UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-33395
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FRANKLIN FEDERAL TAX-FREE INCOME FUND
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(Exact name of registrant as specified in charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1960
(Address of principal executive offices) (Zip code)
MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area Code: (650) 312-2000)
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Date of fiscal year end: 4/30
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Date of reporting period: 4/30/05
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ITEM 1. REPORTS TO STOCKHOLDERS.
[Photo Omitted]
ANNUAL REPORT AND SHAREHOLDER LETTER
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TAX-FREE INCOME
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WANT TO RECEIVE
THIS DOCUMENT
FRANLKLIN FEDERAL FASTER VIA EMAIL?
TAX-FREE INCOME FUND
ELIGIBLE SHAREHOLDERS
CAN SIGN UP FOR EDELIBERY AT
FRANKLINTEMPLETON.COM.
SEE INSIDE FOR DETAILS.
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[Photo Omitted]
[Logo Omitted]
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o TEMPLETON o MUTUAL SERIES
<page>
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE
Franklin Templeton's distinct multi-manager structure
combines the specialized expertise of three
world-class investment management groups--Franklin,
Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and staying
true to the unique investment disciplines that
underlie its success.
FRANKLIN. Founded in 1947, Franklin is a recognized
leader in fixed income investing and also brings
expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched what
has become the industry's oldest global fund. Today,
it offers investors the broadest global reach in the
industry with offices in over 25 countries.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what it
believes are undervalued stocks, as well as arbitrage
situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently and
adhere to different investment approaches, Franklin,
Templeton and Mutual Series funds typically have
distinct portfolios. That's why our funds can be used
to build truly diversified allocation plans covering
every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well as
the reliable, accurate and personal service that has
helped us become one of the most trusted names in
financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
[Photo Omitted]
Not part of the annual report
Contents
SHAREHOLDER LETTER ......... 1
SPECIAL FEATURE:
Understanding Interest Rates 4
ANNUAL REPORT
Franklin Federal
Tax-Free Income Fund ....... 7
Performance Summary ........ 11
Your Fund's Expenses ....... 16
Financial Highlights and
Statement of Investments ... 18
Financial Statements ....... 54
Notes to
Financial Statements ....... 58
Report of Independent
Registered Public
Accounting Firm ............ 65
Tax Designation ............ 66
Board Members and Officers.. 67
Shareholder Information .... 72
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ANNUAL REPORT
FRANKLIN FEDERAL TAX-FREE INCOME FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Federal Tax-Free Income
Fund seeks to provide high, current income exempt from federal income tax
consistent with prudent investment management and preservation of capital
by investing at least 80% of its total assets in a nationally diversified
portfolio consisting of investment-grade municipal securities that pay
interest free from such tax.1
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CREDIT QUALITY BREAKDOWN
Based on Total Long-Term Investments as Of 4/30/05**
[Pie Chart Omitted]
Percentage Points Follow:
[ ] AAA ..................... 55.8%
[ ] AA ...................... 9.9%
[ ] A ....................... 12.9%
[ ] BBB ..................... 12.6%
[ ] BELOW INVESTMENT GRADE .. 3.5%
[ ] NOT RATED BY S&P ........ 5.3%
**Does not include short-term investments and other
net assets.
*Standard & Poor's (S&P) is the primary independent
rating agency; Moody's is the secondary rating
agency. Securities not rated by an independent rating
agency are assigned comparable internal ratings.
Ratings for securities not rated by S&P are in the
table below.
RATINGS MOODY'S INTERNAL
AAA or Aaa ................ 2.8% 0.2%
AA or Aa .................. 0.3% --
A ......................... 0.3% --
BBB or Baa ................ 0.7% 0.1%
Below Investment Grade .... 0.2% 0.7%
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Total 4.3% 1.0%
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We are pleased to bring you Franklin Federal Tax-Free
Income Fund's annual report for the fiscal year ended
April 30, 2005.
1. For investors subject to the alternative minimum
tax, a small portion of Fund dividends may be
taxable. Distributions of capital gains are generally
taxable.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL
AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE
LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI).
THE SOI BEGINS ON PAGE 22.
Annual Report | 7
DIVIDEND DISTRIBUTIONS2
5/01/04-4/30/05
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DIVIDEND PER SHARE
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MONTH CLASS A CLASS B CLASS C ADVISOR CLASS
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May 4.65 cents 4.09 cents 4.08 cents 4.74 cents
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June 4.70 cents 4.14 cents 4.14 cents 4.79 cents
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July 4.70 cents 4.14 cents 4.14 cents 4.79 cents
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August 4.70 cents 4.14 cents 4.14 cents 4.79 cents
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September 4.70 cents 4.02 cents 4.02 cents 4.78 cents
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October 4.70 cents 4.02 cents 4.02 cents 4.79 cents
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November 4.70 cents 4.02 cents 4.02 cents 4.79 cents
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December 4.70 cents 4.17 cents 4.17 cents 4.79 cents
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January 4.70 cents 4.17 cents 4.17 cents 4.79 cents
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February 4.70 cents 4.17 cents 4.17 cents 4.79 cents
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March 4.70 cents 4.16 cents 4.16 cents 4.78 cents
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April 4.70 cents 4.16 cents 4.16 cents 4.79 cents
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TOTAL 56.35 CENTS 49.40 CENTS 49.39 CENTS 57.41 CENTS
PERFORMANCE OVERVIEW
PERFORMANCE DATA QUOTED Because bond yield and price typically move in
REPRESENT PAST opposite directions, as municipal bond yields fell,
PERFORMANCE, WHICH DOES bond prices rose for the 12-month reporting period.
NOT GUARANTEE FUTURE The Fund's Class A share price, as measured by net
RESULTS. INVESTMENT asset value, increased from $11.91 on April 30, 2004,
RETURN AND PRINCIPAL to $12.23 on April 30, 2005. The Fund's Class A
VALUE WILL FLUCTUATE, AND shares paid dividends totaling 56.35 cents per share
YOU MAY HAVE A GAIN OR for the same period.2 The Performance Summary
LOSS WHEN YOU SELL YOUR beginning on page 11 shows that at the end of this
SHARES. CURRENT reporting period the Fund's Class A shares'
PERFORMANCE MAY DIFFER distribution rate was 4.42%, based on an
FROM FIGURES SHOWN. annualization of April's 4.70 cent per share dividend
PLEASE VISIT and the maximum offering price of $12.77 on April 30,
FRANKLINTEMPLETON.COM OR 2005. An investor in the 2005 maximum federal
CALL 1-800/342-5236 FOR personal income tax bracket of 35.00% would need to
MOST RECENT MONTH-END earn a distribution rate of 6.80% from a taxable
PERFORMANCE. investment to match the Fund's Class A tax-free
distribution rate. For the Fund's Class B, C and
Advisor shares' performance, please see the
Performance Summary.
2. All Fund distributions will vary depending upon
current market conditions, and past distributions are
not indicative of future trends.
8 | Annual Report
MUNICIPAL BOND MARKET OVERVIEW
For the one-year period ended April 30, 2005, the fixed income markets had
positive performance despite record high oil prices, fears of inflation,
concerns about the dollar, and mixed economic releases. Municipal bonds
outperformed U.S. Treasury bonds with similar maturities. The Lehman Brothers
Municipal Bond Index returned 6.81% for the period, while the Lehman Brothers
U.S. Treasury Index returned 1.93%.3
Although long-term interest rates experienced some volatility, short-term
interest rates experienced greater changes over the year. The Federal Reserve
Board raised the federal funds target rate from 1.00% to 2.75% in seven
successive moves from late June through April. The Treasury yield curve, which
illustrates rates for Treasuries with short to long maturities, flattened
somewhat as short-term rates went up and longer-maturity Treasuries declined.
Over the one-year period, the 10-year Treasury bond yield declined 32 basis
points and the 30-year Treasury bond yield decreased 78 basis points (100 basis
points equal one percentage point). According to Municipal Market Data, 10- and
30-year municipal bond yields decreased 39 and 56 basis points.4 Consequently,
long-maturity municipal bonds outperformed intermediates.
Although short-term interest rates rose during the year, overall interest rates
remained relatively low. This environment led to another high-volume year for
new-issue municipal bonds. Just as homebuyers seek the lowest mortgage rates,
municipalities borrow money when interest rates are low. Thus, over the past two
years, municipalities have issued more bonds to lock in lower rates.
Municipalities issued more than $358 billion in new debt during 2004.5 Although
this was a decrease of more than 6% from 2003 (a record year), 2004 was the
third successive year of more than $300 billion in new issuance.5 Demand for
municipal bonds remained strong as investors sought to reinvest proceeds from a
combination of coupon payments, maturities and bond calls. Also, demand came
from
3. Source: Lehman Brothers Inc. The Lehman Brothers Municipal Bond Index is a
market value-weighted index engineered for the long-term tax-exempt bond market.
All bonds included have a minimum credit rating of at least Baa. They must have
an outstanding par value of at least $5 million and be issued as part of a
transaction of at least $50 million. The bonds must be dated after 12/31/90, and
must be at least one year from their maturity date. Remarketed issues, taxable
municipal bonds, bonds with floating rates and derivatives are excluded from the
index. The index has four main bond sectors: general obligation, revenue,
insured and prerefunded. The Lehman Brothers U.S. Treasury Index includes public
obligations of the U.S. Treasury with a remaining maturity of one year or more.
All issues must have at least one year to final maturity regardless of call
features, have at least $250 million par amount outstanding and be rated
investment grade (Baa3 or better). They must also be dollar denominated,
nonconvertible and publicly issued. The index excludes Treasury bills (because
of the maturity constraint), flower bonds, targeted investor notes (TINs), and
state and local government series (SLGS) bonds, STRIPS and Treasury
Inflation-Protected Securities (TIPS).
4. Source: Thomson Financial.
5. Source: THE BOND BUYER.
Annual Report | 9
PORTFOLIO BREAKDOWN
4/30/05
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% OF TOTAL
LONG-TERM INVESTMENTS*
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Utilities 19.5%
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Transportation 17.6%
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Prerefunded 16.7%
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General Obligation 12.2%
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Hospital & Health Care 10.7%
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Subject to Government Appropriations 6.3%
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Tax-Supported 4.9%
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Other Revenue 3.8%
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Corporate-Backed 2.9%
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Higher Education 2.9%
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Housing 2.5%
*Does not include short-term investments and other
net assets.
a wide range of traditional buyers including mutual funds, individuals and
property and casualty companies, as well as crossover buyers. Crossover buyers,
such as hedge funds, typically invest in taxable securities, but they enter the
tax-exempt market when municipal valuations are attractive.
INVESTMENT STRATEGY
We use a consistent, disciplined strategy to maximize income for our
shareholders by seeking to maintain exposure to higher coupon securities. We
generally employ a buy-and-hold approach and invest in securities that we
believe should provide the most relative value in the market. As we invest
throughout different interest rate environments, our portfolio becomes well
diversified with a broad range of coupons, calls and maturities. This broad
diversification may help mitigate interest rate risk. We generally stay fully
invested to maximize income distribution.
MANAGER'S DISCUSSION
Our value-oriented philosophy of investing primarily for income, combined with a
relatively steep yield curve, favored longer-term bonds during the reporting
period. Consistent with our strategy, we sought to remain fully invested in
bonds ranging from 15 to 30 years in maturity with good call features. We also
maintained our conservative, buy-and-hold investment strategy as we attempted to
provide shareholders with high, current, tax-free income.
Thank you for your participation in Franklin Federal Tax-Free Income Fund. We
look forward to serving your future investment needs.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR
COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT
PHILOSOPHY.
10 | Annual Report
Performance Summary as of 4/30/05
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- -------------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FKTIX) CHANGE 4/30/05 4/30/04
- -------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.32 $12.23 $11.91
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DISTRIBUTIONS (5/1/04-4/30/05)
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Dividend Income $0.5635
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CLASS B (SYMBOL: FFTBX) CHANGE 4/30/05 4/30/04
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Net Asset Value (NAV) +$0.32 $12.22 $11.90
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DISTRIBUTIONS (5/1/04-4/30/05)
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Dividend Income $0.4940
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CLASS C (SYMBOL: FRFTX) CHANGE 4/30/05 4/30/04
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Net Asset Value (NAV) +$0.33 $12.23 $11.90
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DISTRIBUTIONS (5/1/04-4/30/05)
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Dividend Income $0.4939
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ADVISOR CLASS (SYMBOL: FAFTX) CHANGE 4/30/05 4/30/04
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Net Asset Value (NAV) +$0.31 $12.23 $11.92
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DISTRIBUTIONS (5/1/04-4/30/05)
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Dividend Income $0.5741
Annual Report | 11
Performance Summary (CONTINUED)
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES
CHARGES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES.
