector shrank unexpectedly in June. Although gasolineprices hit a peak in early April, they plunged to a five-month low nearperiod-end due to lower crude oil prices. In keeping with its goal tostrengthen U.S. economic recovery by fostering increased employmentwhile keeping inflation in check, during June the Federal Reserve Board(Fed) extended through 2012 its program (dubbed Operation Twist) tobuy long-term Treasuries in an attempt to lower long-term yields. TheFed also reaffirmed its intention to keep the federal funds target ratelow at least through late 2014.

During late March and early April 2012, improved economic reportshelped U.S. stock markets reach multi-year highs. The Dow Jones In-dustrial Average exceeded 13,000 and the Standard & Poor’s® 500

1. Source: © 2012 Morningstar. One cannot invest directly in an index, and an index is notrepresentative of the Fund’s portfolio. Please see Index Descriptions following the FundSummaries.2. Source: Bureau of Labor Statistics.

Fund Risks: All investments in-

volve risks, including possible

loss of principal. Stock prices

fluctuate, sometimes rapidly and

dramatically, due to factors af-

fecting individual companies,

particular industries or sectors,

or general market conditions.

Value securities may not in-

crease in price as anticipated, or

may decline further in value.

Smaller-company stocks have

historically exhibited special

risks, including greater price

volatility, particularly over the

short term. Smaller companies

often have relatively small rev-

enues, limited product lines and

a small market share. Invest-

ments in foreign securities may

involve special risks including

currency fluctuations and eco-

nomic and political uncertainty.

The Fund is actively managed

but there is no guarantee that

the manager’s investment deci-

sions will produce the desired

results. The Fund’s prospectus

also includes a description of the

main investment risks.

FSV-2

Index topped 1,400 for the first time since 2008, while the NASDAQComposite Index hit an 11-year high.3 Global markets grew volatile,however, amid renewed concerns about eurozone debt and slowingglobal economic growth. Fears of a Greek debt default and exit fromthe eurozone were somewhat mitigated by secured bailout financingand bondholder concessions in February, as well as elections in Mayand June that resulted in the formation of a new coalition government.Risk-averse investors seeking safety drove U.S. Treasury yields to histor-ical lows during the period.

At the end of the reporting period, significant challenges to the U.S.economy remained, including weak jobs reports, lack of broad publicand political agreement on how to achieve U.S. deficit reduction, anduncertainty surrounding deeply indebted European countries includingGreece, Italy and Spain. Signs of China’s economic growth slowdownfurther contributed to pessimism. Although long-term resolution ofEuropean debt issues remained unclear, the European Central Bank’slatest plan to allow the European Stability Mechanism to directlyrecapitalize troubled banks throughout the eurozone, as well as a late-June proposal leaning toward fiscal and banking union, supported cau-tious optimism in U.S. and global markets.

Investment Strategy

We are a research-driven, fundamental investment adviser, pursuing adisciplined, value-oriented strategy for the Fund. As a bottom-up adviserconcentrating primarily on individual securities, we focus on the marketprice of a company’s securities relative to our evaluation of the compa-ny’s potential long-term earnings, asset value or cash flow. We seek bar-gains among the “unloved,” out-of-favor companies that offer, in ouropinion, attractive long-term potential. These might include currentgrowth companies that are being ignored by the market, former growthcompanies that have stumbled recently, dropping sharply in price butthat still have significant growth potential, in our opinion, or companiesthat may be potential turnaround candidates or takeover targets.

Manager’s Discussion

During the six months under review, significant contributors to Fundperformance came from positions in the financials sector, includinginsurer Protective Life.4 Several consumer discretionary sector holdingsalso boosted performance, such as footwear manufacturer and marketer

3. Please see Index Descriptions following the Fund Summaries.4. The financials sector comprises banks and insurance in the SOI.

Portfolio BreakdownFranklin Small Cap Value Securities FundBased on Total Net Assets as of 6/30/12

Short-Term Investments & Other Net Assets

Other

Construction & Engineering

Banks

Consumer Services

Commercial & Professional Services

Electrical Equipment

Health Care Equipment & Services

Technology Hardware & Equipment

Consumer Durables & Apparel

Automobiles & Components

Building Products

Materials

Retailing

Energy

Insurance

Machinery14.3%

11.7%

11.5%

8.3%

7.7%

5.6%

5.3%

4.4%

4.0%

3.5%

3.2%

3.1%

2.2%

2.2%

2.2%

8.2%

2.6%

FSV-3

Brown Shoe, and single-family home builders M/I Homes and M.D.C.Holdings.5 Industrials sector holdings also helped performance, notablylumber products manufacturer Universal Forest Products.6

Most market sectors represented in the Fund contributed to perform-ance with the exception of the Fund’s energy and information technol-ogy (IT) holdings.7 Key individual detractors from performanceincluded regional airline company SkyWest, auto components supplierGentex, industrial compressor and blower manufacturer Gardner Den-ver, aircraft-related aftermarket service provider AAR, and railcar manu-facturer and lessor Trinity Industries.

The Fund initiated a position in IT products distributor Ingram Micro,which we considered an attractively valued security. In addition to in-creasing existing positions in AAR and Gentex, we also added to ourpositions in road construction equipment manufacturer Astec In-dustries, medical equipment manufacturer Hill-Rom Holdings, brandedwomen’s apparel manufacturer Maidenform Brands, laser equipmentproducer Rofin-Sinar Technologies and brand marketing consultantSchawk. We liquidated eight positions during the period: AmericanNational Insurance, Casey’s General Stores, D.R. Horton, Mettler-Toledo International, J.C. Penney, PNM Resources, Transatlantic Hold-ings and Tuesday Morning. An additional security, a Mueller Industriescorporate bond, was redeemed via the company’s call option. We alsomade significant reductions to holdings in AptarGroup, Fred’s, NV En-ergy, RLI, Roper Industries and Steel Dynamics, and made smaller re-ductions to eight other positions.

Thank you for your participation in Franklin Small Cap Value SecuritiesFund. We look forward to serving your future investment needs.

5. The consumer discretionary sector comprises automobiles and components, consumer durablesand apparel, consumer services and retailing in the SOI.6. The industrials sector comprises aerospace and defense, building products, commercial andprofessional services, construction and engineering, electrical equipment, industrial conglomerates,machinery, trading companies and distributors, and transportation in the SOI.7. The information technology sector comprises semiconductors and semiconductor equipment,and technology hardware and equipment in the SOI.

The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30,2012, the end of the reporting period. The way we implement our main investment strategiesand the resulting portfolio holdings may change depending on factors such as market andeconomic conditions. These opinions may not be relied upon as investment advice or an offerfor a particular security. The information is not a complete analysis of every aspect of anymarket, country, industry, security or the Fund. Statements of fact are from sources consid-ered reliable, but the investment manager makes no representation or warranty as to theircompleteness or accuracy. Although historical performance is no guarantee of future results,these insights may help you understand our investment management philosophy.

Top 10 HoldingsFranklin Small Cap ValueSecurities Fund6/30/12

CompanySector/Industry

% of TotalNet Assets

Protective Life Corp. 2.7%Insurance

Thor Industries Inc. 1.8%Automobiles & Components

Group 1 Automotive Inc. 1.8%Retailing

Universal Forest Products Inc. 1.8%Building Products

Reliance Steel & Aluminum Co. 1.8%Materials

Rowan Cos. PLC 1.6%Energy

Tidewater Inc. 1.6%Energy

RPM International Inc. 1.6%Materials

Bristow Group Inc. 1.6%Energy

Granite Construction Inc. 1.6%Construction & Engineering

The dollar value, number of shares orprincipal amount, and names of allportfolio holdings are listed in theFund’s Statement of Investments (SOI).

FSV-4

Fund Expenses

As an investor in a variable insurance contract (Contract) that indirectlyprovides for investment in an underlying mutual fund, you can incurtransaction and/or ongoing expenses at both the Fund level and theContract level.

• Transaction expenses can include sales charges (loads) on purchases,surrender fees, transfer fees and premium taxes.

• Ongoing expenses can include management fees, distribution andservice (12b-1) fees, contract fees, annual maintenance fees, mortalityand expense risk fees and other fees and expenses. All mutual fundsand Contracts have some types of ongoing expenses.

The expenses shown in the table are meant to highlight ongoing expenses atthe Fund level only and do not include ongoing expenses at the Contract level,or transaction expenses at either the Fund or Contract levels. While the Funddoes not have transaction expenses, if the transaction and ongoing expensesat the Contract level were included, the expenses shown below would be high-er. You should consult your Contract prospectus or disclosure document formore information.

The table shows Fund-level ongoing expenses and can help you under-stand these expenses and compare them with those of other mutualfunds offered through the Contract. The table assumes a $1,000investment held for the six months indicated. Please refer to the Fundprospectus for additional information on operating expenses.