- -------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Cumulative Total Return1 +7.62% +37.82% +79.17%
- -------------------------------------------------------------------------------------------------------
Average Annual Total Return2 +3.03% +5.70% +5.55%
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Avg. Ann. Total Return (3/31/05)3 -0.62% +5.31% +5.44%
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Distribution Rate4 4.42%
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Taxable Equivalent Distribution Rate5 6.80%
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30-Day Standardized Yield6 3.70%
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Taxable Equivalent Yield5 5.69%
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CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
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Cumulative Total Return1 +7.00% +33.92% +32.03%
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Average Annual Total Return2 +3.00% +5.70% +4.49%
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Avg. Ann. Total Return (3/31/05)3 -0.79% +5.32% +4.33%
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Distribution Rate4 4.09%
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Taxable Equivalent Distribution Rate5 6.29%
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30-Day Standardized Yield6 3.31%
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Taxable Equivalent Yield5 5.09%
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CLASS C 1-YEAR 5-YEAR 10-YEAR INCEPTION (5/1/95)
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Cumulative Total Return1 +7.09% +34.00% +68.48% +68.48%
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Average Annual Total Return2 +6.09% +6.03% +5.36% +5.36%
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Avg. Ann. Total Return (3/31/05)3 +2.18% +5.62% N/A +5.30%
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Distribution Rate4 4.08%
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Taxable Equivalent Distribution Rate5 6.28%
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30-Day Standardized Yield6 3.31%
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Taxable Equivalent Yield5 5.09%
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ADVISOR CLASS7 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------------------------
Cumulative Total Return1 +7.71% +38.29% +79.78%
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Average Annual Total Return2 +7.71% +6.70% +6.04%
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Avg. Ann. Total Return (3/31/05)3 +3.86% +6.28% +5.92%
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Distribution Rate4 4.70%
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Taxable Equivalent Distribution Rate5 7.23%
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30-Day Standardized Yield6 3.95%
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Taxable Equivalent Yield5 6.08%
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
12 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
CLASS A (5/1/95-4/30/95)
[Line Graph Omitted]
Plot Points Follow:
Date Franklin Federal Lehman Brothers
Tax-Free Income Fund Municipal Bond Index8 CPI8
5/95 9,576.00 10,000.00 10,000.00
9,799.00 10,319.10 10,019.80
9,767.00 10,228.90 10,039.50
9,844.00 10,325.70 10,039.50
9,937.00 10,456.70 10,065.80
9,989.00 10,522.80 10,085.60
10,117.00 10,675.80 10,118.50
10,271.00 10,853.10 10,111.90
10,375.00 10,957.30 10,105.30
10,419.00 11,040.10 10,164.60
10,378.00 10,965.50 10,197.50
10,284.00 10,825.40 10,250.20
10,277.00 10,794.70 10,289.70
10,288.00 10,790.60 10,309.40
10,395.00 10,908.20 10,316.00
10,473.00 11,006.90 10,335.80
10,481.00 11,004.40 10,355.50
10,614.00 11,158.20 10,388.40
10,720.00 11,284.60 10,421.30
10,882.00 11,491.00 10,441.10
10,863.00 11,442.50 10,441.10
10,889.00 11,464.20 10,474.00
10,988.00 11,569.40 10,506.90
10,887.00 11,415.10 10,533.20
4/97 10,977.00 11,510.80 10,546.40
11,114.00 11,684.00 10,539.80
11,224.00 11,808.50 10,553.00
11,484.00 12,135.50 10,566.20
11,417.00 12,021.80 10,585.90
11,547.00 12,164.30 10,612.20
11,621.00 12,242.70 10,638.60
11,686.00 12,314.80 10,632.00
11,837.00 12,494.40 10,618.80
11,929.00 12,623.20 10,638.60
11,945.00 12,627.10 10,658.30
11,970.00 12,638.30 10,678.10
11,957.00 12,581.30 10,697.80
12,110.00 12,780.30 10,717.60
12,165.00 12,830.80 10,730.70
12,200.00 12,862.80 10,743.90
12,345.00 13,061.60 10,757.10
12,461.00 13,224.40 10,770.20
12,457.00 13,224.10 10,796.60
12,503.00 13,270.50 10,796.60
12,540.00 13,303.90 10,790.00
12,648.00 13,462.10 10,816.30
12,623.00 13,403.40 10,829.50
12,660.00 13,421.80 10,862.40
4/99 12,686.00 13,455.20 10,941.40
12,640.00 13,377.40 10,941.40
12,476.00 13,184.90 10,941.40
12,502.00 13,232.90 10,974.30
12,371.00 13,126.80 11,000.70
12,366.00 13,132.30 11,053.30
12,202.00 12,990.00 11,073.10
12,303.00 13,128.20 11,079.70
12,190.00 13,030.30 11,079.70
12,109.00 12,973.60 11,112.60
12,254.00 13,124.40 11,178.40
12,509.00 13,411.10 11,270.60
12,448.00 13,331.90 11,277.20
12,387.00 13,262.50 11,290.30
12,668.00 13,614.00 11,349.60
12,827.00 13,803.40 11,375.90
13,010.00 14,016.10 11,375.90
12,971.00 13,943.20 11,435.10
13,088.00 14,095.30 11,454.90
13,172.00 14,202.00 11,461.50
13,426.00 14,552.90 11,454.90
13,522.00 14,697.10 11,527.30
13,584.00 14,743.70 11,573.40
13,690.00 14,875.80 11,599.70
4/01 13,577.00 14,714.60 11,645.80
13,707.00 14,873.10 11,698.50
13,803.00 14,972.60 11,718.20
14,016.00 15,194.40 11,685.30
14,230.00 15,444.60 11,685.30
14,126.00 15,392.80 11,738.00
14,259.00 15,576.20 11,698.50
14,178.00 15,444.90 11,678.70
14,048.00 15,298.80 11,632.60
14,229.00 15,564.20 11,659.00
14,363.00 15,751.70 11,705.10
14,146.00 15,443.00 11,770.90
14,353.00 15,744.80 11,836.70
14,451.00 15,840.50 11,836.70
14,575.00 16,008.00 11,843.30
14,698.00 16,213.90 11,856.50
14,822.00 16,408.80 11,896.00
15,071.00 16,768.20 11,915.70
14,798.00 16,490.20 11,935.50
14,783.00 16,421.70 11,935.50
15,058.00 16,768.20 11,909.10
15,031.00 16,725.70 11,961.80
15,219.00 16,959.50 12,054.00
15,204.00 16,969.70 12,126.40
4/03 15,318.00 17,081.80 12,100.10
15,700.00 17,481.80 12,080.30
15,670.00 17,407.50 12,093.50
15,097.00 16,798.30 12,106.60
15,222.00 16,923.60 12,152.70
15,622.00 17,421.20 12,192.20
15,604.00 17,333.50 12,179.10
15,796.00 17,514.10 12,146.10
15,937.00 17,659.10 12,133.00
16,078.00 17,760.30 12,192.20
16,299.00 18,027.60 12,258.10
16,308.00 17,964.80 12,337.10
15,942.00 17,539.30 12,376.60
15,870.00 17,475.70 12,449.00
15,920.00 17,539.30 12,488.50
16,119.00 17,770.20 12,468.70
16,387.00 18,126.30 12,475.30
16,492.00 18,222.50 12,501.60
16,652.00 18,379.30 12,567.50
16,580.00 18,227.70 12,574.10
16,796.00 18,450.30 12,528.00
17,000.00 18,622.70 12,554.30
16,982.00 18,560.80 12,626.70
16,922.00 18,443.70 12,725.50
4/05 17,156.00 18,734.60 12,811.10
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS A 4/30/05
- --------------------------------------
1-Year +3.03%
- --------------------------------------
5-Year +5.70%
- --------------------------------------
10-Year +5.55%
CLASS B (1/1/99-4/30/05)
[Line Graph Omitted]
Plot Points Follow:
Date Franklin Federal Lehman Brothers
Tax-Free Income Fund Municipal Bond Index8 CPI8
1/99 10,000.00 10,000.00 10,000.00
10,086.00 10,118.90 10,024.40
10,054.00 10,074.80 10,036.60
10,079.00 10,088.60 10,067.10
10,096.00 10,113.70 10,140.30
10,055.00 10,055.20 10,140.30
9,920.00 9,910.57 10,140.30
9,935.00 9,946.63 10,170.80
9,826.00 9,866.89 10,195.20
9,817.00 9,871.01 10,244.00
9,682.00 9,764.06 10,262.40
9,766.00 9,867.92 10,268.50
9,672.00 9,794.35 10,268.50
9,603.00 9,751.70 10,299.00
9,706.00 9,865.03 10,360.00
9,903.00 10,080.60 10,445.40
9,859.00 10,021.00 10,451.50
9,806.00 9,968.89 10,463.70
10,014.00 10,233.00 10,518.60
10,136.00 10,375.40 10,543.00
10,276.00 10,535.30 10,543.00
10,240.00 10,480.50 10,597.90
10,328.00 10,594.90 10,616.20
10,389.00 10,675.00 10,622.30
10,585.00 10,938.80 10,616.20
10,656.00 11,047.20 10,683.30
10,700.00 11,082.20 10,726.00
10,778.00 11,181.50 10,750.50
4/01 10,693.00 11,060.40 10,793.20
10,782.00 11,179.50 10,842.00
10,861.00 11,254.30 10,860.30
11,015.00 11,421.00 10,829.80
11,178.00 11,609.10 10,829.80
11,092.00 11,570.20 10,878.60
11,191.00 11,708.00 10,842.00
11,131.00 11,609.30 10,823.70
11,015.00 11,499.50 10,781.00
11,151.00 11,699.00 10,805.40
11,251.00 11,839.90 10,848.10
11,076.00 11,607.90 10,909.10
11,242.00 11,834.70 10,970.10
11,304.00 11,906.70 10,970.10
11,396.00 12,032.60 10,976.20
11,488.00 12,187.30 10,988.40
11,580.00 12,333.80 11,025.00
11,769.00 12,604.00 11,043.30
11,549.00 12,395.00 11,061.60
11,533.00 12,343.50 11,061.60
11,741.00 12,604.00 11,037.20
11,715.00 12,572.00 11,086.00
11,856.00 12,747.80 11,171.50
11,839.00 12,755.40 11,238.60
4/03 11,932.00 12,839.70 11,214.10
12,214.00 13,140.30 11,195.90
12,185.00 13,084.50 11,208.00
11,744.00 12,626.60 11,220.30
11,826.00 12,720.80 11,263.00
12,131.00 13,094.80 11,299.60
12,111.00 13,028.90 11,287.40
12,255.00 13,164.60 11,256.90
12,358.00 13,273.60 11,244.70
12,462.00 13,349.70 11,299.60
12,627.00 13,550.60 11,360.60
12,628.00 13,503.40 11,433.80
12,339.00 13,183.60 11,470.40
12,278.00 13,135.80 11,537.50
12,310.00 13,183.60 11,574.10
12,459.00 13,357.10 11,555.80
12,660.00 13,624.80 11,561.90
12,734.00 13,697.10 11,586.30
12,851.00 13,815.00 11,647.40
12,787.00 13,701.00 11,653.50
12,959.00 13,868.30 11,610.70
13,100.00 13,997.90 11,635.10
13,091.00 13,951.40 11,702.30
13,029.00 13,863.40 11,793.80
4/05 13,203.00 14,082.00 11,873.10
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS B 4/30/05
- --------------------------------------
1-Year +3.00%
- --------------------------------------
5-Year +5.70%
- --------------------------------------
Since Inception (1/1/99) +4.49%
Annual Report | 13
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
CLASS C 4/30/05
- --------------------------------------
1-Year +6.09%
- --------------------------------------
5-Year +6.03%
- --------------------------------------
10-Year +5.36%
CLASS C (5/1/95-4/30/05)
[Line Graph Omitted]
Plot Points Follow:
Date Franklin Federal Lehman Brothers
Tax-Free Income Fund Municipal Bond Index8 CPI8
5/95 10,000.00 10,000.00 10,000.00
10,231.00 10,319.10 10,019.80
10,193.00 10,228.90 10,039.50
10,268.00 10,325.70 10,039.50
10,360.00 10,456.70 10,065.80
10,409.00 10,522.80 10,085.60
10,537.00 10,675.80 10,118.50
10,683.00 10,853.10 10,111.90
10,795.00 10,957.30 10,105.30
10,835.00 11,040.10 10,164.60
10,787.00 10,965.50 10,197.50
10,685.00 10,825.40 10,250.20
10,666.00 10,794.70 10,289.70
10,671.00 10,790.60 10,309.40
10,777.00 10,908.20 10,316.00
10,853.00 11,006.90 10,335.80
10,856.00 11,004.40 10,355.50
10,997.00 11,158.20 10,388.40
11,102.00 11,284.60 10,421.30
11,254.00 11,491.00 10,441.10
11,239.00 11,442.50 10,441.10
11,261.00 11,464.20 10,474.00
11,349.00 11,569.40 10,506.90
11,248.00 11,415.10 10,533.20
4/97 11,336.00 11,510.80 10,546.40
11,471.00 11,684.00 10,539.80
11,579.00 11,808.50 10,553.00
11,842.00 12,135.50 10,566.20
11,768.00 12,021.80 10,585.90
11,887.00 12,164.30 10,612.20
11,957.00 12,242.70 10,638.60
12,028.00 12,314.80 10,632.00
12,168.00 12,494.40 10,618.80
12,266.00 12,623.20 10,638.60
12,276.00 12,627.10 10,658.30
12,296.00 12,638.30 10,678.10
12,268.00 12,581.30 10,697.80
12,418.00 12,780.30 10,717.60
12,479.00 12,830.80 10,730.70
12,510.00 12,862.80 10,743.90
12,642.00 13,061.60 10,757.10
12,765.00 13,224.40 10,770.20
12,755.00 13,224.10 10,796.60
12,796.00 13,270.50 10,796.60
12,827.00 13,303.90 10,790.00
12,931.00 13,462.10 10,816.30
12,890.00 13,403.40 10,829.50
12,921.00 13,421.80 10,862.40
4/99 12,952.00 13,455.20 10,941.40
12,889.00 13,377.40 10,941.40
12,715.00 13,184.90 10,941.40
12,736.00 13,232.90 10,974.30
12,596.00 13,126.80 11,000.70
12,595.00 13,132.30 11,053.30
12,411.00 12,990.00 11,073.10
12,519.00 13,128.20 11,079.70
12,398.00 13,030.30 11,079.70
12,310.00 12,973.60 11,112.60
12,441.00 13,124.40 11,178.40
12,705.00 13,411.10 11,270.60
12,637.00 13,331.90 11,277.20
12,570.00 13,262.50 11,290.30
12,837.00 13,614.00 11,349.60
13,004.00 13,803.40 11,375.90
13,171.00 14,016.10 11,375.90
13,125.00 13,943.20 11,435.10
13,238.00 14,095.30 11,454.90
13,317.00 14,202.00 11,461.50
13,568.00 14,552.90 11,454.90
13,658.00 14,697.10 11,527.30
13,715.00 14,743.70 11,573.40
13,827.00 14,875.80 11,599.70
4/01 13,707.00 14,714.60 11,645.80
13,819.00 14,873.10 11,698.50
13,921.00 14,972.60 11,718.20
14,118.00 15,194.40 11,685.30
14,327.00 15,444.60 11,685.30
14,217.00 15,392.80 11,738.00
14,344.00 15,576.20 11,698.50
14,268.00 15,444.90 11,678.70
14,118.00 15,298.80 11,632.60
14,305.00 15,564.20 11,659.00
14,421.00 15,751.70 11,705.10
14,208.00 15,443.00 11,770.90
14,410.00 15,744.80 11,836.70
14,489.00 15,840.50 11,836.70
14,606.00 16,008.00 11,843.30
14,736.00 16,213.90 11,856.50
14,841.00 16,408.80 11,896.00
15,096.00 16,768.20 11,915.70
14,803.00 16,490.20 11,935.50
14,782.00 16,421.70 11,935.50
15,050.00 16,768.20 11,909.10
15,016.00 16,725.70 11,961.80
15,210.00 16,959.50 12,054.00
15,176.00 16,969.70 12,126.40
4/03 15,295.00 17,081.80 12,100.10
15,658.00 17,481.80 12,080.30
15,620.00 17,407.50 12,093.50
15,054.00 16,798.30 12,106.60
15,158.00 16,923.60 12,152.70
15,548.00 17,421.20 12,192.20
15,536.00 17,333.50 12,179.10
15,720.00 17,514.10 12,146.10
15,839.00 17,659.10 12,133.00
15,985.00 17,760.30 12,192.20
16,197.00 18,027.60 12,258.10
16,185.00 17,964.80 12,337.10
15,814.00 17,539.30 12,376.60
15,748.00 17,475.70 12,449.00
15,790.00 17,539.30 12,488.50
15,967.00 17,770.20 12,468.70
16,225.00 18,126.30 12,475.30
16,333.00 18,222.50 12,501.60
16,483.00 18,379.30 12,567.50
16,388.00 18,227.70 12,574.10
16,609.00 18,450.30 12,528.00
16,789.00 18,622.70 12,554.30
16,778.00 18,560.80 12,626.70
16,697.00 18,443.70 12,725.50
4/05 16,848.00 18,734.60 12,811.10
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
ADVISOR CLASS7 4/30/05
- --------------------------------------
1-Year +7.71%
- --------------------------------------
5-Year +6.70%
- --------------------------------------
10-Year +6.04%
ADVISOR CLASS (5/1/95-4/30/05)7
[Line Graph Omitted]
Plot Points Follow:
Date Franklin Federal Lehman Brothers
Tax-Free Income Fund Municipal Bond Index8 CPI8
5/95 10,000.00 10,000.00 10,000.00
10,233.00 10,319.10 10,019.80
10,200.00 10,228.90 10,039.50
10,280.00 10,325.70 10,039.50
10,378.00 10,456.70 10,065.80
10,432.00 10,522.80 10,085.60
10,565.00 10,675.80 10,118.50
10,726.00 10,853.10 10,111.90
10,835.00 10,957.30 10,105.30
10,881.00 11,040.10 10,164.60
10,838.00 10,965.50 10,197.50
10,740.00 10,825.40 10,250.20
10,733.00 10,794.70 10,289.70
10,744.00 10,790.60 10,309.40
10,856.00 10,908.20 10,316.00
10,938.00 11,006.90 10,335.80
10,946.00 11,004.40 10,355.50
11,085.00 11,158.20 10,388.40
11,196.00 11,284.60 10,421.30
11,364.00 11,491.00 10,441.10
11,344.00 11,442.50 10,441.10
11,371.20 11,464.20 10,474.00
11,475.20 11,569.40 10,506.90
11,368.20 11,415.10 10,533.20
4/97 11,463.20 11,510.80 10,546.40
11,606.20 11,684.00 10,539.80
11,721.20 11,808.50 10,553.00
11,992.20 12,135.50 10,566.20
11,922.20 12,021.80 10,585.90
12,058.20 12,164.30 10,612.20
12,135.20 12,242.70 10,638.60
12,203.20 12,314.80 10,632.00
12,361.20 12,494.40 10,618.80
12,457.10 12,623.20 10,638.60
12,473.10 12,627.10 10,658.30
12,500.10 12,638.30 10,678.10
12,486.10 12,581.30 10,697.80
12,645.10 12,780.30 10,717.60
12,703.10 12,830.80 10,730.70
12,740.10 12,862.80 10,743.90
12,892.10 13,061.60 10,757.10
13,013.10 13,224.40 10,770.20
13,008.10 13,224.10 10,796.60
13,057.10 13,270.50 10,796.60
13,095.10 13,303.90 10,790.00
13,207.10 13,462.10 10,816.30
13,182.10 13,403.40 10,829.50
13,220.10 13,421.80 10,862.40
4/99 13,247.10 13,455.20 10,941.40
13,199.10 13,377.40 10,941.40
13,028.10 13,184.90 10,941.40
13,055.10 13,232.90 10,974.30
12,918.10 13,126.80 11,000.70
12,913.10 13,132.30 11,053.30
12,742.10 12,990.00 11,073.10
12,847.10 13,128.20 11,079.70
12,729.10 13,030.30 11,079.70
12,645.10 12,973.60 11,112.60
12,796.10 13,124.40 11,178.40
13,062.10 13,411.10 11,270.60
12,999.10 13,331.90 11,277.20
12,935.10 13,262.50 11,290.30
13,228.10 13,614.00 11,349.60
13,395.10 13,803.40 11,375.90
13,586.10 14,016.10 11,375.90
13,545.10 13,943.20 11,435.10
13,667.10 14,095.30 11,454.90
13,755.10 14,202.00 11,461.50
14,020.00 14,552.90 11,454.90
14,121.00 14,697.10 11,527.30
14,186.00 14,743.70 11,573.40
14,296.00 14,875.80 11,599.70
4/01 14,178.00 14,714.60 11,645.80
14,314.00 14,873.10 11,698.50
14,414.00 14,972.60 11,718.20
14,636.00 15,194.40 11,685.30
14,860.00 15,444.60 11,685.30
14,752.00 15,392.80 11,738.00
14,890.00 15,576.20 11,698.50
14,806.00 15,444.90 11,678.70
14,670.00 15,298.80 11,632.60
14,859.00 15,564.20 11,659.00
14,999.00 15,751.70 11,705.10
14,785.00 15,443.00 11,770.90
15,001.00 15,744.80 11,836.70
15,092.00 15,840.50 11,836.70
15,222.00 16,008.00 11,843.30
15,365.00 16,213.90 11,856.50
15,483.00 16,408.80 11,896.00
15,756.90 16,768.20 11,915.70
15,459.00 16,490.20 11,935.50
15,445.00 16,421.70 11,935.50
15,732.90 16,768.20 11,909.10
15,705.90 16,725.70 11,961.80
15,916.90 16,959.50 12,054.00
15,902.90 16,969.70 12,126.40
4/03 16,022.90 17,081.80 12,100.10
16,409.90 17,481.80 12,080.30
16,379.90 17,407.50 12,093.50
15,795.90 16,798.30 12,106.60
15,913.90 16,923.60 12,152.70
16,346.90 17,421.20 12,192.20
16,329.90 17,333.50 12,179.10
16,531.90 17,514.10 12,146.10
16,679.90 17,659.10 12,133.00
16,828.80 17,760.30 12,192.20
17,061.80 18,027.60 12,258.10
17,057.80 17,964.80 12,337.10
16,689.90 17,539.30 12,376.60
16,615.90 17,475.70 12,449.00
16,669.90 17,539.30 12,488.50
16,864.80 17,770.20 12,468.70
17,160.80 18,126.30 12,475.30
17,271.80 18,222.50 12,501.60
17,426.80 18,379.30 12,567.50
17,351.80 18,227.70 12,574.10
17,594.80 18,450.30 12,528.00
17,794.80 18,622.70 12,554.30
17,791.80 18,560.80 12,626.70
17,715.80 18,443.70 12,725.50
4/05 17,978.00 18,734.60 12,811.10
14 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
MUNICIPAL BONDS ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS;
THEREFORE, THE FUND'S YIELD AND SHARE PRICE WILL FLUCTUATE WITH MARKET
CONDITIONS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION FROM INTEREST RATES. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These
shares have higher annual fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include a sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes any current, applicable,
maximum sales charge.
3. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
4. Distribution rate is based on an annualization of the respective class's
April dividend and the maximum offering price (NAV for Classes B, C and Advisor)
per share on 4/30/05.
5. Taxable equivalent distribution rate and yield assume the 2005 maximum
federal income tax rate of 35.00%.
6. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 4/30/05.
7. Effective 3/20/02, the Fund began offering Advisor Class shares, which do not
have sales charges or a Rule 12b-1 plan. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 3/20/02,
a restated figure is used based upon the Fund's Class A performance, excluding
the effect of Class A's maximum initial sales charge, but reflecting the effect
of the Class A Rule 12b-1 fees; and (b) for periods after 3/19/02, actual
Advisor Class performance is used reflecting all charges and fees applicable to
that class. Since 3/20/02 (commencement of sales), the cumulative and average
annual total returns of Advisor Class shares were +21.59% and +6.48%.
8. Source: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman Brothers
Municipal Bond Index is a market value-weighted index engineered for the
long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $5
million and be issued as part of a transaction of at least $50 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded.
Annual Report | 15
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE,
THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 =
$64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
16 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 10/31/04 VALUE 4/30/05 PERIOD* 10/31/04-4/30/05
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,030.30 $3.07
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.77 $3.06
- ---------------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.40 $5.83
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.04 $5.81
- ---------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.40 $5.88
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.99 $5.86
- ---------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,031.50 $2.62
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,022.22 $2.61
*Expenses are equal to the annualized expense ratio for each class (A: 0.61%; B:
1.16%; C: 1.17%; and Advisor: 0.52%), multiplied by the average account value
over the period, multiplied by 181/365 to reflect the one-half year period.
Annual Report | 17
Franklin Federal Tax-Free Income Fund
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------
YEAR ENDED APRIL 30,
CLASS A 2005 2004 2003 2002 2001
------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $11.91 $11.99 $11.81 $11.77 $11.41
------------------------------------------------------------------
Income from investment operations:
Net investment incomea ................................... 0.57 0.58 0.59 0.62 0.65
Net realized and unrealized gains (losses) ............... 0.31 (0.10) 0.18 0.04 0.36
------------------------------------------------------------------
Total from investment operations .......................... 0.88 0.48 0.77 0.66 1.01
------------------------------------------------------------------
Less distributions from net investment income ............. (0.56) (0.56) (0.59) (0.62) (0.65)
------------------------------------------------------------------
Redemption fees ........................................... --c -- -- -- --
------------------------------------------------------------------
Net asset value, end of year .............................. $12.23 $11.91 $11.99 $11.81 $11.77
==================================================================
Total returnb ............................................. 7.62% 4.08% 6.72% 5.71% 9.07%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $6,324,986 $6,357,878 $6,835,209 $6,633,281 $6,431,800
Ratios to average net assets:
Expenses ................................................. 0.61% 0.61% 0.61% 0.59% 0.60%
Net investment income .................................... 4.72% 4.79% 4.98% 5.20% 5.54%
Portfolio turnover rate ................................... 6.74% 6.94% 13.18% 12.95% 9.79%
aBased on average daily shares outstanding.
bTotal return does not reflect sales commissions or the contingent deferred
sales charge.
cAmount is less than $0.01 per share.
18 | See notes to financial statements. | Annual Report
Franklin Federal Tax-Free Income Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------------------
YEAR ENDED APRIL 30,
CLASS B 2005 2004 2003 2002 2001
------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $11.90 $11.99 $11.81 $11.77 $11.41
------------------------------------------------------------------
Income from investment operations:
Net investment incomea ................................... 0.50 0.51 0.53 0.55 0.58
Net realized and unrealized gains (losses) ............... 0.31 (0.11) 0.18 0.04 0.37
------------------------------------------------------------------
Total from investment operations .......................... 0.81 0.40 0.71 0.59 0.95
------------------------------------------------------------------
Less distributions from net investment income ............. (0.49) (0.49) (0.53) (0.55) (0.59)
------------------------------------------------------------------
Redemption fees ........................................... --c -- -- -- --
------------------------------------------------------------------
Net asset value, end of year .............................. $12.22 $11.90 $11.99 $11.81 $11.77
==================================================================
Total returnb ............................................. 7.00% 3.41% 6.13% 5.13% 8.47%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $289,490 $298,252 $293,285 $220,757 $120,639
Ratios to average net assets:
Expenses ................................................. 1.17% 1.17% 1.17% 1.16% 1.16%
Net investment income .................................... 4.16% 4.23% 4.42% 4.63% 4.96%
Portfolio turnover rate ................................... 6.74% 6.94% 13.18% 12.95% 9.79%
aBased on average daily shares outstanding.
bTotal return does not reflect the contingent deferred sales charge.
cAmount is less than $0.01 per share.
Annual Report | See notes to financial statements. | 19
<page>
Franklin Federal Tax-Free Income Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------------------
YEAR ENDED APRIL 30,
CLASS C 2005 2004 2003 2002 2001
------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $11.90 $11.99 $11.81 $11.77 $11.41
------------------------------------------------------------------
Income from investment operations:
Net investment incomea ................................... 0.50 0.51 0.53 0.55 0.58
------------------------------------------------------------------
Net realized and unrealized gains (losses) ............... 0.32 (0.11) 0.18 0.04 0.36
------------------------------------------------------------------
Total from investment operations .......................... 0.82 0.40 0.71 0.59 0.94
------------------------------------------------------------------
Less distributions from net investment income ............. (0.49) (0.49) (0.53) (0.55) (0.58)
------------------------------------------------------------------
Redemption fees ........................................... --c -- -- -- --
------------------------------------------------------------------
Net asset value, end of year .............................. $12.23 $11.90 $11.99 $11.81 $11.77
==================================================================
Total returnb ............................................. 7.09% 3.39% 6.15% 5.13% 8.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $371,438 $373,431 $394,026 $320,087 $242,255
Ratios to average net assets:
Expenses ................................................. 1.17% 1.17% 1.17% 1.16% 1.16%
Net investment income .................................... 4.16% 4.23% 4.42% 4.63% 4.97%
Portfolio turnover rate ................................... 6.74% 6.94% 13.18% 12.95% 9.79%
aBased on average daily shares outstanding.
bTotal return does not reflect the contingent deferred sales charge.
cAmount is less than $0.01 per share.
20 | See notes to financial statements. | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
---------------------------------------------------
YEAR ENDED APRIL 30,
ADVISOR CLASS 2005 2004 2003 2002D
---------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ....................................... $11.92 $12.00 $11.82 $11.70
---------------------------------------------------
Income from investment operations:
Net investment incomea .................................................. 0.58 0.59 0.60 0.07
Net realized and unrealized gains (losses) .............................. 0.30 (0.10) 0.18 0.10
---------------------------------------------------
Total from investment operations ......................................... 0.88 0.49 0.78 0.17
---------------------------------------------------
Less distributions from net investment income ............................ (0.57) (0.57) (0.60) (0.05)
---------------------------------------------------
Redemption fees .......................................................... --c -- -- --
---------------------------------------------------
Net asset value, end of year ............................................. $12.23 $11.92 $12.00 $11.82
===================================================
Total returnb ............................................................ 7.71% 4.17% 6.81% 1.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .......................................... $112,032 $97,303 $88,142 $84,479
Ratios to average net assets:
Expenses ................................................................ 0.52% 0.52% 0.52% 0.51%e
Net investment income ................................................... 4.81% 4.88% 5.07% 5.17%e
Portfolio turnover rate .................................................. 6.74% 6.94% 13.18% 12.95%
aBased on average daily shares outstanding.
bTotal return is not annualized for periods less than one year.
cAmount is less than $0.01 per share.
dFor the period March 20, 2002 (effective date) to April 30, 2002.
eAnnualized.
Annual Report | See notes to financial statements. | 21
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.0%
BONDS 93.0%
ALABAMA 1.0%
Alabama HFA, SFMR, Series D-2, GNMA Secured, 5.75%, 10/01/23 ...................... $ 1,995,000 $ 2,049,463
Anniston Regional Medical Center Board Revenue, Series A, AMBAC Insured,
5.125%, 6/01/28 ................................................................. 7,000,000 7,325,500
Auburn University General Fee Revenue, AMBAC Insured, 5.00%, 6/01/34 .............. 11,025,000 11,540,419
Courtland IDB, PCR, Champion International Corp. Project, Refunding,
6.15%, 6/01/19 .................................................................. 5,000,000 5,111,050
Courtland IDB Solid Waste Disposal Revenue, Champion International Corp.
Project, Refunding,
6.00%, 8/01/29 ................................................................ 12,000,000 12,554,520
Series A, 6.70%, 11/01/29 ..................................................... 4,000,000 4,354,720
Fairfield IDB Environmental Improvement Revenue, USX Corp. Project, Refunding,
5.45%, 9/01/14 .................................................................. 1,445,000 1,526,599
University of Alabama General Revenue, Series A, MBIA Insured, 5.00%,
7/01/29 ....................................................................... 10,000,000 10,517,000
7/01/34 ....................................................................... 11,500,000 12,041,305
University of Alabama University Revenues, Hospital, Series A, MBIA Insured,
5.875%, 9/01/31 ................................................................. 5,000,000 5,567,200
---------------
72,587,776
---------------
ALASKA 0.4%
Alaska State HFC Revenue,
General Housing, Series A, FGIC Insured, 5.00%, 12/01/29 ...................... 4,000,000 4,188,920
General Housing, Series A, FGIC Insured, 5.00%, 12/01/30 ...................... 3,500,000 3,659,740
Veterans Mortgage Program, MBIA Insured, 6.75%, 12/01/25 ...................... 630,000 636,936
Alaska State International Airports Revenues, Series B,
AMBAC Insured, 5.25%, 10/01/27 ................................................ 15,000,000 15,866,100
MBIA Insured, 5.00%, 10/01/28 ................................................. 5,100,000 5,291,148
---------------
29,642,844
---------------
ARIZONA 1.9%
Gila County IDAR, Asarco Inc., Refunding, 5.55%, 1/01/27 .......................... 3,340,000 3,189,967
Maricopa County IDA Health Facilities Revenue, Catholic Healthcare West Project,
Refunding, Series A, 5.00%, 7/01/16 ............................................. 23,000,000 23,725,650
Maricopa County IDA Hospital Facility Revenue, Mayo Clinic Hospital,
5.25%, 11/15/37 ................................................................. 19,000,000 20,001,110
Mesa IDAR, Discovery Health System, Series A, MBIA Insured, 5.75%, 1/01/25 ........ 22,500,000 24,706,350
Salt River Project Agricultural Improvement and Power District Electric System
Revenue, Salt River Project,
Refunding, Series A, 5.125%, 1/01/27 .......................................... 35,000,000 37,241,050
Series B, 5.00%, 1/01/25 ...................................................... 17,500,000 18,466,350
Scottsdale Municipal Property Corp. Excise Tax Revenue, Series A, 5.00%, 7/01/34 .. 7,500,000 7,887,750
---------------
135,218,227
---------------
ARKANSAS 1.4%
Arkansas State Development Finance Authority HMR, Series B-1, GNMA Secured,
5.80%, 1/01/23 .................................................................. 270,000 277,592
Arkansas State Development Finance Authority Revenue, White River Medical Center
Project, 5.60%, 6/01/24 ......................................................... 1,200,000 1,237,284
Arkansas State Development Finance Authority SFMR, MBS Program,
Series B, 6.10%, 1/01/29 ...................................................... 270,000 277,255
Series D, 6.85%, 1/01/27 ...................................................... 35,000 35,766
22 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
ARKANSAS (CONT.)