Actual Fund Expenses

The first line (Actual) of the table provides actual account values andexpenses. The “Ending Account Value” is derived from the Fund’s ac-tual return, which includes the effect of ongoing Fund expenses, butdoes not include the effect of ongoing Contract expenses.

You can estimate the Fund-level expenses you incurred during theperiod by following these steps. Of course, your account value and ex-penses will differ from those in this illustration:

1. Divide your account value by $1,000.If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.

2. Multiply the result by the number under the heading “Fund-LevelExpenses Incurred During Period.”If Fund-Level Expenses Incurred During Period were $7.50, then8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses incurred this period at theFund level are $64.50.

Franklin Small Cap ValueSecurities Fund – Class 2

FSV-5

Hypothetical Example for Comparison with Other MutualFunds

Information in the second line (Hypothetical) of the table can help youcompare ongoing expenses of the Fund with those of other mutualfunds offered through the Contract. This information may not be usedto estimate the actual ending account balance or expenses you incurredduring the period. The hypothetical “Ending Account Value” is basedon the Fund’s actual expense ratio and an assumed 5% annual rate ofreturn before expenses, which does not represent the Fund’s actual re-turn. The figure under the heading “Fund-Level Expenses IncurredDuring Period” shows the hypothetical expenses your account wouldhave incurred under this scenario. You can compare this figure with the5% hypothetical examples that appear in shareholder reports of otherfunds offered through a Contract.

Class 2

BeginningAccount

Value 1/1/12

EndingAccount

Value 6/30/12

Fund-LevelExpenses Incurred

During Period*1/1/12–6/30/12

Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000 $1,013.70 $4.61Hypothetical (5% return before

expenses) . . . . . . . . . . . . . . . . . . . . . . . . $1,000 $1,020.29 $4.62

*Expenses are calculated using the most recent six-month annualized expense ratio forthe Fund’s Class 2 shares (0.92%), which does not include any ongoing expenses of theContract for which the Fund is an investment option, multiplied by the average accountvalue over the period, multiplied by 182/366 to reflect the one-half year period.

FSV-6

SUPPLEMENT DATED JULY 2, 2012TO THE PROSPECTUSES

DATED MAY 1, 2012 OF

FRANKLIN SMALL CAP VALUE SECURITIES FUND

(A series of Franklin Templeton Variable Insurance Products Trust)

The Prospectus is amended as follows:

I. The portfolio management team under the “Fund Summary — Portfolio Managers” sectionon page FSV-S4 is revised as follows:

PORTFOLIO MANAGERS

William J. Lippman President of Advisory Services and portfolio manager of the Fund since

inception (1998).

Steven B. Raineri Portfolio Manager of Advisory Services and portfolio manager of the Fund

since July 2012.

Bruce C. Baughman, CPA Senior Vice President of Advisory Services and portfolio manager of

the Fund since inception (1998).

Margaret McGee Vice President of Advisory Services and portfolio manager of the Fund since

inception (1998).

Donald G. Taylor, CPA Senior Vice President of Advisory Services and portfolio manager of the

Fund since inception (1998).

II. The portfolio management team under the “Fund Details — Management” sectionbeginning on page FSV-D5 is revised as follows:

William LippmanPRESIDENT OFADVISORY SERVICES

Mr. Lippman has been the lead portfolio manager of the Fund since itsinception and became a co-lead in 2007. He joined Franklin TempletonInvestments in 1988.

Steven B. RaineriPORTFOLIO MANAGEROF ADVISORYSERVICES

Mr. Raineri has been a co-lead portfolio manager of the Fund since July2012. He joined Franklin Templeton Investments in 2005.

Bruce BaughmanSENIOR VICEPRESIDENT OFADVISORY SERVICES

Mr. Baughman has been a portfolio manager of the Fund since its inception.He joined Franklin Templeton Investments in 1988.

FSV-7

Margaret McGeeVICE PRESIDENT OFADVISORY SERVICES

Ms. McGee has been a portfolio manager of the Fund since its inception.She joined Franklin Templeton Investments in 1988.

Donald G. Taylor, CPASENIOR VICEPRESIDENT OFADVISORY SERVICES

Mr. Taylor has been a portfolio manager of the Fund since its inception. Hejoined Franklin Templeton Investments in 1996.

Please keep this supplement for future reference.

FSV-8

Franklin Templeton Variable Insurance Products Trust

Financial Highlights

Franklin Small Cap Value Securities Fund

Six MonthsEnded

June 30, 2012(unaudited)

Year Ended December 31,

Class 1 2011 2010 2009 2008 2007

Per share operating performance(for a share outstanding throughout the period)

Net asset value, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15.82 $ 16.55 $ 13.00 $ 10.73 $ 17.38 $ 19.07

Income from investment operationsa:Net investment incomeb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.14 0.16 0.14 0.15 0.24 0.22Net realized and unrealized gains (losses) . . . . . . . . . . . . . . . . . . . . . 0.10 (0.74) 3.54 2.86 (5.44) (0.44)

Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.24 (0.58) 3.68 3.01 (5.20) (0.22)

Less distributions from:Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.17) (0.15) (0.13) (0.22) (0.23) (0.17)Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (0.52) (1.22) (1.30)

Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.17) (0.15) (0.13) (0.74) (1.45) (1.47)

Net asset value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15.89 $ 15.82 $ 16.55 $ 13.00 $ 10.73 $ 17.38

Total returnc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.56% (3.53)% 28.49% 29.54% (32.87)% (2.14)%

Ratios to average net assetsd

Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.67% 0.66% 0.67% 0.68%e 0.67%e 0.64%e

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.63% 1.02% 0.98% 1.29% 1.62% 1.13%

Supplemental dataNet assets, end of period (000’s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,775 $ 39,374 $ 47,300 $ 42,428 $ 34,901 $ 57,045Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.88% 14.39% 15.92% 6.68% 16.98% 16.27%

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of salesand repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.bBased on average daily shares outstanding.cTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton VariableInsurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.dRatios are annualized for periods less than one year.eBenefit of expense reduction rounds to less than 0.01%.

The accompanying notes are an integral part of these financial statements. FSV-9


Financial Highlights (continued)


Six MonthsEnded



Class 2 2011 2010 2009 2008 2007

Per share operating performance(for a share outstanding throughout the period)

Net asset value, beginning of period . . . . . . . . . . . . . . . . . . . . $ 15.53 $ 16.25 $ 12.77 $ 10.55 $ 17.10 $ 18.79

Income from investment operationsa:Net investment incomeb . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.11 0.12 0.10 0.12 0.20 0.17Net realized and unrealized gains (losses) . . . . . . . . . . . . . . 0.10 (0.73) 3.48 2.81 (5.35) (0.43)

Total from investment operations . . . . . . . . . . . . . . . . . . . . . . 0.21 (0.61) 3.58 2.93 (5.15) (0.26)

Less distributions from:Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.13) (0.11) (0.10) (0.19) (0.18) (0.13)Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (0.52) (1.22) (1.30)

Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.13) (0.11) (0.10) (0.71) (1.40) (1.43)

Net asset value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 15.61 $ 15.53 $ 16.25 $ 12.77 $ 10.55 $ 17.10

Total returnc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.37% (3.76)% 28.22% 29.16% (33.02)% (2.38)%

Ratios to average net assetsd

Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.92% 0.91% 0.92% 0.93%e 0.92%e 0.89%e

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.38% 0.77% 0.73% 1.04% 1.37% 0.88%

Supplemental dataNet assets, end of period (000’s) . . . . . . . . . . . . . . . . . . . . . . . $1,183,480 $1,211,168 $1,362,292 $1,109,855 $ 784,773 $1,177,367Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.88% 14.39% 15.92% 6.68% 16.98% 16.27%

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of salesand repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.bBased on average daily shares outstanding.cTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton VariableInsurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.dRatios are annualized for periods less than one year.eBenefit of expense reduction rounds to less than 0.01%.

The accompanying notes are an integral part of these financial statements.FSV-10


Financial Highlights (continued)


Six MonthsEnded



Class 4 2011 2010 2009 2008a

Per share operating performance(for a share outstanding throughout the period)Net asset value, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15.71 $ 16.44 $ 12.92 $ 10.70 $ 16.42

Income from investment operationsb:Net investment incomec . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.11 0.11 0.09 0.11 0.15Net realized and unrealized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.10 (0.75) 3.53 2.84 (4.42)

Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.21 (0.64) 3.62 2.95 (4.27)

Less distributions from:Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.12) (0.09) (0.10) (0.21) (0.23)Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (0.52) (1.22)

Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.12) (0.09) (0.10) (0.73) (1.45)

Net asset value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15.80 $ 15.71 $ 16.44 $ 12.92 $ 10.70

Total returnd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.34% (3.87)% 28.14% 29.04% (29.14)%

Ratios to average net assetse

Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.02% 1.01% 1.02% 1.03%f 1.02%f

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.28% 0.67% 0.63% 0.94% 1.27%

Supplemental dataNet assets, end of period (000’s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,025 $ 34,284 $ 39,075 $ 28,599 $ 14,850Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.88% 14.39% 15.92% 6.68% 16.98%

aFor the period February 29, 2008 (effective date) to December 31, 2008.bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of salesand repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.cBased on average daily shares outstanding.dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton VariableInsurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.eRatios are annualized for periods less than one year.fBenefit of expense reduction rounds to less than 0.01%.