Arkansas State Development Finance Authority Wastewater System Revenue,
Revolving Loan Fund, Series A, Pre-Refunded, 5.85%, 12/01/19 .................... $ 1,000,000 $ 1,043,060
Arkansas State Student Loan Authority Revenue,
Refunding, Sub Series B, 5.60%, 6/01/14 ....................................... 325,000 338,985
Sub Series B, Pre-Refunded, 6.25%, 6/01/10 .................................... 500,000 517,695
Jefferson County PCR,
Arkansas Power and Light Co. Project, Refunding, 6.30%, 6/01/18 ............... 1,865,000 1,889,674
Entergy Arkansas Inc. Project, Refunding, 5.60%, 10/01/17 ..................... 7,900,000 7,903,871
Pope County PCR, Arkansas Power and Light Co. Project, Refunding, 6.30%,
12/01/16 ...................................................................... 2,600,000 2,629,874
11/01/20 ...................................................................... 60,500,000 60,826,095
Pulaski County Health Facilities Board Revenue, Nazareth Sisters of Charity,
St. Vincent's Infirmary, Refunding, MBIA Insured, ETM, 6.05%, 11/01/09 .......... 125,000 140,630
Saline County Hospital Revenue, Refunding, Connie Lee Insured, 6.00%, 9/01/19 ..... 700,000 721,259
Saline County Retirement Housing and Healthcare Facilities Board Revenue,
Refunding, AMBAC Insured, 5.80%, 6/01/11 ........................................ 195,000 199,343
University of Arkansas University Revenues,
Construction, University of Arkansas for Medical Sciences Campus, Series B,
MBIA Insured, 5.00%, 11/01/28 ................................................. 1,000,000 1,054,880
Construction, University of Arkansas for Medical Sciences Campus, Series B,
MBIA Insured, 5.00%, 11/01/34 ................................................. 9,000,000 9,472,410
Various Facility, Fayetteville Campus, FGIC Insured, 5.00%, 12/01/27 ............ 5,000,000 5,227,350
University of Central Arkansas Academic Facilities Revenue,
Series B, AMBAC Insured, 5.875%, 4/01/16 ...................................... 250,000 261,670
Series C, AMBAC Insured, 6.00%, 4/01/21 ....................................... 1,000,000 1,047,320
University of Central Arkansas Athletic Facilities Revenue, Series C, AMBAC Insured,
6.00%, 4/01/21 ................................................................ 1,000,000 1,047,320
6.125%, 4/01/26 ............................................................... 1,200,000 1,258,128
University of Central Arkansas Housing System Revenue, Refunding, Series A, AMBAC
Insured, 6.00%, 4/01/21 ......................................................... 1,000,000 1,047,320
---------------
98,454,781
---------------
CALIFORNIA 6.3%
Alhambra COP, Clubhouse Facility Project, 11.25%,
1/01/08 ....................................................................... 410,000 415,424
1/01/09 ....................................................................... 455,000 461,097
1/01/10 ....................................................................... 500,000 506,740
California Educational Facilities Authority Revenue, Pooled College and University
Projects, Series B, 6.00%, 12/01/20 ............................................. 6,025,000 6,249,793
California Health Facilities Financing Authority Revenue, St. Francis Medical
Center, Refunding, Series H, AMBAC Insured, 6.30%, 10/01/15 ..................... 2,800,000 2,894,976
California Infrastructure and Economic Development Bank Revenue, Bay Area Toll
Bridges, first lien, Series A, AMBAC Insured, 5.00%, 7/01/33 .................... 24,500,000 25,719,855
California State GO,
5.90%, 5/01/08 ................................................................ 235,000 241,072
6.00%, 5/01/18 ................................................................ 535,000 548,894
6.00%, 5/01/20 ................................................................ 850,000 873,477
5.90%, 4/01/23 ................................................................ 1,200,000 1,216,872
Annual Report | 23
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
CALIFORNIA (CONT.)
California State GO, (cont.)
5.00%, 2/01/24 ................................................................ $ 5,000,000 $ 5,229,800
5.00%, 2/01/26 ................................................................ 20,000,000 20,820,600
5.125%, 2/01/26 ............................................................... 7,500,000 7,890,525
5.00%, 2/01/32 ................................................................ 49,000,000 50,350,440
Refunding, 5.125%, 6/01/25 .................................................... 25,000,000 26,282,500
Refunding, 5.00%, 2/01/26 ..................................................... 27,000,000 27,934,470
Various Purpose, 5.25%, 11/01/25 .............................................. 16,260,000 17,456,736
Various Purpose, 5.25%, 4/01/27 ............................................... 17,500,000 18,745,650
Various Purpose, 5.50%, 11/01/33 .............................................. 2,500,000 2,715,225
Chino USD, COP,
FSA Insured, Pre-Refunded, 5.90%, 9/01/15 ..................................... 2,010,000 2,073,436
Refunding, FSA Insured, 5.90%, 9/01/15 ........................................ 6,230,000 6,427,242
Commerce Refuse to Energy Authority Revenue, Refunding, Series 1994,
8.75%, 7/01/10 .................................................................. 655,000 671,231
Foothill/Eastern Corridor Agency Toll Road Revenue,
Refunding, 5.75%, 1/15/40 ..................................................... 20,000,000 20,451,400
senior lien, Series A, Pre-Refunded, 6.50%, 1/01/32 ........................... 39,240,000 41,712,905
Golden State Tobacco Securitization Corp. Tobacco Settlement Revenue,
5.375%, 6/01/28 ............................................................... 50,000,000 52,495,500
2003 Series A-1, 6.25%, 6/01/33 ............................................... 26,000,000 26,879,840
Hacienda La Puente USD GO, Election of 2000, Series B, FSA Insured,
5.00%, 8/01/27 .................................................................. 5,000,000 5,268,800
Los Angeles CRDA Housing Revenue, Refunding, Series A, AMBAC Insured,
6.55%, 1/01/27 .................................................................. 2,535,000 2,589,072
Los Angeles Regional Airports Improvement Corp. Lease Revenue,
Facilities Sub Lease, International Airport, Refunding, 6.35%, 11/01/25 ....... 7,500,000 5,977,875
aUnited Airlines, International Airport, Refunding, 6.875%, 11/15/12 ........... 8,400,000 7,440,636
Los Angeles USD, GO, Series A, MBIA Insured, 5.00%, 1/01/28 ....................... 25,000,000 26,315,000
Los Angeles Wastewater System Revenue, Refunding, MBIA Insured, 5.00%, 6/01/25 .... 10,000,000 10,577,800
Metropolitan Water District Southern California Waterworks Revenue, Series B-2,
FGIC Insured, 5.00%, 10/01/27 ................................................... 9,645,000 10,193,511
Pajaro Valley USD, GO, Series A, FSA Insured, 5.00%, 8/01/26 ...................... 5,285,000 5,580,431
Pomona PFAR, Series Q, MBIA Insured, Pre-Refunded, 5.90%, 12/01/25 ................ 4,000,000 4,161,360
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue,
senior lien, 5.00%, 1/01/33 ..................................................... 5,000,000 4,556,050
---------------
449,926,235
---------------
COLORADO 2.6%
Colorado Health Facilities Authority Revenue,
Catholic Health Initiatives, Series A, 5.00%, 12/01/28 ........................ 2,000,000 2,042,120
Kaiser Permanente, Series A, ETM, 5.35%, 11/01/16 ............................. 13,250,000 13,788,877
Kaiser Permanente, Series B, ETM, 5.35%, 8/01/15 .............................. 20,200,000 21,035,876
Denver City and County Airport Revenue, Refunding, Series E, MBIA Insured,
5.25%, 11/15/23 ................................................................. 43,000,000 45,522,810
Denver City and County School District No. 1 COP, Denver School Facilities Leasing
Corp., AMBAC Insured, 5.50%, 12/15/08 ........................................... 1,000,000 1,040,190
aDenver City and County Special Facilities Airport Revenue, United Airlines Inc.
Project, Series A, 6.875%, 10/01/32 ............................................. 47,980,000 41,102,067
24 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
COLORADO (CONT.)
Denver Convention Center Hotel Authority Revenue, Senior Series A, XLCA
Insured, 4.75%, 12/01/28 ........................................................ $ 13,500,000 $ 13,814,685
E-470 Public Highway Authority Revenue, Refunding, Senior Series A, MBIA
Insured, 5.00%, 9/01/21 12,715,000 13,367,788
Littleton MFHR, Riverpointe I, Refunding, Series A, FSA Insured, 5.95%, 4/01/29 ... 11,095,000 11,757,150
Northwest Parkway Public Highway Authority Revenue, Series A, AMBAC Insured,
5.125%, 6/15/31 ................................................................. 7,500,000 7,940,775
Pueblo County School District No. 060 GO, FGIC Insured, 5.00%, 12/15/22 ........... 5,500,000 5,828,075
University of Colorado Hospital Authority Revenue, Series A, AMBAC Insured,
5.00%, 11/15/29 ................................................................. 8,500,000 8,790,020
---------------
186,030,433
---------------
CONNECTICUT 0.4%
Connecticut State GO, Series D, 5.00%, 11/15/20 ................................... 8,000,000 8,507,680
Connecticut State Special Tax Obligation Revenue, Transportation Infrastructure,
Series B, AMBAC Insured, Pre-Refunded, 5.00%, 12/01/17 .......................... 11,870,000 13,145,313
Meriden Housing Authority MFR, Connecticut Baptist Housing Project, GNMA Secured,
5.80%, 8/20/39 .................................................................. 2,710,000 2,898,670
---------------
24,551,663
---------------
DELAWARE 0.0%b
Delaware State Housing Authority MFMR, Refunding, Series D, 6.75%, 7/01/06 ........ 1,375,000 1,396,010
---------------
FLORIDA 3.7%
Broward County School Board COP,
MBIA Insured, 5.00%, 7/01/28 .................................................. 17,415,000 18,220,966
Series A, FSA Insured, 5.25%, 7/01/24 ......................................... 25,000,000 26,942,250
Callaway/Bay County Wastewater Systems Revenue, Series A, FGIC Insured,
Pre-Refunded, 6.00%, 9/01/26 .................................................... 695,000 738,229
Escambia County Health Facilities Authority Revenue, Ascension Health Credit,
Series A-2 AMBAC Insured, Pre-Refunded, 5.75%, 11/15/29 ......................... 10,000,000 11,176,500
Florida State Board of Education Capital Outlay GO, Public Education, Refunding,
Series D, 5.75%, 6/01/22 ...................................................... 10,000,000 11,141,200
6.00%, 6/01/23 ................................................................ 17,500,000 21,714,875
Hillsborough County IDAR, Refunding, Series A, 5.25%, 10/01/24 .................... 13,500,000 14,105,610
Hillsborough County School Board COP,
MBIA Insured, 5.00%, 7/01/27 .................................................. 5,000,000 5,227,900
Refunding, Series A, MBIA Insured, 5.00%, 7/01/25 ............................. 5,000,000 5,287,700
Jacksonville Capital Improvement Revenue, Series A, AMBAC Insured,
5.00%, 10/01/30 ................................................................. 20,175,000 21,062,095
Jacksonville Sales Tax Revenue, AMBAC Insured, 5.00%,
10/01/23 ...................................................................... 6,000,000 6,329,100
10/01/26 ...................................................................... 20,000,000 20,935,800
Jacksonville Transportation Revenue, MBIA Insured, 5.00%, 10/01/31 ................ 5,000,000 5,188,350
Miami-Dade County Special Obligation Revenue, Juvenile Courthouse Project,
Series A, AMBAC Insured, 5.00%, 4/01/32 ......................................... 10,000,000 10,444,200
Orlando and Orange County Expressway Authority Revenue, Series B, AMBAC Insured,
5.00%, 7/01/28 10,630,000 11,159,268
Orlando Utilities Commission Water and Electric Revenue, Refunding,
5.00%, 10/01/22 ................................................................. 7,500,000 7,961,700
Annual Report | 25
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
FLORIDA (CONT.)
Palm Beach County School Board COP,
Refunding, Series D, FSA Insured, 5.00%, 8/01/28 .............................. $ 25,000,000 $ 26,030,000
Series A, FGIC Insured, Pre-Refunded, 6.00%, 8/01/23 .......................... 5,100,000 5,853,576
St. Augustine Water and Sewer Revenue, Refunding, Series A, MBIA Insured, 6.20%,
10/01/05 ...................................................................... 1,130,000 1,146,509
10/01/06 ...................................................................... 1,200,000 1,240,224
10/01/07 ...................................................................... 1,275,000 1,318,809
10/01/08 ...................................................................... 1,355,000 1,401,558
10/01/12 ...................................................................... 6,300,000 6,516,468
Tampa Bay Water Utility System Revenue, Series B, FGIC Insured, 5.00%,
10/01/26 ...................................................................... 10,000,000 10,439,300
10/01/31 ...................................................................... 10,000,000 10,376,700
---------------
261,958,887
---------------
GEORGIA 3.6%
Atlanta Airport Passenger Facility Charge Revenue, General, sub. lien,
Series C, FSA Insured, 5.00%, 1/01/33 ......................................... 29,520,000 30,660,948
Series J, FSA Insured, 5.00%, 1/01/29 ......................................... 10,000,000 10,435,400
Atlanta Airport Revenue, General,
Series A, FGIC Insured, Pre-Refunded, 5.50%, 1/01/26 .......................... 18,295,000 20,368,921
Series G, FSA Insured, 5.00%, 1/01/30 ......................................... 18,285,000 19,051,873
Atlanta Development Authority Revenue, Yamacraw Design Center Project, Series A,
MBIA Insured, 5.125%, 1/01/27 ................................................... 5,000,000 5,286,750
Atlanta Water and Wastewater Revenue,
FSA Insured, 5.00%, 11/01/34 .................................................. 20,205,000 21,233,435
Refunding, Series A, MBIA Insured, 5.00%, 11/01/33 ............................ 13,000,000 13,520,520
Burke County Development Authority PCR, Georgia Power Co. Plant Vogtle, 1st Series,
5.40%, 5/01/34 .................................................................. 15,705,000 15,863,463
Cobb County Hospital Authority Revenue, AMBAC Insured, 5.00%, 4/01/28 ............. 18,000,000 19,120,320
De Kalb County Water and Sewer Revenue, 5.25%, 10/01/25 ........................... 12,000,000 12,934,800
Griffin Combined Public Utility Revenue, Refunding and Improvement, AMBAC Insured,
5.00%, 1/01/25 .................................................................. 5,000,000 5,335,100
Gwinnett County Hospital Authority Revenue, Anticipation Certificates, Gwinnett
Hospital Systems Inc. Project, Series B, MBIA Insured, 5.30%, 9/01/27 ........... 10,000,000 10,708,900
Gwinnett County Water and Sewer Authority Revenue, 5.25%, 8/01/25 ................. 20,000,000 21,544,000
Henry County and Henry County Water and Sewer Authority Revenue, Refunding and
Improvement, Series A, MBIA Insured, 5.00%, 2/01/26 ........................... 5,770,000 6,116,604
Metropolitan Atlanta Rapid Transit Authority Sales Tax Revenue, Second Indenture
Series, MBIA Insured, 5.00%,
7/01/23 ....................................................................... 10,150,000 10,751,489
7/01/25 ....................................................................... 12,160,000 12,831,475
7/01/26 ....................................................................... 12,800,000 13,472,512
Richmond County Development Authority Educational Facilities Revenue, MCG-PPG
Cancer Research Center, Series A, AMBAC Insured, 5.00%, 12/15/29 ................ 5,000,000 5,289,150
---------------
254,525,660
---------------
26 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
HAWAII 1.1%
Hawaii State Airports System Revenue, Second Series,
ETM, 6.90%, 7/01/12 ........................................................... $ 500,000 $ 574,925
MBIA Insured, ETM, 6.90%, 7/01/12 ............................................. 400,000 460,976
Hawaii State Department of Budget and Finance Special Purpose Revenue,
Hawaiian Electric Co. Project, Series B, MBIA Insured, 5.875%, 12/01/26 ....... 500,000 518,480
Kaiser Permanente, Series A, ETM, 5.15%, 3/01/15 .............................. 4,000,000 4,273,640
Kapiolani Health Care System, Pre-Refunded, 6.00%, 7/01/19 .................... 2,725,000 2,740,042
Kapiolani Health Obligation, Pre-Refunded, 6.25%, 7/01/21 ..................... 7,350,000 7,780,783
Pre-Refunded, 6.00%, 7/01/11 .................................................. 1,000,000 1,055,780
Pre-Refunded, 6.20%, 7/01/16 .................................................. 2,000,000 2,116,080
Queens Health System, Series A, Pre-Refunded, 6.05%, 7/01/16 .................. 1,000,000 1,056,350
Queens Health System, Series A, Pre-Refunded, 6.00%, 7/01/20 .................. 120,000 126,694
Queens Health System, Series A, Pre-Refunded, 5.75%, 7/01/26 .................. 7,000,000 7,370,650
St. Francis Medical Centers, Refunding, FSA Insured, 6.50%, 7/01/22 ........... 1,050,000 1,055,113
Wilcox Memorial Hospital Projects, 5.25%, 7/01/13 ............................. 600,000 626,082
Wilcox Memorial Hospital Projects, 5.35%, 7/01/18 ............................. 2,040,000 2,091,530
Wilcox Memorial Hospital Projects, 5.50%, 7/01/28 ............................. 2,410,000 2,444,343
Hawaii State GO,
Series BW, 6.375%, 3/01/11 .................................................... 100,000 116,572
Series CA, 6.00%, 1/01/09 ..................................................... 100,000 110,170
Series CT, FSA Insured, Pre-Refunded, 5.875%, 9/01/19 ......................... 5,000,000 5,622,750
Hawaii State Housing Finance and Development Corp. Revenue, Affordable Rental
Housing Program, Series A, Pre-Refunded,
6.00%, 7/01/15 ................................................................ 915,000 937,500
6.05%, 7/01/22 ................................................................ 750,000 769,140
6.10%, 7/01/30 ................................................................ 235,000 241,016
Hawaii State Housing Finance and Development Corp. SFM Purchase Revenue,
Refunding, Series B, FNMA Insured, 6.90%, 7/01/16 ............................. 210,000 213,683
Series A, 7.10%, 7/01/24 ...................................................... 2,555,000 2,558,577
Series A, FNMA Insured, 7.00%, 7/01/11 ........................................ 165,000 166,650
Series A, FNMA Insured, 5.75%, 7/01/30 ........................................ 950,000 960,574
Series B, 7.00%, 7/01/31 ...................................................... 6,745,000 6,762,200
Honolulu City and County GO,
Series 1992, ETM, 6.00%, 12/01/14 ............................................. 150,000 179,202
Series C, FGIC Insured, 5.00%, 7/01/20 ........................................ 5,250,000 5,613,510
Honolulu City and County MFHR, Waipahu Towers Project, Series A, 6.90%, 6/20/35 ... 1,205,000 1,231,896
Honolulu City and County Wastewater System Revenue,
First Bond Resolution, Senior Series, AMBAC Insured, 5.125%, 7/01/31 .......... 8,000,000 8,379,760
Second Bond Resolution, Junior Series, FGIC Insured, 5.00%, 7/01/23 ........... 10,000,000 10,602,500
Honolulu City and County Water Supply Board Water System Revenue, Pre-Refunded,
5.80%, 7/01/21 .................................................................. 1,785,000 1,865,343
Kauai County GO, Refunding, Series C, AMBAC Insured, 5.95%, 8/01/10 ............... 220,000 250,221
---------------
80,872,732
---------------
IDAHO 0.0%b
Idaho Housing Agency Revenue, Refunding, Series D-1, 6.45%, 7/01/19 ............... 485,000 490,873
---------------
Annual Report | 27
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
ILLINOIS 5.1%
Chicago Board of Education GO, Chicago School Reform, MBIA Insured, Pre-Refunded,
6.00%, 12/01/16 ................................................................. $ 9,700,000 $ 10,372,986
Chicago COP, AMBAC Insured, 7.75%, 7/15/11 ........................................ 12,400,000 14,726,860
Chicago Gas Supply Revenue, The People's Gas Light, Refunding, Series A, 6.10%,
6/01/25 ......................................................................... 12,000,000 12,275,400
Chicago GO, Lakefront Millennium Parking Facilities, MBIA Insured, 5.75%, 1/01/23 . 8,955,000 10,735,344
Chicago O'Hare International Airport Special Facilities Revenue, American
Airlines Inc. Project, 8.20%, 12/01/24 .......................................... 11,720,000 10,606,600
Chicago Sales Tax Revenue, FGIC Insured, 5.375%, 1/01/27 .......................... 3,060,000 3,289,317
Chicago SFMR, Collateralized, Series A, GNMA Secured, 7.25%, 9/01/28 .............. 145,000 147,848
Cook County GO, Capital Improvement, Refunding, FGIC Insured, 5.90%, 12/01/14 ..... 10,000,000 10,379,200
Cook County Tinley Park School District No. 140 GO, Refunding, Series A,
AMBAC Insured, 6.00%, 12/01/15 .................................................. 8,750,000 9,324,613
Illinois Development Finance Authority Hospital Revenue,
Adventist Health System, Sunbelt Obligation, 5.65%, 11/15/24 .................. 6,030,000 6,350,434
Adventist Health System, Sunbelt Obligation, 5.50%, 11/15/29 .................. 20,000,000 20,758,000
Sisters of St. Francis Health Services, Refunding, MBIA Insured, 5.375%, 11/01/27 5,000,000 5,329,650
Illinois Development Finance Authority PCR, Illinois Power Co. Project, Series A,
Pre-Refunded, 7.375%, 7/01/21 ................................................... 26,550,000 28,412,217
Illinois Development Finance Authority Revenue, Provena Health, Series A,
MBIA Insured, 5.50%, 5/15/21 .................................................... 10,000,000 10,678,100
Illinois HDA Revenue,
MF Program, Series 1, 6.625%, 9/01/12 ......................................... 12,000,000 12,016,200
MF Program, Series 1, 6.75%, 9/01/21 .......................................... 7,550,000 7,560,872
MFH, Refunding, Series A, 7.10%, 7/01/26 ...................................... 9,305,000 9,310,397
Illinois Health Facilities Authority Revenue,
Children's Memorial Hospital, Series A, AMBAC Insured, Pre-Refunded, 5.75%,
8/15/25 ..................................................................... 9,120,000 10,200,264
Loyola University Health Systems, Refunding, Series A, MBIA Insured, 5.625%,
7/01/18 ..................................................................... 7,090,000 7,530,076
Loyola University Health Systems, Series A, MBIA Insured, ETM, 5.625%, 7/01/18 2,105,000 2,494,972
Methodist Medical Center, Refunding, MBIA Insured, 5.25%, 11/15/21 ............ 2,885,000 3,071,833
Northwestern Medical Facility Foundation, Refunding, MBIA Insured, 5.125%,
11/15/28 .................................................................... 7,500,000 7,783,200
South Suburban Hospital, ETM, 7.00%, 2/15/18 .................................. 4,200,000 5,274,570
Victory Health Services, Series A, 5.75%, 8/15/27 ............................. 8,015,000 7,846,765
Kane County School District No. 129 GO, Series A, FGIC Insured, 5.25%, 2/01/22 .... 5,285,000 5,661,979
Metropolitan Pier and Exposition Authority Dedicated State Tax Revenue,
FGIC Insured, ETM, 6.50%, 6/15/07 ............................................. 5,000 5,024
McCormick Place Expansion Project, Refunding, Series A, FGIC Insured, 5.25%,
12/15/28 .................................................................... 39,580,000 41,546,730
McCormick Place Expansion Project, Series A, 6.50%, 6/15/22 ................... 5,000 5,026
McCormick Place Expansion Project, Series A, 6.50%, 6/15/27 ................... 555,000 557,869
McCormick Place Expansion Project, Series A, FGIC Insured, 6.65%, 6/15/12 ..... 250,000 251,335
McCormick Place Expansion Project, Series A, MBIA Insured, 5.00%, 12/15/28 .... 26,795,000 27,936,467
28 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
ILLINOIS (CONT.)
Metropolitan Pier and Exposition Authority Hospitality Facilities Revenue,
McCormick Place Convention Center,
ETM, 5.75%, 7/01/06 ........................................................... $ 665,000 $ 677,003
ETM, 7.00%, 7/01/26 ........................................................... 12,000,000 16,168,920
Pre-Refunded, 6.25%, 7/01/17 .................................................. 3,500,000 3,709,300
Onterie Center HFC Mortgage Revenue, Refunding, MBIA Insured, 7.05%, 7/01/27 ...... 4,350,000 4,382,321
Regional Transportation Authority Revenue, Series A, AMBAC Insured,
7.20%, 11/01/20 ................................................................. 1,000,000 1,279,870
Southwestern Illinois Development Authority IDR, Spectrulite Consortium Inc.
Project, 6.625%, 2/01/10 ........................................................ 3,050,000 3,077,572
University of Illinois University Revenues,
Auxiliary Facilities, Refunding, Series A, AMBAC Insured, 5.00%, 4/01/30 ...... 5,000,000 5,159,650
Auxiliary Facilities System, Refunding, Series B, FGIC Insured, 5.125%, 4/01/26 12,000,000 12,562,200
Upper River Valley Development Authority Environmental Facilities Revenue, General
Electric Co. Project, 5.45%, 2/01/23 ............................................ 3,600,000 3,775,572
Will County Exempt Facilities Revenue, Mobil Oil Refining Corp. Project,
6.00%, 2/01/27 .................................................................. 7,130,000 7,399,371
---------------
360,631,927
---------------
INDIANA 1.5%
Carmel EDR, Cool Creek Assn., Refunding, 6.50%, 9/01/15 ........................... 985,000 991,787
Carmel Industrial RDA County Option Income Tax Lease Rent Revenue, MBIA Insured,
Pre-Refunded, 5.25%, 1/01/18 .................................................... 1,090,000 1,132,270
Eastern Hancock Middle School Building Corp. Revenue, first mortgage, Pre-Refunded,
6.00%, 1/15/21 .................................................................. 1,000,000 1,026,780
Indiana Bond Bank Revenue, Special Program, Hendricks Redevelopment, Series B,
Pre-Refunded, 6.20%, 2/01/23 .................................................... 3,500,000 3,764,915
Indiana Health Facility Financing Authority Hospital Revenue,
Community Foundation Northwest Indiana, Series A, 6.375%, 8/01/21 ............. 17,500,000 18,498,900
Jackson County Schneck Memorial Hospital, Refunding, 5.25%, 2/15/22 ........... 1,200,000 1,229,940
Indiana Health Facility Financing Authority Revenue, Greenwood Village
South Project, Refunding, 5.625%, 5/15/28 ....................................... 1,750,000 1,762,512
Indiana State Development Financing Authority Environmental Revenue, 6.25%, 7/15/30 2,000,000 2,110,720
Indiana State Educational Facilities Authority Revenue,
DePauw University Project, Refunding, 5.30%, 7/01/16 .......................... 600,000 641,328
Valparaiso University, AMBAC Insured, 5.125%, 10/01/23 ........................ 2,015,000 2,158,327
Indiana State HFA, SFMR,
GNMA Secured, 6.10%, 7/01/22 .................................................. 240,000 248,141
Refunding, Series A, 6.75%, 1/01/10 ........................................... 2,940,000 2,965,049
Refunding, Series A, 6.80%, 1/01/17 ........................................... 12,835,000 13,075,528
Indiana Transportation Finance Authority Highway Revenue,
5.375%, 12/01/25 .............................................................. 12,765,000 13,759,521
Pre-Refunded, 5.375%, 12/01/25 ................................................ 2,235,000 2,482,549
Indianapolis Local Public Improvement Bond Bank Revenue, Waterworks Project,
Series A, MBIA Insured, 5.25%, 7/01/33 .......................................... 19,020,000 20,098,054
Jasper County EDR, Georgia-Pacific Corp. Project,
5.625%, 12/01/27 .............................................................. 3,500,000 3,508,890
Refunding, 6.70%, 4/01/29 ..................................................... 3,000,000 3,163,920
Annual Report | 29
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
INDIANA (CONT.)
Madison County Authority Anderson Hospital Revenue, Refunding, Series A, BIG
Insured, 8.00%, 1/01/14 ......................................................... $ 95,000 $ 96,266
New Albany Floyd County School Building Corp. Revenue, first mortgage, MBIA Insured,
Pre-Refunded, 5.375%, 1/15/18 ................................................... 1,500,000 1,639,395
New Prairie Unified School Building Corp. Revenue, first mortgage, Refunding,
FSA Insured, 5.80%, 7/05/11 ..................................................... 1,520,000 1,543,423
Penn-Harris-Madison Multi-School Building Corp. Industry Revenue, first mortgage,
FSA Insured, Pre-Refunded, 5.90%, 7/15/14 ....................................... 1,000,000 1,071,110
Petersburg PCR, 5.75%, 8/01/21 .................................................... 5,000,000 5,280,250
Purdue University of Indiana University Revenue, Student Fee, Series Q, 5.375%,
7/01/07 ......................................................................... 1,355,000 1,424,322
Rochester Community Multi-School Building Corp. Revenue, first mortgage, AMBAC\
Insured, 5.20%, 1/15/18 ......................................................... 1,000,000 1,067,980
Sullivan Industrial PCR, Hoosier Energy, Merom Project, Refunding, 7.10%, 4/01/19 750,000 763,642
---------------
105,505,519
---------------
KANSAS 0.5%
Burlington PCR, Kansas Gas & Electric Co. Project, Refunding, Series A, MBIA
Insured, 5.30%, 6/01/31 ......................................................... 18,000,000 19,326,060
Kansas State Department of Transportation and Highway Revenue, Refunding, 5.50%,
9/01/06 ......................................................................... 1,000,000 1,035,760
Kansas State Development Finance Authority Hospital Revenue, Susan B. Allen Memorial
Hospital, Series Z, Radian Insured, 5.25%, 12/15/23 ............................. 2,000,000 2,125,380
Kansas State Development Finance Authority Revenue, Water Pollution Control Revolving
Fund, Series II, 5.125%, 11/01/18 ............................................... 5,000,000 5,389,900
Newton Hospital Revenue, Newton Healthcare Corp., Refunding, Series A, 5.70%,
11/15/18 ........................................................................ 1,875,000 1,915,744
Shawnee County USD No. 437 Auburn-Washburn GO, Refunding, FSA Insured, 5.00%,
9/01/20 ......................................................................... 2,500,000 2,636,925
---------------
32,429,769
---------------
KENTUCKY 1.0%
Ashland PCR, Ashland Oil Inc. Project, Refunding, 6.65%, 8/01/09 .................. 3,100,000 3,114,260
Henderson County Solid Waste Disposal Revenue, MacMillan Bloedel Project, 7.00%,
3/01/05 ......................................................................... 10,000,000 10,200,000
Kenton County Airport Board Airport Revenue, Special Facilities, Delta Airlines Inc.