Franklin Templeton Variable Insurance Products TrustStatement of Investments, June 30, 2012 (unaudited)

Franklin Small Cap Value Securities Fund Shares Value

Common Stocks 97.4%Aerospace & Defense 1.9%AAR Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,017,000 $ 13,709,160Ceradyne Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397,500 10,195,875

23,905,035

Automobiles & Components 5.3%Autoliv Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326,800 17,862,888

aDrew Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251,400 7,001,490Gentex Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 725,000 15,130,750Thor Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 820,000 22,476,200

aWinnebago Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423,100 4,311,389

66,782,717

Banks 2.2%Chemical Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360,854 7,758,361Oriental Financial Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602,000 6,670,160Peoples Bancorp Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,000 3,472,840TrustCo Bank Corp. NY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,690,000 9,227,400

27,128,761

Building Products 5.6%A.O. Smith Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,700 6,194,363

aAmerican Woodmark Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431,300 7,375,230Apogee Enterprises Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 778,100 12,504,067

aGibraltar Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900,100 9,343,038Simpson Manufacturing Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433,400 12,789,634Universal Forest Products Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 566,000 22,062,680

70,269,012

Commercial & Professional Services 3.1%ABM Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 633,200 12,385,392Insperity Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296,100 8,009,505Mine Safety Appliances Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328,300 13,210,792Schawk Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440,800 5,598,160

39,203,849

Construction & Engineering 2.2%EMCOR Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272,700 7,586,514Granite Construction Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747,000 19,504,170

27,090,684

Consumer Durables & Apparel 4.4%Brunswick Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000 11,110,000Ethan Allen Interiors Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159,000 3,168,870Hooker Furniture Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 509,700 6,009,363

aLa-Z-Boy Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,089,000 13,383,810M.D.C. Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213,800 6,984,846

aM/I Homes Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 435,900 7,549,788aMaidenform Brands Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347,600 6,924,192

55,130,869

Consumer Services 2.2%Hillenbrand Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539,000 9,906,820Regis Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 992,000 17,816,320

27,723,140

FSV-12

Franklin Templeton Variable Insurance Products TrustStatement of Investments, June 30, 2012 (unaudited) (continued)


Common Stocks (continued)Electrical Equipment 3.2%Brady Corp., A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453,000 $ 12,462,030

aEnerSys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,100 845,187Franklin Electric Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199,232 10,186,732

aGeneral Cable Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,500 2,684,790aPowell Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,500 8,237,880Roper Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000 5,619,060

40,035,679

Energy 11.5%Arch Coal Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,500 768,235

aAtwood Oceanics Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405,400 15,340,336Bristow Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480,000 19,521,600CONSOL Energy Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,500 2,071,440Energen Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219,000 9,883,470

aHelix Energy Solutions Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 819,500 13,447,995aOil States International Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255,200 16,894,240bOverseas Shipholding Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371,000 4,121,810Peabody Energy Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,200 2,530,464

aRowan Cos. PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 638,100 20,629,773Teekay Corp. (Canada) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226,831 6,641,612Tidewater Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443,700 20,569,932

aUnit Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333,900 12,317,571

144,738,478

Food, Beverage & Tobacco 1.1%Lancaster Colony Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194,800 13,871,708

Health Care Equipment & Services 3.5%Hill-Rom Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306,000 9,440,100STERIS Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382,500 11,999,025Teleflex Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227,900 13,881,389West Pharmaceutical Services Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,500 7,952,175

43,272,689

Industrial Conglomerates 1.5%Carlisle Cos. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353,400 18,737,268

Insurance 11.7%Arthur J. Gallagher & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,200 5,898,774Aspen Insurance Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550,100 15,897,890The Hanover Insurance Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372,200 14,564,186HCC Insurance Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188,200 5,909,480Montpelier Re Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 649,000 13,817,210Old Republic International Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,401,500 11,618,435Protective Life Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,135,000 33,380,350RLI Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000 3,069,000StanCorp Financial Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401,000 14,901,160Tower Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000 14,609,000Validus Holdings Ltd. (Bermuda) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422,700 13,539,081

147,204,566

Machinery 14.3%aAstec Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359,100 11,017,188Briggs & Stratton Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 588,900 10,299,861CIRCOR International Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,102 4,162,457

FSV-13



Common Stocks (continued)Machinery (continued)

aEnPro Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402,000 $ 15,022,740Gardner Denver Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238,800 12,634,908Graco Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,900 9,902,592Kaydon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399,000 8,534,610Kennametal Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397,300 13,170,495Lincoln Electric Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 419,000 18,348,010Mueller Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409,000 17,419,310Nordson Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209,800 10,760,642Pentair Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,800 8,222,544Timken Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,200 3,672,358Trinity Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 764,400 19,094,712

aWabash National Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,350,000 8,937,000Watts Water Technologies Inc., A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257,200 8,575,048

179,774,475

Materials 7.7%A. Schulman Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459,000 9,111,150AptarGroup Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000 3,573,500Cabot Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324,100 13,190,870Commercial Metals Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389,000 4,916,960H.B. Fuller Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,100 6,204,470Reliance Steel & Aluminum Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436,000 22,018,000RPM International Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 753,600 20,497,920Sensient Technologies Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,300 7,173,369Steel Dynamics Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850,000 9,987,500

96,673,739

Retailing 8.3%Brown Shoe Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 982,000 12,677,620The Cato Corp., A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460,000 14,011,600Christopher & Banks Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,183,304 1,396,299Fred’s Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 4,587,000

bGameStop Corp., A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 690,000 12,668,400Group 1 Automotive Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 485,900 22,161,899The Men’s Wearhouse Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 526,317 14,810,560Pier 1 Imports Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 581,000 9,545,830

a,bSaks Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 532,548 5,671,636aWest Marine Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 610,700 7,175,725

104,706,569

Semiconductors & Semiconductor Equipment 0.7%Cohu Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 826,500 8,397,240

Technology Hardware & Equipment 4.0%aBenchmark Electronics Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,271,000 17,730,450aIngram Micro Inc., A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000 12,229,000aMulti-Fineline Electronix Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274,100 6,753,824aRofin-Sinar Technologies Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 705,000 13,345,650

50,058,924

Trading Companies & Distributors 0.5%Applied Industrial Technologies Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178,700 6,585,095

Transportation 1.6%aGenesee & Wyoming Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,300 13,754,252SkyWest Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 990,000 6,464,700

20,218,952

FSV-14



Common Stocks (continued)Utilities 0.9%NV Energy Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 630,000 $ 11,075,400

Total Common Stocks (Cost $1,031,433,152) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,222,584,849

Short Term Investments 3.9%Money Market Funds (Cost $29,543,419) 2.3%

a,cInstitutional Fiduciary Trust Money Market Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,543,419 29,543,419

PrincipalAmount

dInvestments from Cash Collateral Received for Loaned Securities 1.6%eRepurchase Agreements 1.6%BNP Paribas Securities Corp., 0.16%, 7/02/12 (Maturity Value $4,702,089) Collateralized by fU.S. Government Agency

Discount Notes, 7/18/12 - 12/26/12; U.S Government Agency Securities, 0.125% - 10.35%, 7/03/12 - 8/06/38;and U.S. Government Agency Strips, zero cpn., 5/15/22 (valued at $4,796,075) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,702,026 4,702,026

Credit Suisse Securities (USA) LLC, 0.15%, 7/02/12 (Maturity Value $989,910) Collateralized by U.S. Treasury Notes,0.625% - 2.00%, 4/15/14 - 7/15/21 (valued at $1,009,698) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 989,898 989,898

Deutsche Bank Securities Inc., 0.15%, 7/02/12 (Maturity Value $4,702,085) Collateralized by U.S. Government AgencySecurities, zero cpn. - 5.27%, 8/28/12 - 11/02/40 (valued at $4,796,074) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,702,026 4,702,026

HSBC Securities (USA) Inc., 0.16%, 7/02/12 (Maturity Value $4,702,089) Collateralized by U.S. Government AgencySecurities, zero cpn. - 0.40%, 5/22/14 - 3/17/31; U.S. Government Agency Strips, zero cpn., 10/15/12 - 4/15/30(valued at $4,796,116) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,702,026 4,702,026

Merrill Lynch, Pierce, Fenner & Smith Inc., 0.14%, 7/02/12 (Maturity Value $4,702,081) Collateralized by U.S. TreasuryBonds, 4.25% - 4.50%, 2/15/36 - 11/15/40; and U.S. Treasury Notes, 0.125% - 2.00%, 4/15/15 - 1/15/22(valued at $4,805,924) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,702,026 4,702,026

Total Repurchase Agreements (Cost $19,798,002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,798,002

Total Investments (Cost $1,080,774,573) 101.3% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,271,926,270

Other Assets, less Liabilities (1.3)% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,646,490)

Net Assets 100.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,255,279,780

aNon-income producing.bA portion or all of the security is on loan at June 30, 2012. See Note 1(c).cSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio.dSee Note 1(c) regarding securities on loan.eSee Note 1(b) regarding repurchase agreements.fThe security is traded on a discount basis with no stated coupon rate.

FSV-15


Financial Statements

Statement of Assets and LiabilitiesJune 30, 2012 (unaudited)

Franklin Small CapValue Securities

Fund

Assets:Investments in securities:

Cost - Unaffiliated issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,031,433,152Cost - Sweep Money Fund (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,543,419Cost - Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,798,002

Total cost of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,080,774,573

Value - Unaffiliated issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,222,584,849Value - Sweep Money Fund (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,543,419Value - Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,798,002

Total value of investments (includes securities loaned in the amount of $19,975,247) . . . . . . . . . . . . . . . . . . . . . . . . . 1,271,926,270Receivables:

Investment securities sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,971,220Capital shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321,136Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 886,056

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,279,105,009

Liabilities:Payables:

Investment securities purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379,443Capital shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,150,625Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,149,201

Payable upon return of securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,798,002Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347,958

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,825,229

Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,255,279,780

Net assets consist of:Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,041,515,093Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,258,289Net unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,151,697Accumulated net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,354,701

Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,255,279,780



Financial Statements (continued)

Statement of Assets and Liabilities (continued)June 30, 2012 (unaudited)


Fund

Class 1:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,774,802

Shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,377,430

Net asset value and maximum offering price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15.89

Class 2:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,183,479,775



Class 4:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,025,203






Statement of Operationsfor the six months ended June 30, 2012 (unaudited)


Fund

Investment income:Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,909,998Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,808Income from securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360,530

Total investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,315,336

Expenses:Management fees (Note 3a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,372,664Administrative fees (Note 3b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 785,321Distribution fees: (Note 3c)

Class 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,569,151Class 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,311

Unaffiliated transfer agent fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,893Custodian fees (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,371Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218,962Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,287Trustees’ fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,671Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,369

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,066,000

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,249,336

Realized and unrealized gains (losses):Net realized gain (loss) from investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,216,798Net change in unrealized appreciation (depreciation) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,833,755)

Net realized and unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,383,043

Net increase (decrease) in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,632,379




Statements of Changes in Net Assets

Franklin Small Cap ValueSecurities Fund

Six MonthsEnded


YearEnded

December 31,2011

Increase (decrease) in net assets:Operations:

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,249,336 $ 10,424,838Net realized gain (loss) from investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,216,798 79,690,343Net change in unrealized appreciation (depreciation) on investments . . . . . . . . . . . . . . . . . . . . . . . . . (20,833,755) (139,845,262)

Net increase (decrease) in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,632,379 (49,730,081)

Distributions to shareholders from:Net investment income:

Class 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (407,505) (392,860)Class 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,757,412) (8,773,166)Class 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (256,129) (201,936)

Total distributions to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,421,046) (9,367,962)

Capital share transactions: (Note 2)Class 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,899,795) (5,885,116)Class 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37,441,162) (95,600,673)Class 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (416,807) (3,256,590)

Total capital share transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39,757,764) (104,742,379)

Net increase (decrease) in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29,546,431) (163,840,422)Net assets:

Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,284,826,211 1,448,666,633

End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,255,279,780 $1,284,826,211

Undistributed net investment income included in net assets:End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,258,289 $ 10,429,999



Notes to Financial Statements (unaudited)


1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, asamended, (1940 Act) as an open-end investment company, consisting of twenty separate funds. The Franklin Small Cap ValueSecurities Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presentedseparately. Shares of the Fund are generally sold only to insurance company separate accounts to fund the benefits of variable lifeinsurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2 and Class 4. Each classof shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received tosell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Underprocedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator, investment manager and otheraffiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration andoversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, theseprocedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers,and other market sources to determine fair value.

Equity securities listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or theofficial closing price of the day, respectively. Over-the-counter securities are valued within the range of the most recent quotedbid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest andmost representative market. Certain equity securities are valued based upon fundamental characteristics or relationships tosimilar securities. Investments in open-end mutual funds are valued at the closing net asset value. Repurchase agreements arevalued at cost, which approximates market value.

The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readilyavailable. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers anumber of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employsa market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, bookvalues, and other relevant information for the investment to determine the fair value of the investment. An income-basedvaluation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fairvalue. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Dueto the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that wouldhave been used had an active market existed. The VLOC employs various methods for calibrating these valuation approachesincluding a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of anyrelated market activity.

b. Repurchase Agreements

The Fund enters into repurchase agreements, which are accounted for as a loan by the fund to the seller, collateralized bysecurities which are delivered to the fund’s custodian. The market value, including accrued interest, of the initial collateralizationis required to be at least 102% of the dollar amount invested by the fund, with the value of the underlying securities marked tomarket daily to maintain coverage of at least 100%. All repurchase agreements held by the Fund at period end had been enteredinto on June 29, 2012.

c. Securities Lending

The Fund participates in a principal based securities lending program. The fund receives cash collateral against the loanedsecurities in an amount equal to at least 102% of the market value of the loaned securities. Collateral is maintained over the life

FSV-20


Notes to Financial Statements (unaudited) (continued)


1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

c. Securities Lending (continued)

of the loan in an amount not less than 100% of the market value of loaned securities, as determined at the close of fund businesseach day; any additional collateral required due to changes in security values is delivered to the fund on the next businessday. The collateral is invested in repurchase agreements as indicated on the Statement of Investments. The fund receives incomefrom the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The fund bears the marketrisk with respect to the collateral investment, securities loaned, and the risk that the principal may default on its obligations tothe fund.

d. Income Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends todistribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and ifapplicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustainedupon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2012, and for all opentax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statementsrelated to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are thosethat remain subject to examination and are based on each tax jurisdiction statute of limitation.

e. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on aspecific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on theex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to incometax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance withaccounting principles generally accepted in the United States of America. These differences may be permanent or temporary.Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impacton net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to thecombined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily toeach class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class,are generally due to differences in class specific expenses.

f. Accounting Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States ofAmerica requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differfrom those estimates.

g. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arisingout of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the

FSV-21




1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

g. Guarantees and Indemnifications (continued)

Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposureunder these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yetoccurred. Currently, the Trust expects the risk of loss to be remote.

2. SHARES OF BENEFICIAL INTEREST

At June 30, 2012, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shareswere as follows:

Six Months EndedJune 30, 2012

Year EndedDecember 31, 2011

Class 1 Shares: Shares Amount Shares Amount

Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,830 $ 1,158,423 385,043 $ 6,445,781Shares issued in reinvestment of distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,308 407,505 24,646 392,860Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (205,972) (3,465,723) (778,610) (12,723,757)

Net increase (decrease) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (110,834) $ (1,899,795) (368,921) $ (5,885,116)

Class 2 Shares:Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,290,373 $ 86,796,323 12,352,861 $ 192,000,345Shares issued in reinvestment of distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 641,091 9,757,412 559,870 8,773,166Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,127,115) (133,994,897) (18,752,469) (296,374,184)

Net increase (decrease) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,195,651) $ (37,441,162) (5,839,738) $ (95,600,673)

Class 4 Shares:Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341,712 $ 5,813,731 385,949 $ 6,104,316Shares issued on reinvestment of distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,621 256,129 12,732 201,936Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (387,526) (6,486,667) (593,170) (9,562,842)

Net increase (decrease) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29,193) $ (416,807) (194,489) $ (3,256,590)

3. TRANSACTIONS WITH AFFILIATES

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin TempletonInvestments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:

Subsidiary Affiliation

Franklin Advisory Services, LLC (Advisory Services) Investment managerFranklin Templeton Services, LLC (FT Services) Administrative managerFranklin Templeton Distributors, Inc. (Distributors) Principal underwriterFranklin Templeton Investor Services, LLC (Investor Services) Transfer agent

a. Management Fees

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

Annualized Fee Rate Net Assets

0.600% Up to and including $200 million0.500% Over $200 million, up to and including $1.3 billion0.400% In excess of $1.3 billion

FSV-22




3. TRANSACTIONS WITH AFFILIATES (continued)

b. Administrative Fees

The Fund pays an administrative fee to FT Services based on the Fund’s average daily net assets as follows:

Annualized Fee Rate Net Assets

0.150% Up to and including $200 million0.135% Over $200 million, up to and including $700 million0.100% Over $700 million, up to and including $1.2 billion0.075% In excess of $1.2 billion

c. Distribution Fees

The Board has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under theFund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale anddistribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. The Board has agreed to limitthe current rate to 0.25% per year for Class 2.

d. Transfer Agent Fees

Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for theservices.

4. EXPENSE OFFSET ARRANGEMENT

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances areused to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2012, there were no creditsearned.