Project,
Series A, 7.50%, 2/01/20 ...................................................... 10,000,000 8,966,000
Series A, 7.125%, 2/01/21 ..................................................... 9,330,000 8,024,266
Series B, 7.25%, 2/01/22 ...................................................... 3,350,000 2,938,519
Kentucky Economic Development Finance Authority Hospital System Revenue, Appalachian
Regional Health Center Facility, Refunding and Improvement,
5.80%, 10/01/12 ............................................................... 1,000,000 991,640
5.85%, 10/01/17 ............................................................... 5,615,000 5,503,262
Pendleton County Multi-County Lease Revenue, Kentucky Assn. of Counties Leasing Trust,
Series A, 6.50%, 3/01/19 ........................................................ 27,160,000 27,277,603
---------------
67,015,550
---------------
30 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
LOUISIANA 2.0%
Calcasieu Parish Inc. IDB, PCR, Gulf States Utilities Co. Project, Refunding, 6.75%,
10/01/12 ........................................................................ $ 14,285,000 $ 14,376,995
Calcasieu Parish Memorial Hospital Service District Revenue, Lake Charles Parish
Memorial Hospital Project, Series A, Connie Lee Insured,
6.375%, 12/01/12 .............................................................. 4,310,000 5,053,001
6.50%, 12/01/18 ............................................................... 5,530,000 7,027,358
6.65%, 12/01/21 ............................................................... 3,145,000 3,156,070
Calcasieu Parish Public Trust Authority Mortgage Revenue, Refunding, Series B,
6.875%, 11/01/12 ................................................................ 60,000 60,000
East Baton Rouge Mortgage Finance Authority SFM Purchase Revenue,
Series A, 6.80%, 10/01/28 ..................................................... 1,330,000 1,350,322
Series C, 7.00%, 4/01/32 ...................................................... 150,000 150,632
Ernest N. Morial New Orleans Exhibit Hall Authority Special Tax, senior sub. note,
Series A, AMBAC Insured, 5.00%, 7/15/33 ......................................... 15,000,000 15,487,650
Greater New Orleans Expressway Commission Revenue, Refunding, AMBAC Insured, 5.00%,
11/01/27 ........................................................................ 5,655,000 5,934,131
Jefferson Parish Home Mortgage Authority SFMR, Refunding, Series G-2, GNMA Secured,
5.55%, 6/01/32 .................................................................. 1,960,000 1,993,830
cLafayette Public Improvement Sales Tax GO, Series B, MBIA Insured, 4.75%, 3/01/30 5,055,000 5,187,593
Louisiana Local Government Environmental Facilities CDA Revenue,
Jefferson Parking Garage Project, AMBAC Insured, 5.00%, 9/01/31 ............... 4,290,000 4,435,302
MBIA Insured, 5.00%, 12/01/26 ................................................. 5,605,000 5,867,258
Louisiana Public Facilities Authority Revenue,
Ochsner Clinic Foundation Project, Series B, 5.75%, 5/15/23 ................... 10,000,000 10,744,100
Tulane University, Refunding, Series A, AMBAC Insured, 5.00%, 7/01/32 ......... 5,000,000 5,185,350
Louisiana State Gas and Fuels Tax Revenue, Series A, AMBAC Insured, 5.00%, 6/01/27 19,250,000 20,063,890
Louisiana State GO, Series A, FGIC Insured, Pre-Refunded, 5.00%, 11/15/19 ......... 9,000,000 9,843,750
New Orleans GO, Refunding, AMBAC Insured,
6.125%, 10/01/16 .............................................................. 10,275,000 10,523,244
6.20%, 10/01/21 ............................................................... 8,050,000 8,246,903
Pointe Coupee Parish PCR, Gulf States Utilities Co. Project, Refunding, 6.70%,
3/01/13 ....................................................................... 2,200,000 2,214,300
West Feliciana Parish PCR, Gulf State Utility Co. Project,
7.70%, 12/01/14 ............................................................... 2,000,000 2,007,700
7.00%, 11/01/15 ............................................................... 3,050,000 3,106,212
---------------
142,015,591
---------------
MAINE 0.6%
Financial Authority Solid Waste Recycling Facilities Revenue, Great Northern
Paper Co., Bowater Project, 7.75%, 10/01/22 ..................................... 29,300,000 29,571,904
Jay Solid Waste Disposal Revenue, International Paper Co. Project, Refunding,
Series B, 6.20%, 9/01/19 ........................................................ 8,000,000 8,700,080
Maine State Housing Authority Mortgage Purchase Revenue, Refunding, Series D-1,
5.05%, 11/15/16 ................................................................. 115,000 115,523
Rumford PCR, Boise Cascade Corp. Project, Refunding, 6.625%, 7/01/20 .............. 4,800,000 4,911,552
---------------
43,299,059
---------------
Annual Report | 31
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MARYLAND 0.2%
Gaithersburg Hospital Facilities Revenue, Shady Grove Adventist Hospital,
Refunding and Improvement, FSA Insured, 6.00%, 9/01/21 .......................... $ 10,110,000 $ 10,417,041
Price Georges County GO, Conservation Public Improvement, Series A, 5.00%,
10/01/23 ........................................................................ 5,385,000 5,790,006
---------------
16,207,047
---------------
MASSACHUSETTS 3.7%
Massachusetts Bay Transportation Authority Revenue, General Transportation System,
Refunding, Series C, 5.00%, 3/01/24 ........................................... 14,000,000 14,428,540
Series A, FGIC Insured, 5.00%, 3/01/23 ........................................ 1,035,000 1,086,170
Series A, FGIC Insured, Pre-Refunded, 5.00%, 3/01/23 .......................... 2,965,000 3,103,465
Massachusetts Bay Transportation Authority Revenue Special Assessment,
Refunding, Series A, 5.25%, 7/01/30 ........................................... 6,785,000 7,163,128
Series A, Pre-Refunded, 5.25%, 7/01/30 ........................................ 25,740,000 28,358,273
Massachusetts Bay Transportation Authority Sales Tax Revenue, Senior Series A,
5.00%, 7/01/28 .................................................................. 10,000,000 10,988,500
Massachusetts Special Obligation Revenue, Consolidation Loan, Series A, FGIC
Insured, Pre-Refunded, 5.00%, 6/01/22 ........................................... 15,070,000 16,634,417
Massachusetts State Development Finance Agency Revenue, Massachusetts/Saltonstall
Redevelopment Building Corp., Series A, MBIA Insured, 5.125%, 8/01/28 ........... 6,735,000 7,186,043
Massachusetts State GO,
MBIA Insured, Pre-Refunded, 5.00%, 8/01/22 .................................... 4,100,000 4,495,691
Refunding, Series B, ETM, 6.50%, 8/01/08 ...................................... 5,900,000 6,503,098
Massachusetts State Health and Educational Facilities Authority Revenue,
Berkshire Health System, Series E, 6.25%, 10/01/31 ............................ 2,250,000 2,412,472
Berkshire Health System, Series E, Radian Insured, 5.70%, 10/01/25 ............ 4,500,000 4,950,045
Harvard University, Series FF, 5.00%, 7/15/22 ................................. 13,550,000 14,432,918
Melrose-Wakefield Hospital, Refunding, Series B, ETM, 6.35%, 7/01/06 .......... 1,100,000 1,106,567
Massachusetts State HFA Housing Projects Revenue, Refunding, Series A,
6.30%, 10/01/13 ............................................................... 425,000 426,334
6.375%, 4/01/21 ............................................................... 125,000 125,398
Massachusetts State HFA Housing Revenue, SF, Series 41, 6.30%, 12/01/14 ........... 975,000 997,172
Massachusetts State Industrial Finance Agency Health Care Facilities Revenue,
Jewish Geriatric Services Inc., Series B, Pre-Refunded,
5.375%, 5/15/17 ............................................................... 1,965,000 2,094,042
5.50%, 5/15/27 ................................................................ 5,000,000 5,340,600
Massachusetts State Industrial Finance Agency Revenue, D'Youville Senior Care,
5.65%, 10/01/17 ............................................................... 2,295,000 2,410,278
5.70%, 10/01/27 ............................................................... 7,375,000 7,705,326
Massachusetts State Port Authority Revenue, Special Facilities, Bosfuel Project,
MBIA Insured, 5.75%, 7/01/39 .................................................... 10,150,000 10,596,194
Massachusetts State Turnpike Authority Metropolitan Highway System Revenue,
Refunding, Sub Series A, AMBAC Insured, 5.25%, 1/01/29 ........................ 5,000,000 5,341,800
Series A, MBIA Insured, 5.00%, 1/01/37 ........................................ 52,130,000 53,314,915
sub. lien, Refunding, Series B, MBIA Insured, 5.125%, 1/01/37 ................. 21,350,000 21,961,037
32 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MASSACHUSETTS (CONT.)
Massachusetts State Water Pollution Abatement Trust Revenue,
Massachusetts Water Revenue Abatement Program, Series A, 5.00%, 8/01/32 ....... $ 5,000,000 $ 5,209,150
Water Revenue Authority Program, Sub Series A, 5.75%, 8/01/29 ................. 5,210,000 5,773,930
Water Revenue Authority Program, Sub Series A, Pre-Refunded, 5.75%, 8/01/29 ... 1,290,000 1,441,614
Route 3 North Transportation Improvement Assn. Massachusetts Lease Revenue,
MBIA Insured, Pre-Refunded, 5.375%, 6/15/29 ..................................... 16,405,000 18,156,890
---------------
263,744,007
---------------
MICHIGAN 3.6%
Anchor Bay School District GO, Refunding, 5.00%, 5/01/29 .......................... 6,300,000 6,530,769
Belding Area Schools GO, FGIC Insured,
6.10%, 5/01/26 ................................................................ 810,000 843,194
Pre-Refunded, 6.10%, 5/01/26 .................................................. 2,995,000 3,123,755
Chippewa Valley School GO, Refunding, 5.125%, 5/01/27 ............................. 5,310,000 5,611,502
Detroit City School District GO,
School Building and Site Improvements, Series A, FGIC Insured, 5.00%, 5/01/23 2,000,000 2,114,620
School Building and Site Improvements, Series B, FGIC Insured, 5.00%, 5/01/33 16,870,000 17,534,172
Series A, FSA Insured, 5.125%, 5/01/31 ........................................ 14,925,000 15,624,982
Detroit Sewage Disposal Revenue,
second lien, Series A, MBIA Insured, 5.00%, 7/01/30 ............................. 10,000,000 10,503,400
senior lien, Refunding, Series A, FGIC Insured, 5.125%, 7/01/31 ................. 10,000,000 10,419,700
Series A, MBIA Insured, 5.00%, 7/01/27 .......................................... 15,000,000 15,627,750
Detroit Water Supply System Revenue,
second lien, Series B, FGIC Insured, 5.50%, 7/01/33 ............................. 5,000,000 5,479,100
senior lien, Series A, FGIC Insured, 5.00%, 7/01/30 ............................. 17,575,000 18,156,557
senior lien, Series A, FGIC Insured, 5.25%, 7/01/33 ............................. 6,170,000 6,497,442
senior lien, Series A, FGIC Insured, Pre-Refunded, 5.25%, 7/01/33 ............... 7,060,000 7,858,698
Detroit/Wayne County Stadium Authority Revenue, FGIC Insured, 5.25%, 2/01/27 ...... 8,625,000 9,104,636
Jackson County Building Authority Revenue, AMBAC Insured, 5.60%, 5/01/30 .......... 4,145,000 4,626,898
Kalamazoo EDC Revenue, Limited Obligation, Friendship Village, Refunding,
Series A, 6.25%, 5/15/27 ........................................................ 1,750,000 1,761,060
Kent Hospital Finance Authority Health Care Revenue, Butterworth Health System,
Series A, MBIA Insured, Pre-Refunded, 5.625%, 1/15/26 ........................... 2,500,000 2,600,025
Michigan State Building Authority Revenue, Facilities Program, Refunding,
Series I, 5.00%, 10/15/24 ....................................................... 31,350,000 32,933,488
Michigan State Hospital Finance Authority Revenue, Ascension Health Credit,
Series A, MBIA Insured, Pre-Refunded, 6.125%, 11/15/23 .......................... 18,000,000 20,400,480
Michigan State Strategic Fund Resources Recovery Ltd. Obligation Revenue,
Detroit Education Exempt Facilities, Refunding, Series D, XLCA Insured, 5.25%,
12/15/32 ........................................................................ 10,000,000 10,531,200
Michigan State Trunk Line Revenue, Series A, FSA Insured,
5.00%, 11/01/25 ............................................................... 16,250,000 16,991,325
5.25%, 11/01/30 ............................................................... 10,000,000 10,562,100
Royal Oak Hospital Finance Authority Revenue, William Beaumont Hospital, Series M,
MBIA Insured, 5.25%, 11/15/31 ................................................... 10,000,000 10,500,900
Southgate Community School District GO, FGIC Insured, 5.00%, 5/01/25 .............. 5,500,000 5,806,955
West Ottawa Public School District GO, Series A, 5.00%, 5/01/27 ................... 5,000,000 5,235,150
---------------
256,979,858
---------------
Annual Report | 33
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MINNESOTA 2.2%
Cloquet PCR, Potlatch Corp. Projects, Refunding, 5.90%, 10/01/26 .................. $ 9,100,000 $ 9,219,665
Golden Valley Revenue, Covenant Retirement Communities, Series A, 5.50%,
12/01/29 ........................................................................ 1,500,000 1,563,465
International Falls PCR, Boise Cascade Corp. Project, Refunding, 5.65%, 12/01/22 .. 3,500,000 3,583,230
Minneapolis and St. Paul Metropolitan Airports Commission Airport Revenue,
Series A, FGIC Insured, 5.125%, 1/01/31 ....................................... 10,000,000 10,389,100
Series A, FGIC Insured, 5.25%, 1/01/32 ........................................ 32,025,000 33,882,770
Series A, FGIC Insured, 5.75%, 1/01/32 ........................................ 5,000,000 5,506,100
Series C, FGIC Insured, 5.25%, 1/01/26 ........................................ 19,000,000 20,200,800
Minnesota Agriculture and Economic Development Board Revenue, Health Care System,
Fairview Hospital, Refunding, Series A, MBIA Insured, 5.75%, 11/15/26 ........... 25,810,000 27,880,220
Minnetonka MFHR, Ridgepointe II Project, Refunding, Series A, GNMA Secured, 5.95%,
10/20/33 ........................................................................ 11,075,000 11,708,158
Rochester Health Care Facilities Revenue, Mayo Foundation, Series A, 5.50%,
11/15/27 ........................................................................ 20,000,000 21,284,800
Roseville MFHR, Rosepointe I Project, Refunding, Series A, GNMA Secured, 5.95%,
10/20/33 ........................................................................ 8,195,000 8,663,508
University of Minnesota Revenue, Refunding, Series A, 5.75%, 7/01/13 .............. 1,250,000 1,449,000
---------------
155,330,816
---------------
MISSISSIPPI 1.3%
Claiborne County PCR, Systems Energy Resources Inc., Refunding, 6.20%, 2/01/26 .... 36,500,000 36,724,110
Jackson County Environmental Improvement Revenue, International Paper Co. Project,
6.70%, 5/01/24 .................................................................. 3,500,000 3,771,250
Mississippi Business Finance Corp. PCR, System Energy Resource Inc. Project,
5.875%, 4/01/22 ............................................................... 40,000,000 40,420,800
Refunding, 5.90%, 5/01/22 ..................................................... 8,250,000 8,440,080
Mississippi State GO, Refunding, 5.75%, 12/01/12 .................................. 2,000,000 2,301,400
---------------
91,657,640
---------------
MISSOURI 1.2%
Jackson County Special Obligation Revenue, MBIA Insured, 5.00%, 12/01/22 .......... 9,095,000 9,677,899
Missouri Development Finance Board Cultural Facilities Revenue, Nelson Gallery
Foundation, Series A, MBIA Insured, 5.00%, 12/01/30 ............................. 11,500,000 11,989,900
Missouri State Board of Public Buildings Special Obligation Revenue, Series A,
4.75%, 10/15/28 ................................................................. 8,250,000 8,463,427
Missouri State Health and Educational Facilities Authority Revenue, SSM Health
Care, Refunding, Series A, MBIA Insured, 5.00%, 6/01/22 ....................... 4,500,000 4,715,325
Series A, AMBAC Insured, 5.25%, 6/01/21 ....................................... 17,500,000 18,796,750
St. Louis Airport Revenue,
Airport Development Program, Series A, MBIA Insured, 5.00%, 7/01/20 ........... 5,000,000 5,273,050
Airport Development Program, Series A, MBIA Insured, 5.00%, 7/01/21 ........... 7,250,000 7,629,755
Capital Improvement Program, Series A, MBIA Insured, 5.00%, 7/01/27 ........... 12,390,000 12,887,830
Taney County IDA Hospital Revenue, The Skaggs Community Hospital Assn., 5.40%,
5/15/28 ......................................................................... 4,000,000 4,042,000
---------------
83,475,936
---------------
34 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MONTANA 0.8%
Forsyth PCR,
Puget Sound Energy, Refunding, Series A, AMBAC Insured, 5.00%, 3/01/31 ........ $ 30,000,000 $ 31,213,800
The Montana Power Co., Refunding, MBIA Insured, 5.90%, 12/01/23 ............... 20,385,000 20,648,986
Montana State Board of Housing Revenue, SF Program, Refunding, Series B-1, 6.25%,
12/01/21 ........................................................................ 6,025,000 6,184,000
---------------
58,046,786
---------------
NEBRASKA 0.2%
Omaha Convention Hotel Corp. Revenue, Convention Center First Tier, Series A,
AMBAC Insured, 5.125%, 4/01/26 .................................................. 12,500,000 13,225,000
----------------
NEVADA 2.0%
Clark County Airport Revenue, sub. lien,
Series A-2, FGIC Insured, 5.125%, 7/01/27 ..................................... 10,000,000 10,556,500
Series B, FGIC Insured, 5.25%, 7/01/31 ........................................ 20,000,000 21,050,400
Clark County IDR, Nevada Power Co. Project, Refunding, Series C, 7.20%, 10/01/22 .. 12,500,000 12,580,375
Director of the State Department of Business and Industry Revenue, Las Vegas
Monorail Project, first tier, AMBAC Insured, 5.625%,
1/01/32 ....................................................................... 21,995,000 24,310,854
1/01/34 ....................................................................... 15,000,000 16,362,450
Henderson Health Care Facility Revenue, Catholic Healthcare West, Series A,
5.25%, 7/01/18 .................................................................. 13,815,000 14,305,294
Pre-Refunded, 5.25%, 7/01/18 .................................................... 9,870,000 10,620,811
Humboldt County PCR, Sierra Pacific Power Co., Refunding, Series A, AMBAC Insured,
6.30%, 7/01/22 .................................................................. 4,500,000 4,553,415
Nevada Housing Division Revenue, SF Program, senior issue, Refunding,
Series A-1, 6.25%, 10/01/26 ..................................................... 735,000 744,224
Series C-2, FHA Insured, 6.75%, 10/01/26 ........................................ 1,025,000 1,037,413
Nevada State GO, Municipal Bond Bank Project No. 40-41, Series A, ETM, 6.375%,
12/01/17 ........................................................................ 10,275,000 10,306,030
Sparks RDA Tax Allocation Revenue, Refunding, Series A, Radian Insured, 6.00%,
1/15/23 ......................................................................... 5,000,000 5,519,000
Washoe County Gas and Water Facilities Revenue, Refunding, AMBAC Insured, 6.30%,
12/01/14 ........................................................................ 5,000,000 5,072,600
Washoe County GO, Reno Sparks Convention, Refunding, Series A, FGIC Insured, 5.00%,
7/01/24 ......................................................................... 5,000,000 5,214,800
---------------
142,234,166
---------------
NEW HAMPSHIRE 0.3%
Nashua Housing Authority MFR, Clocktower Project, Refunding, GNMA Secured, 6.25%,
6/20/33 ......................................................................... 5,788,000 6,049,270
New Hampshire Health and Education Facilities Authority Revenue, Exeter Project,
6.00%, 10/01/24 ............................................................... 2,000,000 2,187,360
5.75%, 10/01/31 ............................................................... 1,000,000 1,063,190
New Hampshire Higher Educational and Health Facilities Authority Revenue,
New Hampshire Catholic Charities, 5.80%, 8/01/22 .............................. 1,000,000 1,010,740
Rivier College, 5.60%, 1/01/28 ................................................ 4,590,000 4,758,774
The Hitchcock Clinic, MBIA Insured, Pre-Refunded, 6.00%, 7/01/27 .............. 4,275,000 4,641,795
Annual Report | 35
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW HAMPSHIRE (CONT.)