5. INCOME TAXES

For tax purposes, capital losses may be carried over to offset future capital gains, if any. Capital loss carryforwards with noexpiration, if any, must be fully utilized before those losses with expiration dates.

At December 31, 2011, the Fund had capital loss carryforwards of $18,771,926 expiring in 2018.

At June 30, 2012, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were asfollows:

Cost of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,080,864,744

Unrealized appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 318,050,369Unrealized depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (126,988,843)

Net unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . $ 191,061,526

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differingtreatments of bond discounts and premiums and wash sales.

FSV-23




6. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2012, aggregated $37,060,769and $68,404,240, respectively.

7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO

The Fund invests in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investmentcompany managed by Franklin Advisers, Inc. (an affiliate of the investment manager). Management fees paid by the Fund arereduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paidby the Sweep Money Fund.

8. CREDIT FACILITY

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by FranklinTempleton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global CreditFacility) which matures on January 18, 2013. This Global Credit Facility provides a source of funds to the Borrowers fortemporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by theFund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementationand maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers,including an annual commitment fee of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected inother expenses on the Statement of Operations. During the period ended June 30, 2012, the Fund did not use the Global CreditFacility.

9. FAIR VALUE MEASUREMENTS

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observableinputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of theFund’s financial instruments and are summarized in the following fair value hierarchy:

• Level 1 – quoted prices in active markets for identical financial instruments• Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates,

prepayment speed, credit risk, etc.)• Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of

financial instruments)

The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing inthose financial instruments.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers asof the date of the underlying event which caused the movement.

FSV-24




9. FAIR VALUE MEASUREMENTS (continued)

A summary of inputs used as of June 30, 2012, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:

Level 1 Level 2 Level 3 Total

Assets:Investments in Securities:

Equity Investmentsa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,222,584,849 $ — $ — $1,222,584,849Short Term Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,543,419 19,798,002 — 49,341,421

Total Investments in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,252,128,268 $19,798,002 $ — $1,271,926,270

aFor detailed categories, see the accompanying Statement of Investments.

10. NEW ACCOUNTING PRONOUNCEMENTS

In December 2011, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2011-11, BalanceSheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in the ASU enhance disclosures aboutoffsetting of financial assets and liabilities to enable investors to understand the effect of these arrangements on a fund’s financialposition. The ASU is effective for interim and annual reporting periods beginning on or after January 1, 2013. The Fund believesthe adoption of this ASU will not have a material impact on its financial statements.

11. SUBSEQUENT EVENTS

The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events haveoccurred that require disclosure.

FSV-25

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INDEX DESCRIPTIONS

The indexes are unmanaged and include reinvested distributions.

For indexes sourced by Morningstar: © 2012 Morningstar. All Rights Reserved. The information contained herein: (1) isproprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to beaccurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arisingfrom any use of this information.

Russell® is a trademark and Russell™ is a servicemark of the Frank Russell Company.

Barclays U.S. Aggregate Index is a market capitalization-weighted index representing the U.S. investment-grade, fixed-rate,taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities.All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to finalmaturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) using the middle rating of Moody’s, Standard & Poor’sand Fitch, respectively.

Barclays U.S. Government Index: Intermediate Component is the intermediate component of the Barclays U.S. GovernmentIndex, which includes public obligations of the U.S. Treasury with at least one year to final maturity and publicly issued debt ofU.S. government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government.

Citigroup World Government Bond Index is a market capitalization-weighted index consisting of investment-grade worldgovernment bond markets.

Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics, is a commonly used measure of the inflationrate.

Credit Suisse (CS) High Yield Index is designed to mirror the investable universe of the U.S. dollar-denominated high yielddebt market.

Dow Jones Industrial Average is a price-weighted average of blue-chip stocks that are generally the leaders in their industry.

FTSE EPRA/NAREIT Developed Index is a free float-adjusted index designed to measure the performance of publicly tradedreal estate securities in the North American, European and Asian real estate markets. FTSE® is a trademark of London StockExchange Plc and The Financial Times Limited and is used by FTSE under license.

J.P. Morgan (JPM) Global Government Bond Index (GGBI) tracks total returns for liquid, fixed-rate, domestic governmentbonds with maturities greater than one year issued by developed countries globally.

Lipper Multi-Sector Income Funds Classification Average is calculated by averaging the total returns of all funds within theLipper Multi-Sector Income Funds classification in the Lipper Open-End underlying funds universe. Lipper Multi-Sector IncomeFunds are defined as funds that seek current income by allocating assets among different fixed income securities sectors (notprimarily in one sector except for defensive purposes), including U.S. and foreign governments, with a significant portion ratedbelow investment grade. For the six-month period ended 6/30/12, there were 231 funds in this category. Lipper calculations donot include contract fees, expenses or sales charges, and may have been different if such charges had been considered.

Lipper VIP Equity Income Funds Classification Average is an equally weighted average calculation of performance figures forall funds within the Lipper Equity Income Funds classification in the Lipper VIP underlying funds universe. Lipper EquityIncome Funds seek relatively high current income and growth of income through investing 60% or more of their portfolios inequities. For the six-month period ended 6/30/12, there were 64 funds in this category. Lipper calculations do not includecontract fees, expenses or sales charges, and may have been different if such charges had been considered.

Lipper VIP General U.S. Government Funds Classification Average is an equally weighted average calculation of performancefigures for all funds within the Lipper General U.S. Government Funds classification in the Lipper VIP underlying funds universe.Lipper General U.S. Government Funds invest primarily in U.S. government and agency issues. For the six-month period ended6/30/12, there were 84 funds in this category. Lipper calculations do not include contract fees, expenses or sales charges, and mayhave been different if such charges had been considered.

Lipper VIP High Current Yield Funds Classification Average is an equally weighted average calculation of performancefigures for all funds within the Lipper High Current Yield Funds Classification in the Lipper VIP underlying funds universe.Lipper High Current Yield Funds aim at high (relative) current yield from fixed income securities, have no quality or maturityrestrictions, and tend to invest in lower grade debt issues. For the six-month period ended 6/30/12, there were 123 funds in this

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category. Lipper calculations do not include contract fees, expenses or sales charges, and may have been different if such chargeshad been considered.

MSCI All Country (AC) World Index is a free float-adjusted, market capitalization-weighted index designed to measure equitymarket performance in global developed and emerging markets.

MSCI Emerging Markets (EM) Index is a free float-adjusted, market capitalization-weighted index designed to measure equitymarket performance in global emerging markets.

MSCI Europe, Australasia, Far East (EAFE) Index is a free float-adjusted, market capitalization-weighted index designed tomeasure equity market performance in global developed markets excluding the U.S. and Canada.

MSCI Europe, Australasia, Far East (EAFE) Index Net Return (Local Currency) is a free float-adjusted, marketcapitalization-weighted index designed to measure equity market performance of global developed markets excluding the U.S.and Canada. The index is calculated in local currency and includes reinvested daily net dividends.

MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity marketperformance in global developed markets.

NASDAQ Composite Index is a broad-based, market capitalization-weighted index designed to measure all NASDAQ domesticand international based common type stocks listed on The NASDAQ Stock Market.

Russell 1000® Growth Index is market capitalization weighted and measures performance of those Russell 1000® Indexcompanies with higher price-to-book ratios and higher forecasted growth values.

Russell 1000® Index is market capitalization weighted and measures performance of the largest companies in the Russell 3000®

Index, which represents the majority of the U.S. market’s total capitalization.

Russell 1000® Value Index is market capitalization weighted and measures performance of those Russell 1000® Indexcompanies with lower price-to-book ratios and lower forecasted growth values.

Russell 2500™ Index is market capitalization weighted and measures performance of the smallest companies in the Russell3000® Index, which represent a modest amount of the Russell 3000® Index’s total market capitalization.

Russell 2500™ Value Index is market capitalization weighted and measures performance of those Russell 2500™ Indexcompanies with lower price-to-book ratios and lower forecasted growth values.

Russell 3000® Growth Index is market capitalization weighted and measures performance of those Russell 3000® Indexcompanies with higher price-to-book ratios and higher forecasted growth values.

Russell 3000® Index is market capitalization weighted and measures performance of the largest U.S. companies based on totalmarket capitalization and represents the majority of the investable U.S. equity market.

Russell Midcap® Growth Index is market capitalization weighted and measures performance of those Russell Midcap® Indexcompanies with higher price-to-book ratios and higher forecasted growth values.

Russell Midcap® Index is market capitalization weighted and measures performance of the smallest companies in the Russell1000® Index, which represent a modest amount of the Russell 1000® Index’s total market capitalization.

Standard & Poor’s® 500 Index (S&P 500®) is a market capitalization-weighted index of 500 stocks designed to measure totalU.S. equity market performance. STANDARD & POOR’S®, S&P® and S&P 500® are registered trademarks of Standard & Poor’sFinancial Services LLC.

Standard & Poor’s/International Finance Corporation Investable (S&P/IFCI) Composite Index is a free float-adjusted,market capitalization-weighted index designed to measure equity performance in global emerging markets.

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Shareholder Information

Board Review of Investment Management Agreement

At a meeting held April 17, 2012, the Board of Trustees (Board), including a majority of non-interested or independent Trustees,approved renewal of the investment management agreement for each of the separate funds within the Trust (Fund(s)). Inreaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as wellas information prepared specifically in connection with the annual renewal review process. Information furnished and discussedthroughout the year included investment performance reports and related financial information for each Fund, as well asperiodic reports on expenses, shareholder services, legal and compliance matters, pricing, brokerage commissions and executionand other services provided by the Investment Manager (Manager) and its affiliates. Information furnished specifically inconnection with the renewal process included reports prepared by Lipper, Inc. (Lipper), an independent organization, as well asadditional material, including a Fund profitability analysis prepared by management. The Lipper reports compared a Fund’sinvestment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper.The Fund profitability analysis discussed the profitability to Franklin Templeton Investments from its overall U.S. fundoperations, as well as on an individual fund-by-fund basis. Additional material accompanying such profitability analysis includedinformation on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information onmanagement fees charged by the Manager and its affiliates to U.S. mutual funds and other accounts, including management’sexplanation of differences where relevant. Such material also included a memorandum prepared by management describingproject initiatives and capital investments relating to the services provided to the Funds by the Franklin Templeton Investmentsorganization, as well as a memorandum relating to economies of scale.

In considering such materials, the independent Trustees received assistance and advice from and met separately withindependent counsel. While the investment management agreements for all Funds were considered at the same Board meeting,the Board dealt with each Fund separately. In approving continuance of the investment management agreement for each Fund,the Board, including a majority of independent Trustees, determined that the existing management fee structure was fair andreasonable and that continuance of the investment management agreement was in the best interests of each Fund and itsshareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to theBoard’s decision.

NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature and quality of the overall servicesprovided by the Manager and its affiliates to the Funds and their shareholders. In addition to investment performance andexpenses discussed later, the Board’s opinion was based, in part, upon periodic reports furnished it showing that the investmentpolicies and restrictions for each Fund were consistently complied with as well as other reports periodically furnished the Boardcovering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adoptedthroughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, andthe accuracy of net asset value calculations. Favorable consideration was given to management’s continuous efforts andexpenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it beingnoted that such systems and procedures had functioned smoothly during the Florida hurricanes and blackouts experienced inprevious years. Among other factors taken into account by the Board were the Manager’s best execution trading policies,including a favorable report by an independent portfolio trading analytical firm, which also covered FOREX transactions.Consideration was also given to the experience of each Fund’s portfolio management team, the number of accounts managed andgeneral method of compensation. In this latter respect, the Board noted that a primary factor in management’s determination of aportfolio manager’s bonus compensation was the relative investment performance of the funds he or she managed and that aportion of such bonus was required to be invested in a predesignated list of funds within such person’s fund management area soas to be aligned with the interests of shareholders. Particular attention was given to management’s conservative approach anddiligent risk management procedures, including continuous monitoring of counterparty credit risk and attention given toderivatives and other complex instruments, including expanded collateralization requirements. The Board also took into account,among other things, management’s efforts in establishing a global credit facility for the benefit of the Funds and other accountsmanaged by Franklin Templeton Investments to provide a source of cash for temporary and emergency purposes or to meetunusual redemption requests as well as the strong financial position of the Manager’s parent company and its commitment to themutual fund business as evidenced by its subsidization of money market funds.

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Shareholder Information (continued)

Board Review of Investment Management Agreement (continued)

INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of each of the Funds inview of its importance to shareholders. While consideration was given to performance reports and discussions with portfoliomanagers at Board meetings throughout the year, particular attention in assessing performance was given to the Lipper reportsfurnished for the agreement renewals of all Funds. The Lipper reports prepared for each of the individual Funds showed theinvestment performance of Class 1 shares for those Funds having such class of shares and Class 2 shares for those Funds that didnot have Class 1 shares, in comparison to a performance universe selected by Lipper. Comparative performance for each Fundwas shown for the one-year period ended January 31, 2012, and previous periods ended that date of up to 10 years unlessotherwise noted. Performance was shown on a total return basis for each Fund and in certain cases, as indicated, on an incomereturn basis as well. The following summarizes the performance results for each of the Funds and the Board’s view of suchperformance.

Franklin Flex Cap Growth Securities Fund – The performance universe for this Fund, which has been in operation for less than10 full years, consisted of the Fund and all multi-cap growth funds underlying variable insurance products as selected by Lipper.The Lipper report showed the Fund’s comparative total return for the one-year period to be in the second-lowest quintile of itsperformance universe, and on an annualized basis to be in the second-lowest quintile of such universe for the previous three-year period and the middle quintile of such universe for the previous five-year period. The Board was not satisfied with theFund’s recent underperformance and discussed the reasons for such performance and steps being taken to improve it, as well asthe Fund’s portfolio management team with upper management. Based on such discussions and taking into account the Fund’smore acceptable longer term performance, the Board did not believe any immediate change in portfolio management waswarranted, but intends to monitor future performance.

Franklin Global Real Estate Securities Fund – The performance universe for this Fund consisted of the Fund and all real estatefunds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s total return to be inthe second-lowest quintile of such universe for the one-year period, and on an annualized basis to be in the lowest quintile ofsuch universe for the previous three-, five- and 10-year periods. The Lipper universe includes all real estate funds underlyingvariable annuities and is not limited to those having a global mandate such as the Fund. The Board noted, however, among the14 global real estate funds with 26 share classes included in such universe, that the Fund’s Class 1 shares had the highest andsecond-highest total returns for the previous one and two years, respectively. The Board also noted steps that had been taken bymanagement to improve the Fund’s performance, including the appointment of an additional portfolio manager in 2010. Whilethe Board intends to continue monitoring the Fund’s results, it was satisfied with the efforts being made by management toimprove performance and believed no change in portfolio management was warranted, noting the Fund’s favorable relativeperformance with respect to other global real estate funds as referred to above.

Franklin Growth and Income Securities Fund – The performance universe for this Fund consisted of the Fund and all equityincome funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s income returnduring the one-year period to be in the highest or best performing quintile of its performance universe, and on an annualizedbasis in each of the previous three-, five- and 10-year periods to also be in the highest quintile of such universe. The Lipperreport showed the Fund’s total return for the one-year period to be in the second-highest quintile of its performance universe,and on an annualized basis to be in the highest quintile of such universe for the previous three-year period, the second-highestquintile of such universe for the previous five-year period, and the second-lowest quintile of such universe for the previous10-year period. The Board was satisfied with the Fund’s performance as shown in the Lipper report.

Franklin High Income Securities Fund – The performance universe for this Fund consisted of the Fund and all high current yieldfunds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s income return for theone-year period to be in the second-lowest quintile of such universe, and on an annualized basis to also be in the second-lowestquintile for the previous three- and five-year periods, but to be in the highest quintile of such universe for the previous 10-yearperiod. The Lipper report showed the Fund’s total return to be in the second-highest quintile of its performance universe for theone-year period, and on an annualized basis to be in the middle quintile of such universe for the previous three-year period, thesecond-highest quintile of such universe for the previous five-year period, and the middle quintile of such universe for theprevious 10-year period. The Board believed the Fund’s performance as shown in the Lipper report to be acceptable and did not

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warrant any change in portfolio management. In reaching such conclusion, the Board noted that the Fund’s overall favorablecomparative total returns and the level of its annualized income return, which amounted to 6.40%, 6.96%, and 7.53% for theone-, three- and five-year periods, respectively, appeared generally consistent with the Fund’s investment objective of earning ahigh level of current income with capital appreciation as a secondary goal.

Franklin Income Securities Fund – The performance universe for this Fund consisted of the Fund and all mixed-asset targetallocation moderate funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’sincome return to be in the highest or best performing quintile of such universe for the one-year period and to also be in thehighest quintile of such universe for each of the previous three-, five- and 10-year periods on an annualized basis. The Lipperreport showed the Fund’s total return to be in the middle quintile of its performance universe for the one-year period and on anannualized basis to be in the highest or second-highest quintile of such universe for each of the previous three-, five- and 10-yearperiods. The Board was satisfied with the Fund’s comparative performance as shown in the Lipper report.

Franklin Large Cap Growth Securities Fund – The performance universe for this Fund consisted of the Fund and all large-capcore funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s comparative totalreturn to be in the upper half of such universe for the one-year period, and on an annualized basis to be in the second-lowestquintile of such universe for the previous three-year period, the second-highest quintile of such universe for the previous five-year period, and the second-lowest quintile of such universe for the previous 10-year period. The Board believed the Fund’soverall performance as set forth in the Lipper report to be acceptable, noting that its three- and 10-year annualized returns ineach case were within 50 basis points of the performance universe median.