New Hampshire State HFA, SFMR, Series E,
6.75%, 7/01/19 ................................................................ $ 595,000 $ 603,021
6.80%, 7/01/25 ................................................................ 480,000 486,475
---------------
20,800,625
---------------
NEW JERSEY 1.8%
Health Care Facilities Financing Authority Revenue, Englewood Hospital, MBIA
Insured, 5.00%, 8/01/23 ......................................................... 5,000,000 5,308,150
Hudson County Improvement Authority Solid Waste Systems Revenue, Refunding,
Series 1, 6.00%, 1/01/19 ...................................................... 2,100,000 2,121,840
Series 1, 6.00%, 1/01/29 ...................................................... 5,000,000 5,041,900
Series 2, 6.125%, 1/01/19 ..................................................... 2,000,000 2,030,900
Series 2, 6.125%, 1/01/29 ..................................................... 5,000,000 5,067,050
New Jersey EDA Lease Revenue, International Center for Public Health Project,
University of Medicine and Dentistry, AMBAC Insured, 6.00%, 6/01/32 ............. 5,000,000 5,616,000
New Jersey EDA Revenue,
Cigarette Tax, 5.75%, 6/15/29 ................................................. 20,000,000 21,221,400
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/29 ....... 10,000,000 10,532,500
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/34 ....... 5,000,000 5,250,800
School Facilities Construction, Series C, MBIA Insured, 4.75%, 6/15/25 ........ 7,500,000 7,723,200
New Jersey State Transportation Trust Fund Authority Revenue, Transportation
System, Series B, MBIA Insured, Pre-Refunded, 5.00%, 12/15/21 ................... 12,400,000 13,666,164
New Jersey State Turnpike Authority Turnpike Revenue, Series A, MBIA Insured,
5.60%, 1/01/22 ................................................................ 7,500,000 8,208,300
5.50%, 1/01/25 ................................................................ 13,000,000 14,154,660
Tobacco Settlement Financing Corp. Revenue, Asset Backed, Refunding,
5.75%, 6/01/32 ................................................................ 24,225,000 24,237,597
---------------
130,180,461
---------------
NEW MEXICO 0.0%b
New Mexico State Highway Commission Tax Revenue, senior sub. lien, Series A,
Pre-Refunded, 6.00%, 6/15/13 ................................................... 1,000,000 1,133,600
---------------
NEW YORK 13.5%
Long Island Power Authority Electric System Revenue, General, Refunding, Series A,
MBIA Insured, 5.25%, 12/01/26 ................................................... 10,000,000 10,674,100
MTA Commuter Facilities Revenue, Series A,
FGIC Insured, Pre-Refunded, 6.00%, 7/01/16 .................................... 8,950,000 9,792,553
Pre-Refunded, 5.25%, 7/01/28 .................................................. 5,000,000 5,580,450
Pre-Refunded, 6.125%, 7/01/29 ................................................. 15,040,000 16,895,184
MTA Dedicated Tax Fund Revenue, Series A,
FGIC Insured, Pre-Refunded, 6.00%, 4/01/30 .................................... 12,500,000 14,187,125
FGIC Insured, Pre-Refunded, 5.00%, 11/15/31 ................................... 14,250,000 15,732,997
MBIA Insured, ETM, 6.25%, 4/01/11 ............................................. 1,280,000 1,495,360
MTA Revenue,
Refunding, Series E, 5.25%, 11/15/31 .......................................... 10,000,000 10,552,800
Refunding, Series U, 5.125%, 11/15/31 ......................................... 20,720,000 21,633,338
Series A, MBIA Insured, 4.75%, 11/15/27 ....................................... 15,000,000 15,412,950
36 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW YORK (CONT.)
MTA Transit Facilities Revenue,
Series A, FSA Insured, Pre-Refunded, 6.00%, 7/01/16 ........................... $ 3,630,000 $ 3,971,728
Series A, Pre-Refunded, 6.00%, 7/01/24 ........................................ 5,000,000 5,592,450
Series A, Pre-Refunded, 5.625%, 7/01/27 ....................................... 10,800,000 11,727,504
Service Contract, Series 8, Pre-Refunded, 5.375%, 7/01/21 ..................... 15,000,000 17,094,450
Nassau County GO,
Improvement, Series F, 6.625%, 3/01/08 ........................................ 7,325,000 7,827,202
Water Utility Improvements, Series F, 6.625%, 3/01/07 ......................... 7,070,000 7,527,995
Nassau Health Care Corp. Health System Revenue, Nassau County Guaranteed,
FSA Insured, Pre-Refunded, 5.75%, 8/01/29 ..................................... 10,000,000 11,263,400
New York City GO,
Refunding, Series E, 6.00%, 8/01/26 ........................................... 300,000 314,868
Refunding, Series H, 6.125%, 8/01/25 .......................................... 55,990,000 59,834,833
Refunding, Series J, 6.00%, 8/01/21 ........................................... 9,495,000 10,121,575
Series A, 6.125%, 8/01/06 ..................................................... 110,000 111,932
Series B, 8.25%, 6/01/05 ...................................................... 575,000 577,346
Series B, 6.20%, 8/15/06 ...................................................... 1,200,000 1,223,304
Series B, 6.125%, 8/01/09 ..................................................... 5,000 5,088
Series B, 6.00%, 8/15/26 ...................................................... 70,000 73,544
Series B, ETM, 8.25%, 6/01/05 ................................................. 425,000 426,883
Series B, Pre-Refunded, 6.20%, 8/15/06 ........................................ 300,000 306,174
Series B, Pre-Refunded, 6.30%, 8/15/08 ........................................ 26,875,000 27,439,375
Series B, Pre-Refunded, 6.375%, 8/15/10 ....................................... 21,740,000 22,201,105
Series B, Pre-Refunded, 6.00%, 8/15/26 ........................................ 1,930,000 2,039,277
Series D, 8.00%, 8/01/16 ...................................................... 5,000 5,066
Series D, 5.50%, 6/01/24 ...................................................... 23,940,000 25,903,080
Series E, 6.50%, 12/01/12 ..................................................... 20,000 20,060
Series E, Pre-Refunded, 6.00%, 8/01/26 ........................................ 2,700,000 2,849,526
Series F, 5.25%, 1/15/23 ...................................................... 20,000,000 21,205,600
Series F, Pre-Refunded, 6.00%, 8/01/13 ........................................ 14,000,000 14,766,360
Series G, Pre-Refunded, 6.00%, 10/15/26 ....................................... 15,335,000 16,657,490
Series H, 6.25%, 8/01/15 ...................................................... 10,265,000 11,008,905
Series H, Pre-Refunded, 6.25%, 8/01/15 ........................................ 2,770,000 3,003,372
Series H, Pre-Refunded, 6.125%, 8/01/25 ....................................... 9,795,000 10,593,880
Series I, 6.25%, 4/15/13 ...................................................... 1,515,000 1,614,278
Series I, 6.25%, 4/15/27 ...................................................... 595,000 633,413
Series I, Pre-Refunded, 6.25%, 4/15/13 ........................................ 35,095,000 37,747,480
Series I, Pre-Refunded, 6.25%, 4/15/27 ........................................ 6,405,000 6,895,431
Series J, Pre-Refunded, 6.00%, 8/01/21 ........................................ 18,765,000 20,244,808
New York City Municipal Water Finance Authority Water and Sewer System Revenue,
Refunding, 5.50%, 6/15/33 ..................................................... 55,000,000 59,813,050
Refunding, Series B, FGIC Insured, 5.25%, 6/15/29 ............................. 4,855,000 5,109,256
Series A, FGIC Insured, 5.50%, 6/15/32 ........................................ 10,000,000 10,838,400
Series A, Pre-Refunded, 5.75%, 6/15/30 ........................................ 8,000,000 8,932,480
Series B, AMBAC Insured, 5.25%, 6/15/29 ....................................... 8,000,000 8,418,960
Series B, FSA Insured, 5.25%, 6/15/29 ......................................... 4,030,000 4,241,051
Annual Report | 37
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW YORK (CONT.)
New York City Municipal Water Finance Authority Water and Sewer System Revenue, (cont.)
Series B, MBIA Insured, 5.75%, 6/15/26 ........................................ $ 1,865,000 $ 1,944,001
Series B, MBIA Insured, Pre-Refunded, 5.75%, 6/15/26 .......................... 1,135,000 1,184,611
Series B, Pre-Refunded, 5.75%, 6/15/29 ........................................ 15,000,000 16,065,450
Series D, 5.25%, 6/15/25 ...................................................... 10,000,000 10,727,600
Series G, FSA Insured, 5.125%, 6/15/32 ........................................ 24,215,000 25,304,433
New York City Transitional Finance Authority Revenue, Future Tax Secured,
Refunding, Series C, 5.50%, 11/01/20 .......................................... 5,000,000 5,486,750
Refunding, Series C-A, 5.50%, 11/01/24 ........................................ 4,200,000 4,600,806
Series B, 5.00%, 5/01/30 ...................................................... 7,500,000 7,808,850
Series B, Pre-Refunded, 6.00%, 11/15/29 ....................................... 10,000,000 11,467,000
Series D, 5.00%, 2/01/27 ...................................................... 10,000,000 10,469,600
Series E, 5.00%, 2/01/28 ...................................................... 8,885,000 9,314,145
New York City Transportation Authority MTA Triborough COP, Series A, AMBAC
Insured, Pre-Refunded, 5.40%, 1/01/19 ........................................... 15,000,000 16,670,400
New York City Trust Cultural Resources Revenue, Museum of Modern Art 2001,
Series D, AMBAC Insured, 5.125%, 7/01/31 ........................................ 8,000,000 8,417,600
New York State Dormitory Authority Lease Revenue, Court Facilities, 6.00%, 5/15/39 16,000,000 17,614,400
New York State Dormitory Authority Revenue, State University Educational
Facilities, 5.125%, 5/15/21 ..................................................... 7,165,000 7,563,589
New York State Dormitory Authority Revenues,
City University System, Consolidated Third, Series 1, 5.25%, 7/01/25 .......... 10,000,000 10,500,600
City University System, Third General Residence, Series 2, Pre-Refunded,
6.00%, 7/01/20 .............................................................. 16,860,000 17,830,462
City University System, Third General Residence, Series 2, Pre-Refunded,
6.00%, 7/01/26 .............................................................. 5,500,000 5,813,335
Interfaith Medical Center, Series D, 5.40%, 2/15/28 ........................... 8,000,000 8,342,960
Mental Health Services, Series A, Pre-Refunded, 6.00%, 8/15/17 ................ 14,290,000 15,378,755
Mental Health Services, Series A, Pre-Refunded, 5.75%, 2/15/27 ................ 4,830,000 5,177,180
Second Hospital, Interfaith Medical Center, Series D, 5.30%, 2/15/19 .......... 5,000,000 5,226,850
Supported Debt, Mental Health Services, Refunding, Series A, 5.75%, 2/15/27 ... 80,000 85,040
Supported Debt, Mental Health Services, Series A, 6.00%, 8/15/17 .............. 245,000 261,486
Supported Debt, Mental Health Services, Series A, Pre-Refunded, 6.00%, 8/15/17 3,465,000 3,728,998
Supported Debt, Mental Health Services, Series A, Pre-Refunded, 5.75%, 2/15/27 90,000 96,469
Supported Debt, Upstate Community Colleges, Refunding, Series A, 5.00%, 7/01/28 6,570,000 6,770,254
Supported Debt, Upstate Community Colleges, Series A, Pre-Refunded, 5.00%,
7/01/28 ..................................................................... 3,430,000 3,733,521
New York State Energy Research and Development Authority Electric Facilities
Revenue, Consolidated Edison Project, Refunding, Series A, 6.10%, 8/15/20 ....... 8,500,000 8,717,855
New York State HFA Service Contract Obligation Revenue,
Refunding, Series C, 5.50%, 9/15/22 ........................................... 17,505,000 18,539,896
Series A, Pre-Refunded, 6.50%, 3/15/25 ........................................ 10,000,000 10,349,200
New York State HFAR,
Health Facilities, New York City, Refunding, Series A, 5.90%, 5/01/05 ......... 14,070,000 14,070,000
Housing Project Mortgage, Refunding, Series A, FSA Insured, 6.10%, 11/01/15 ... 4,860,000 5,151,940
Housing Project Mortgage, Refunding, Series A, FSA Insured, 6.125%, 11/01/20 .. 3,760,000 3,985,826
New York State Thruway Authority Highway and Bridge Trust Fund Revenue, Series A,
FSA Insured, Pre-Refunded, 6.00%, 4/01/14 ....................................... 1,420,000 1,623,912
38 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW YORK (CONT.)
New York State Thruway Authority Service Contract Revenue, Local Highway and Bridge,
Pre-Refunded, 5.75%, 4/01/16 .................................................... $ 13,200,000 $ 13,828,452
New York State Urban Development Corp. Revenue,
senior lien, Corporate Purpose, 5.50%, 7/01/05 ................................ 400,000 401,800
Youth Facilities, Pre-Refunded, 6.00%, 4/01/17 ................................ 11,720,000 12,659,358
Onondaga County GO,
5.875%, 2/15/12 ............................................................... 300,000 343,827
ETM, 5.875%, 2/15/12 .......................................................... 700,000 811,440
Triborough Bridge and Tunnel Authority Revenues, General Purpose,
Refunding, Series A, 5.00%, 1/01/27 ........................................... 5,000,000 5,206,400
Refunding, Series A, 5.00%, 1/01/32 ........................................... 20,000,000 20,708,200
Series B, Pre-Refunded, 5.50%, 1/01/30 ........................................ 15,000,000 17,608,650
Series X, ETM, 6.625%, 1/01/12 ................................................ 1,800,000 2,126,142
Series Y, ETM, 5.90%, 1/01/07 ................................................. 500,000 525,840
Series Y, ETM, 6.00%, 1/01/12 ................................................. 1,000,000 1,131,030
---------------
957,513,749
---------------
NORTH CAROLINA 3.1%
Charlotte Airport Revenue, Series A, MBIA Insured, 5.00%, 7/01/34 ................. 6,000,000 6,268,620
Charlotte-Mecklenberg Hospital Authority Health Care System Revenue,
5.90%, 1/15/16 ................................................................ 7,010,000 7,269,720
Pre-Refunded, 5.90%, 1/15/16 .................................................. 2,890,000 3,011,091
North Carolina Eastern Municipal Power Agency Power System Revenue,
Refunding, Series A, 5.75%, 1/01/26 ........................................... 65,350,000 69,434,375
Refunding, Series B, 6.00%, 1/01/22 ........................................... 1,250,000 1,442,488
Refunding, Series B, 6.25%, 1/01/23 ........................................... 39,030,000 46,492,536
Refunding, Series B, 5.75%, 1/01/24 ........................................... 35,140,000 37,262,456
Refunding, Series B, FGIC Insured, 6.25%, 1/01/23 ............................. 1,280,000 1,286,093
Refunding, Series D, 5.125%, 1/01/23 .......................................... 12,000,000 12,363,000
Refunding, Series D, 5.125%, 1/01/26 .......................................... 3,000,000 3,082,950
Refunding, Series D, 6.75%, 1/01/26 ........................................... 5,000,000 5,600,000
Series D, 6.70%, 1/01/19 ...................................................... 2,000,000 2,238,500
North Carolina Medical Care Commission Revenue, Rowan Regional Medical Center,
FSA Insured, 4.75%, 9/01/24 ..................................................... 6,970,000 7,101,106
University Hospital Chapel Hill Revenue, Refunding, AMBAC Insured, 5.00%, 2/15/21 5,000,000 5,198,700
Winston-Salem Water and Sewer System Revenue, Refunding, Pre-Refunded, 5.125%,
6/01/28 ......................................................................... 11,000,000 12,212,530
---------------
220,264,165
---------------
OHIO 3.4%
Akron Bath Copley Joint Township Hospital District Revenue, Hospital Improvement
Children's Hospital Center, FSA Insured, 5.00%, 11/15/31 ........................ 9,250,000 9,626,382
Akron Income Tax Revenue, Community Learning, FGIC Insured, 5.00%,
12/01/26 ...................................................................... 6,085,000 6,418,823
12/01/27 ...................................................................... 3,185,000 3,355,047
Cleveland Airport System Revenue, Series A, FSA Insured, 5.00%, 1/01/31 ........... 20,000,000 20,594,200
Cleveland State University General Receipt Revenue, FGIC Insured, 5.00%, 6/01/29 5,000,000 5,249,050
Annual Report | 39
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OHIO (CONT.)