Franklin Large Cap Value Securities Fund – The performance universe for this Fund, which has been in operation for less than10 full years, consisted of the Fund and all large-cap value funds underlying variable insurance products as selected by Lipper.The Lipper report showed the Fund’s total return to be in the lowest quintile of such universe for the one-year period and on anannualized basis to be in the second-highest quintile and middle quintile of such universe for the previous three- and five-yearperiods, respectively. The Board discussed with management the reasons for the Fund’s one-year underperformance, includingits holdings in energy stocks exposed to natural gas, which were hurt by lower gas prices, and also discussed steps being taken toimprove performance, which included the addition of an experienced investment analyst to provide support for the Fund’s leadmanager. Based on such discussions and the Fund’s longer term performance, the Board did not believe that any change in theFund’s portfolio management was warranted.

Franklin Rising Dividends Securities Fund – The performance universe for this Fund consisted of the Fund and all multi-capcore funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s comparative totalreturn to be in the highest or best performing quintile of the performance universe for the one-year period, and on an annualizedbasis to be in the highest or second-highest quintile of such universe for each of the three-, five- and 10-year periods. The Boardwas satisfied with the Fund’s performance as set forth in the Lipper report.

Franklin Small Cap Value Securities Fund – The performance universe for this Fund consisted of the Fund and all small-capvalue funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s total return forthe one-year period to be in the second-highest performing quintile of such performance universe, and on an annualized basis toalso be in the second-highest quintile of such universe for each of the previous three- and five-year periods, and in the upper halfof such universe for the previous 10-year period. The Board found the Fund’s comparative performance as set forth in the Lipperreport to be satisfactory.

Franklin Small-Mid Cap Growth Securities Fund – The performance universe for this Fund consisted of the Fund and allmid-cap growth funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s totalreturn for the one-year period to be in the upper half of such universe, and on an annualized basis to also be in the upper half ofsuch universe for each of the previous three- and five-year periods, and to be in the second-lowest quintile of such universe forthe previous 10-year period. The Board found the Fund’s comparative investment performance as set forth in the Lipper reportto be acceptable.

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Franklin Strategic Income Securities Fund – The performance universe for this Fund consisted of the Fund and all general bondfunds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s income return to be inthe second-highest quintile of such performance universe for the one-year period, and on an annualized basis to also be in thesecond-highest quintiles of such universe during the previous three- and five-year periods, and in the second-lowest quintile ofsuch universe for the previous 10-year period. The Lipper report showed the Fund’s total return to be in the second-lowestquintile of such universe during the one-year period, and on an annualized basis to be in the upper half of such universe for eachof the previous three- and five-year periods, and in the highest quintile of such universe for the previous 10-year period. TheBoard was generally satisfied with the Fund’s performance as shown in the Lipper report, noting its primary income objectiveand the fact that its total return for the one-year period exceeded 5%.

Franklin Templeton VIP Founding Funds Allocation Fund – The performance universe for this Fund consisted of the Fund andall mixed-asset target allocation growth funds underlying variable insurance products as selected by Lipper. The Fund has beenin existence for only four full years and the Lipper report showed its income return to be in the lowest quintile of suchperformance universe for the one-year period, and on an annualized basis to be in the middle quintile of such universe for itsfour-year period of operation. The Lipper report showed the Fund’s total return for the one-year period to be in the second-lowest quintile of such universe and on an annualized basis to be in the lowest quintile of such universe for its four-year periodof operation. In assessing the relevance of such comparative performance, the Board noted the Fund is not actively managed andthat its performance reflects those of the three underlying funds in which it invests in equal portions. The Board reviewed anddiscussed the performance of such underlying funds with management and believes that each is being managed in accordancewith its underlying investment mandate. The Board also notes management’s explanation that the performance of certain of theunderlying funds reflects the general underperformance of value stocks during the past year. In view of the foregoing and takinginto account the nature of the Fund and its short period of operation, the Board did not believe the Fund’s comparativeinvestment performance as set forth in the Lipper report mandated any change in the investment strategy followed or manner inwhich the Fund operates.

Franklin U.S. Government Fund – The performance universe for this Fund consisted of the Fund and all general U.S.government funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s incomereturn for the one-year period to be in the second-highest quintile of such universe and on an annualized basis to be in thehighest or second-highest quintile of such universe for each of the previous three-, five- and 10-year periods. The Lipper reportshowed the Fund’s total return to be in the lowest quintile of such universe for the one-year period, and on an annualized basisto be in the lowest quintile of such universe for the previous three-year period, the second-lowest quintile of such universe forthe previous five-year period, and the middle quintile of such universe for the previous 10-year period. The Board found theFund’s comparative performance as shown in the Lipper report to be acceptable, noting the Fund’s income objective, the natureof the Fund’s investments, which were primarily in U.S. mortgage-backed securities, and the fact that its total return exceeded6% for the one-year period and exceeded 5% for all annualized periods shown in such report.

Mutual Global Discovery Securities Fund – The performance universe for this Fund consisted of the Fund and all global valuefunds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s total return to be inthe highest quintile of such universe for the one-year period, and on an annualized basis to be in the lowest quintile of suchuniverse for the three-year period, but to be in the highest quintile of such universe for each of the previous five- and 10-yearperiods. The Board found the Fund’s overall comparative performance as set forth in the Lipper report to be acceptable.

Mutual International Securities Fund – The performance universe for this Fund consisted of the Fund and all otherinternational value funds underlying variable insurance products as selected by Lipper. The Fund has been in existence for onlytwo full years at the date of the Lipper report, which showed its total return during each such year to be in either the highest orsecond-highest performing quintile of such universe. The Board was pleased with such comparative performance, but did notbelieve it to be particular meaningful in view of the Fund’s short period of operations.

Mutual Shares Securities Fund – The performance universe for this Fund consisted of the Fund and all large-cap value fundsunderlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s income return for the

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one-year period to be in the highest or best performing quintile of such universe, and on an annualized basis to be in either thehighest or second-highest quintile of such universe for each of the previous three-, five- and 10-year periods. The Lipper reportshowed the Fund’s total return for the one-year period to be in the middle quintile of the performance universe, and on anannualized basis to be in the lowest quintile of such universe for the previous three-year period, the middle quintile of suchuniverse for the previous five-year period, and the highest quintile of such universe for the previous 10-year period. The Boardfound the Fund’s overall performance as shown in the Lipper report to be acceptable, noting its annualized three-year totalreturn exceeded 15%.

Templeton Developing Markets Securities Fund – The performance universe for this Fund consisted of the Fund and allemerging markets funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’scomparative total return for the one-year period to be in the highest or best performing quintile of such performance universeand on an annualized basis to be in the second-highest quintile of such universe during each of the previous three- and five-yearperiods, and the middle quintile of such universe during the previous 10-year period. The Board was satisfied with thecomparative performance of the Fund as set forth in the Lipper report.

Templeton Foreign Securities Fund – The performance universe for this Fund consisted of the Fund and all international valuefunds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s comparative totalreturn for the one-year period to be in the highest or best performing quintile of such performance universe and on anannualized basis to be in the highest or best performing quintile of such universe in each of the previous three- and five-yearperiods, and the second-highest quintile of such universe for the previous 10-year period. The Board was satisfied with theFund’s comparative investment performance as set forth in the Lipper report.

Templeton Global Bond Securities Fund – The performance universe for this Fund consisted of the Fund and all global incomefunds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s income return for theone-year period to be in the highest or best performing quintile of such performance universe, and on an annualized basis to alsobe in the highest or best performing quintile of such universe for each of the previous three-, five- and 10-year periods. TheLipper report showed the Fund’s total return for the one-year period to be in the second-lowest performing quintile of itsperformance universe, but on an annualized basis to be in the highest or second-highest quintile of such universe during each ofthe previous three-, five- and 10-year periods. The Board discussed with management the reasons for the relativeunderperformance of the Fund’s total return as shown in the Lipper report for the one-year period, noting, however, that itexceeded 5%. The Board was satisfied with the Fund’s comparative performance as set forth in the Lipper report.

Templeton Growth Securities Fund – The performance universe for this Fund consisted of the Fund and all global value fundsunderlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s total return for the one-yearperiod to be in the second-lowest quintile of such performance universe and on an annualized basis to also be in the second-lowest quintile of such universe for each of the previous three-, five- and 10-year periods. The Board was not satisfied with theFund’s comparative performance as set forth in the Lipper report and discussed the Fund’s portfolio management team,performance and investment process in detail with upper management. Such discussion included the analytic process andreviews followed by the Fund’s portfolio managers in selecting securities for investment and the conviction of the Fund’sportfolio management team with the correctness of adhering to their disciplined, long-term, bottom-up, fundamental approachto investing. Based on such discussions, the Board did not believe any immediate change in portfolio management waswarranted, but intends to continuously monitor future performance.

COMPARATIVE EXPENSES. Consideration was given to expense comparison information contained in the Lipper reportsfurnished for each Fund, which compared its management fee and total expense ratio with those of a group of other fundsselected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon information taken from eachfund’s most recent annual report, which reflects historical asset levels that may be quite different from those currently existing,particularly in a period of market volatility. While recognizing such inherent limitation and the fact that expense ratios generallyincrease as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Lipper to be anappropriate measure of comparative expenses. In reviewing comparative costs, Lipper provides information on a Fund’s

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contractual investment management fee rate in comparison with the contractual investment management fee rate that wouldhave been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as theactual total expense ratio of the Fund in comparison with those of its Lipper expense group. The Lipper contractual investmentmanagement fee analysis includes administrative charges at the fund level as being part of a management fee, and actual totalexpenses, for comparative consistency, are shown by Lipper for the same class of shares for all funds within a particular Lipperexpense group. The results of such comparisons showed that both the contractual investment management fee rates and actualtotal expense ratios of the following Funds were in the least expensive quintile of their respective Lipper expense groups:Franklin Income Securities Fund, Franklin Small Cap Value Securities Fund, Franklin Growth and Income Securities Fund,Franklin High Income Securities Fund, Franklin Strategic Income Securities Fund and Templeton Global Bond Securities Fund.The Board was satisfied with the comparative contractual investment management fees and expenses of these Funds as shown intheir Lipper reports. The contractual investment management fee rates and actual total expense ratios of each of Franklin RisingDividend Securities Fund, Franklin Small-Mid Cap Growth Securities Fund and Franklin U.S. Government Fund were below themedians of their Lipper expense groups. The contractual investment management fee rate of Templeton Foreign Securities Fundwas less than one-half of a basis point above the median of its Lipper expense group, while its actual total expense ratio wasbelow the median of such group. The contractual investment fee rate and actual total expense ratio of Franklin Templeton VIPFounding Funds Allocation Fund were both at the median of its Lipper expense group. The Board was satisfied with thecomparative contractual investment management fees and expenses of these Funds as shown in their Lipper reports. Thecontractual investment management fee rates for Mutual International Securities Fund, Templeton Growth Securities Fund andFranklin Large Cap Value Securities Fund were in the most expensive quintiles of their Lipper expense groups, but in each casetheir actual total expense ratios were below the median of such groups. The Board was satisfied with the comparative expenses ofthese Funds as shown in their Lipper reports, noting that, with the exception of Templeton Growth Securities Fund, theexpenses of these Funds were subsidized through fee waivers. The contractual investment management fee rate of Franklin FlexCap Growth Securities Fund was 13 basis points above its Lipper expense group median, while its actual total expense ratio wasbelow its expense group median. The Board found the comparative expenses of this Fund as shown in its Lipper report to beacceptable, noting its expenses were subsidized through fee waivers. The contractual investment management fee rate and actualexpense ratio for Franklin Large Cap Growth Securities Fund were in each case above but within eight basis points of the medianof its Lipper expense group. The contractual investment fee rate of Franklin Global Real Estate Securities Fund was 20 basispoints higher than the median of its Lipper expense group while its actual expense ratio was within nine basis points of itsexpense group median. The Board found the comparative expenses of these Funds as shown in their Lipper reports to beacceptable, noting with respect to Franklin Global Real Estate Securities Fund that a phased-in increase in its contractualinvestment fee rate had been approved by shareholders in 2007. The contractual investment management fee rate and actualtotal expense ratio of Templeton Developing Markets Securities Fund were both above the median of its Lipper expense group,but in each case were within 17 basis points of such median. The Board found the comparative expenses of this Fund to beacceptable, noting cost factors relating to the Fund’s operations, such as the quality and experience of its portfolio managers andresearch staff and the depth of its physical presence and coverage in developing markets geographical areas, as well as the factthat its investment management fee had been reduced effective May 1, 2011. The contractual investment management fee rates ofboth Mutual Global Discovery Securities Fund and Mutual Shares Securities Fund were in the most expensive quintiles of theirLipper expense groups, while the actual total expense ratio of Mutual Global Discovery Fund was 17 basis points above itsexpense group median, and the actual total expense ratio of Mutual Shares Securities Fund was four basis points above itsexpense group median. In discussing these comparative expenses, management stated its view that the expenses of these Fundswere at an appropriate level in view of their overall favorable comparative investment performance, the quality and experience oftheir portfolio managers and the research-driven fundamental value strategy employed in their portfolio selections. The Boardfound the comparative expenses of these Funds to be acceptable noting the points raised by management.

MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates inconnection with the operation of each Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses theoverall profitability of Franklin Templeton’s U.S. fund business, as well as its profits in providing management and other servicesto each of the individual funds during the 12-month period ended September 30, 2011, being the most recent fiscal year-end forFranklin Resources, Inc., the Manager’s parent. In reviewing the analysis, specific attention was given to the methodology

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followed in allocating costs to each Fund, it being recognized that allocation methodologies are inherently subjective and variousallocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that, whilebeing continuously refined and reflecting changes in the Manager’s own cost accounting, the allocation methodology wasconsistent with that followed in profitability report presentations for the Funds made in prior years and that the Funds’independent registered public accounting firm had been engaged by the Manager to review the reasonableness of the allocationmethodologies solely for use by the Funds’ Board in reference to the profitability analysis. In reviewing and discussing suchanalysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for thetype of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated toeach Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational costsavings and efficiencies initiated by management. The Board also took into account management’s expenditures in improvingservices provided the Funds, as well as the need to implement systems to meet additional regulatory and compliancerequirements resulting from statutes such as the Sarbanes-Oxley and Dodd-Frank Acts and recent SEC and other regulatoryrequirements. In addition, the Board considered a third-party study comparing the profitability of the Manager’s parent on anoverall basis to other publicly held managers broken down to show profitability from management operations exclusive ofdistribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which theManager and its affiliates might derive ancillary benefits from Fund operations, including potential benefits resulting fromallocation of fund brokerage and the use of commission dollars to pay for research. Based upon its consideration of all thesefactors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to eachFund was not excessive in view of the nature, quality and extent of services provided.

ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Manager as the Funds growlarger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precisedetermination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as somefunds get larger, at some point economies of scale do result in the Manager realizing a larger profit margin on managementservices provided such a fund. The Board also noted that economies of scale are shared with a fund and its shareholders throughmanagement fee breakpoints so that as a fund grows in size, its effective management fee rate declines. In the case of FranklinTempleton VIP Founding Funds Allocation Fund, the management fees of the underlying funds in which it invests havemanagement fee breakpoints that extend beyond their existing asset sizes, and in the case of each of the other Funds, theirmanagement fees contain breakpoints that extend beyond their existing asset sizes. To the extent economies of scale may berealized by the manager and its affiliates, the Board believed the schedule of investment management fees provides a sharing ofbenefits for each Fund and its shareholders.

Proxy Voting Policies and Procedures

The Trust’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determinehow to vote proxies relating to portfolio securities. Shareholders may view the Trust’s complete Policies online atfranklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Groupcollect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, FortLauderdale, FL 33301, Attention: Proxy Group. Copies of the Trust’s proxy voting records are also made available online atfranklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the mostrecent 12-month period ended June 30.

Quarterly Statement of Investments

The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and thirdquarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website atsec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC.Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.

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VALUE BLEND GROWTH SECTOR GLOBAL INTERNATIONAL HYBRID ASSET ALLOCATION FIXED INCOME

< GAIN FROM OUR PERSPECTIVE® >

Semiannual Report

Franklin TempletonVariable Insurance Products Trust

Investment ManagersFranklin Advisers, Inc.Franklin Advisory Services, LLCFranklin Mutual Advisers, LLCFranklin Templeton Institutional, LLCTempleton Asset Management, Ltd.Templeton Global Advisors LimitedTempleton Investment Counsel, LLC

Fund AdministratorFranklin Templeton Services, LLC

DistributorFranklin Templeton Distributors, Inc.

Franklin Templeton Variable Insurance Products Trust (FTVIP) shares are not offered to the public; they areoffered and sold only to: (1) insurance company separate accounts (Separate Account) to serve as theunderlying investment vehicle for variable contracts; (2) certain qualified plans; and (3) other mutual funds(funds of funds).

Authorized for distribution to investors in Separate Accounts only when accompanied or preceded by the currentprospectus for the applicable contract, which includes the Separate Account and the FTVIP prospectuses.Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. Theprospectus contains this and other information; please read it carefully before investing.

To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded andaccessed. These calls can be identified by the presence of a regular beeping tone.

© 2012 Franklin Templeton Investments. All rights reserved. VIP S 08/12

Franklin Templeton Variable Insurance Products Trust REPORT · 2012-08-29 · 6. The industrials...

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Transcript of Franklin Templeton Variable Insurance Products Trust REPORT · 2012-08-29 · 6. The industrials...