Columbus City School District GO, School Facilities Construction and Improvement,
FGIC Insured, 5.00%, 12/01/28 ................................................... $ 16,000,000 $ 16,779,040
Cuyahoga County Hospital Facilities Revenue, Canton Inc. Project, 7.50%, 1/01/30 .. 17,100,000 19,278,198
Dayton Special Facilities Revenue, Emery Air Freight Corp., Emery Worldwide
Air Inc., Refunding,
Series A, 5.625%, 2/01/18 ..................................................... 6,000,000 6,483,720
Series E, 6.05%, 10/01/09 ..................................................... 4,000,000 4,451,200
Series F, 6.05%, 10/01/09 ..................................................... 2,750,000 3,060,200
Franklin County Convention Facilities Authority Tax and Lease Revenue,
Anticipation Bonds, MBIA Insured, 5.00%, 12/01/27 ............................... 7,500,000 7,848,750
Hamilton County Sales Tax Revenue, Series B, AMBAC Insured, 5.25%, 12/01/32 ....... 10,000,000 10,711,700
Kettering City School District GO, School Improvement, FGIC Insured, 5.00%, 12/01/30 7,450,000 7,804,098
Montgomery County Health System Revenue, Series B-2, Pre-Refunded, 8.10%, 7/01/18 10,955,000 11,769,460
Montgomery County Hospital Facilities Revenue, Grandview Hospital and Medical
Center, Pre-Refunded,
5.50%, 12/01/10 ............................................................... 1,300,000 1,429,181
5.60%, 12/01/11 ............................................................... 1,000,000 1,103,600
5.65%, 12/01/12 ............................................................... 925,000 1,022,791
Nordonia Hills Local School District GO, School Improvement, AMBAC Insured,
5.375%, 12/01/20 .............................................................. 4,275,000 4,696,943
5.45%, 12/01/25 ............................................................... 3,000,000 3,299,400
Ohio State Air Quality Development Authority Revenue, Dayton Power and Light Co.
Project, Refunding, 6.10%, 9/01/30 .............................................. 12,000,000 12,263,640
Ohio State Water Development Authority Pollution Control Facilities Revenue, Water
Control Loan Fund, Water Quality Series, MBIA Insured, Pre-Refunded, 5.125%,
6/01/19 ......................................................................... 18,000,000 19,186,020
Ohio State Water Development Authority Revenue, Dayton Power, Refunding, Series A,
6.40%, 8/15/27 .................................................................. 3,250,000 3,263,910
Pickerington Local School District GO, School Facilities Construction and
Improvement, FGIC Insured, 5.00%, 12/01/28 ...................................... 15,000,000 15,612,750
Springboro Community City School District GO, School Improvement, MBIA Insured,
5.00%, 12/01/27 ................................................................. 10,350,000 10,929,083
University of Akron General Receipts Revenue, FGIC Insured, Pre-Refunded, 5.75%,
1/01/29 ......................................................................... 11,305,000 12,708,290
University of Cincinnati COP,
Jefferson Avenue Residence Hall, MBIA Insured, 5.125%, 6/01/28 ................ 4,000,000 4,165,920
University Center Project, MBIA Insured, Pre-Refunded, 5.125%, 6/01/24 ........ 10,500,000 10,992,870
University of Cincinnati General Receipts Revenue, Series A, FGIC Insured, 5.25%,
6/01/24 ......................................................................... 5,000,000 5,359,300
---------------
239,463,566
---------------
OKLAHOMA 0.6%
Stillwater Medical Center Authority Revenue,
Series A, Pre-Refunded, 6.10%, 5/15/09 ........................................ 2,340,000 2,457,842
Series B, Pre-Refunded, 6.35%, 5/15/12 ........................................ 1,150,000 1,239,666
Series B, Pre-Refunded, 6.50%, 5/15/19 ........................................ 3,390,000 3,694,286
Tulsa Industrial Authority Hospital Revenue, St. John Medical Center Project,
Series A, Pre-Refunded, 6.25%, 2/15/14 .......................................... 2,000,000 2,055,940
40 | Annual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OKLAHOMA (CONT.)
Tulsa Municipal Airport Trust Revenue,
American Airlines Project, AMR Corp., Refunding, 7.35%, 12/01/11 .............. $ 4,000,000 $ 3,932,480
American Airlines Project, Refunding, 6.25%, 6/01/20 .......................... 18,530,000 15,670,265
AMR Corp., Refunding, Series B, 6.00%, 6/01/35 ................................ 10,000,000 9,581,600
Valley View Hospital Authority Revenue, Valley View Regional Medical
Center, Refunding, 6.00%, 8/15/14 ............................................... 4,000,000 4,182,360
---------------
42,814,439
---------------
OREGON 0.9%
Health Sciences University Revenue, Series A, MBIA Insured, 5.00%, 7/01/26 ........ 10,500,000 11,093,985
Jackson County School District No. 6 Central Point GO, FGIC Insured,
Pre-Refunded, 5.25%, 6/15/20 .................................................... 4,000,000 4,403,680
Lane County School District No. 19 Springfield GO, Refunding, FGIC Insured,
6.00%, 10/15/13 ................................................................. 1,250,000 1,470,800
Oregon State Department of Administrative Services COP, Series A, AMBAC Insured,
Pre-Refunded, 6.00%, 5/01/26 .................................................... 10,000,000 11,432,300
Oregon State EDR, Georgia Pacific Corp. Project,
Refunding, Series 183, 5.70%, 12/01/25 ........................................ 3,500,000 3,527,790
Series CLVII, 6.35%, 8/01/25 .................................................. 5,500,000 5,532,945
Oregon State GO,
Series LX, 6.75%, 5/01/05 ..................................................... 1,000,000 1,000,000
State Board of Higher Education, Series A, 5.00%, 8/01/26 ..................... 18,630,000 19,598,742
State Board of Higher Education, Series A, 5.00%, 8/01/27 ..................... 6,955,000 7,390,035
---------------
65,450,277
---------------
PENNSYLVANIA 4.9%
Allegheny County Hospital Development Authority Revenue, Health System, Series A,
MBIA Insured, 6.50%, 11/15/30 ................................................... 10,000,000 11,755,700
Allegheny County IDAR, Environmental Improvement, USX Corp., Refunding,
5.50%, 12/01/29 ............................................................... 10,000,000 10,479,300
Series A, 6.70%, 12/01/20 ..................................................... 5,250,000 5,328,750
Allegheny County Port Authority Special Revenue, Transportation, FGIC Insured,
5.00%, 3/01/29 .................................................................. 10,000,000 10,391,700
Berks County GO, AMBAC Insured, 5.00%, 11/15/25 ................................... 5,000,000 5,139,850
Butler Area School District GO, FGIC Insured, Pre-Refunded, 5.60%, 4/01/28 ........ 5,000,000 5,572,150
Delaware County Authority University Revenue, Villanova University, Series A,
MBIA Insured,5.00%, 12/01/18 .................................................... 7,090,000 7,433,652
Delaware River Port Authority Pennsylvania and New Jersey Delaware River Bridges
Revenue, FSA Insured, 5.75%,
1/01/22 ....................................................................... 8,500,000 9,422,930
1/01/26 ....................................................................... 10,000,000 11,081,300
Delaware Valley Regional Finance Authority Local Government Revenue, Series B,
AMBAC Insured, 5.60%, 7/01/17 ................................................... 5,000,000 5,821,750
Erie Water Authority Water Revenue, Series A, MBIA Insured, 5.20%, 12/01/30 ....... 18,700,000 19,819,195
Lehigh County IDA, PCR, Pennsylvania Power and Light Co. Project, Refunding,
Series A, MBIA Insured, 6.15%, 8/01/29 .......................................... 4,000,000 4,114,320
Annual Report | 41
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
PENNSYLVANIA (CONT.)
Montgomery County IDA Retirement Community Revenue, Act Retirement-Life
Communities, 5.25%, 11/15/28 .................................................... $ 2,500,000 $ 2,531,025
Northampton County General Purpose Authority Revenue, County Agreement,
FSA Insured,5.25%, 10/01/30 ..................................................... 12,150,000 12,914,842
Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue,
MacMillan LP Project, Pre-Refunded, 7.60%, 12/01/20 5,000,000 5,237,150
Pennsylvania EDA Financing Resources Recovery Revenue, Colver Project,
Series D, 7.125%,12/01/15 ....................................................... 13,500,000 13,790,250
Pennsylvania State GO, First Series, FGIC Insured, Pre-Refunded, 5.00%, 2/01/20 ... 5,000,000 5,512,950
Pennsylvania State Turnpike Commission Revenue, AMBAC Insured, 5.00%, 7/15/31 ..... 5,850,000 6,095,817
Philadelphia Authority for Industrial Development Lease Revenue, Series B,
FSA Insured,5.25%, 10/01/30 ..................................................... 15,630,000 16,461,516
Philadelphia Gas Works Revenue,
Fifth Series A-1, FSA Insured, 5.00%, 9/01/29 ................................. 5,000,000 5,223,250
Refunding, First Series A, FSA Insured, 5.00%, 7/01/26 ........................ 5,000,000 5,192,550
Philadelphia GO, MBIA Insured, 5.00%, 5/15/25 ..................................... 5,000,000 5,121,200
Philadelphia Hospitals and Higher Educational Facilities Authority Revenue,
Mortgage, North Philadelphia Health Systems, Series A, FHA Insured, 5.30%,
1/01/18 3,275,000 3,457,188
Mortgage, North Philadelphia Health Systems, Series A, FHA Insured,
5.35%, 1/01/23 .............................................................. 5,690,000 5,945,709
Mortgage, North Philadelphia Health Systems, Series A, FHA Insured, 5.375%,
1/01/28 ..................................................................... 3,700,000 3,847,075
Temple University Hospital, 5.875%, 11/15/23 .................................. 5,000,000 5,048,150
Philadelphia Parking Authority Parking Revenue, Airport, FSA Insured,
5.25%, 9/01/29 .................................................................. 15,000,000 16,148,400
Philadelphia RDA Revenue, Neighborhood Transformation, Series C, FGIC Insured,
5.00%, 4/15/29 ................................................................ 10,980,000 11,496,829
4/15/30 ....................................................................... 6,000,000 6,272,580
Philadelphia School District GO, Series A, FSA Insured, Pre-Refunded,
5.75%, 2/01/30 .................................................................. 14,050,000 15,946,329
Philadelphia Water and Wastewater Revenue, Series A, FGIC Insured,
5.00%, 11/01/31 ................................................................. 25,000,000 25,964,500
Pittsburgh and Allegheny County Public Auditorium Hotel Room Revenue,
AMBAC Insured, 5.125%, 2/01/35 .................................................. 15,000,000 15,602,850
Pittsburgh and Allegheny County Public Auditorium Revenue, Regional Asset
District Sales Tax, AMBAC Insured, 5.25%, 2/01/31 ............................... 5,000,000 5,376,800
State Public School Building Authority School Revenue,
Daniel Boone School District Project, MBIA Insured, 5.00%, 4/01/28 ............ 9,500,000 9,954,480
Philadelphia School District Project, FSA Insured, 5.00%, 6/01/33 ............. 32,000,000 33,313,920
Washington County Authority Revenue, Capital Projects and Equipment Program,
Refunding, AMBAC Insured, 6.15%, 12/01/29 2,400,000 2,615,592
---------------
345,431,549
---------------
RHODE ISLAND 0.5%
Providence GO, Special Obligation Tax Increment, Series A, 7.65%, 6/01/16 ......... 9,900,000 10,013,850
Rhode Island Health and Educational Building Corp. Revenue, Hospital Financing,
Series A, 5.875%, 9/15/23 ....................................................... 2,000,000 2,030,560
6.00%, 9/15/33 .................................................................. 3,000,000 3,050,790
Rhode Island Housing and Mortgage Finance Corp. Revenue, Homeownership
Opportunity, Refunding, Series 25-A, 4.95%, 10/01/16 ............................ 140,000 141,879
Series 10-A, 6.50%, 10/01/22 .................................................... 475,000 476,876
Series 10-A, 6.50%, 4/01/27 ..................................................... 265,000 266,121
Series 15-A, 6.85%, 10/01/24 .................................................... 620,000 625,636
42 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
RHODE ISLAND (CONT.)
Rhode Island State Health and Educational Building Corp. Revenue,
Health Facilities, Saint Antoine, Series B, 6.125%, 11/15/29 .................. $ 8,400,000 $ 8,937,096
Hospital Financing, Lifespan Obligation Group, 6.375%, 8/15/21 ................ 7,000,000 7,917,840
---------------
33,460,648
---------------
SOUTH CAROLINA 1.1%
Beaufort-Jasper Water and Sewer Authority Waterworks and Sewer System Revenue,
Refunding, FSA Insured, 5.00%, 3/01/26 .......................................... 7,750,000 8,123,550
Dorchester County Waterworks and Sewer System Revenue, Refunding, MBIA Insured,
5.00%, 10/01/28 ................................................................. 8,000,000 8,402,880
Lancaster Educational Assistance Program Inc. Revenue, School District of
Lancaster County Project, 5.00%, 12/01/26 ....................................... 10,000,000 10,244,300
Medical University of South Carolina Hospital Authority Hospital Facilities
Revenue, Mortgage, Refunding, Series A, MBIA Insured, 5.00%, 8/15/31 ............ 13,860,000 14,390,699
South Carolina Public Service Authority Revenue, Series B, FSA Insured,
5.25%, 1/01/33 .................................................................. 31,835,000 33,605,663
---------------
74,767,092
---------------
SOUTH DAKOTA 0.2%
South Dakota Health and Educational Facilities Authority Revenue, Avera Health
Issue, AMBAC Insured, 5.25%, 7/01/22 ............................................ 15,425,000 16,720,237
---------------
TENNESSEE 0.3%
Johnson City Health and Educational Facilities Board Hospital Revenue, first
mortgage, Mountain States Health, Refunding, Series A, MBIA Insured,
6.00%, 7/01/21 .................................................................. 7,000,000 7,835,310
Knox County Health Educational and Housing Facilities Board Hospital Facilities
Revenue, Refunding and Improvement, Series A, FSA Insured, 5.00%, 1/01/22 ....... 5,000,000 5,272,750
Memphis GO, 5.00%, 4/01/17 ........................................................ 3,000,000 3,206,370
Metropolitan Government of Nashville and Davidson County District Energy
Revenue, Series A,AMBAC Insured, 5.00%, 10/01/25 ................................ 5,460,000 5,756,751
Tennessee HDA Revenue, Homeownership Program, Refunding, Series 1D,
4.70%, 7/01/15 695,000 701,408
---------------
22,772,589
---------------
TEXAS 5.5%
Austin Electric Utility System Revenue, Refunding, MBIA Insured, 5.00%, 11/15/28 .. 10,000,000 10,450,200
Bexar County Health Facilities Development Corp. Revenue, Incarnate Word
Health Services, FSA Insured, ETM,
6.00%, 11/15/15 ............................................................... 7,500,000 7,803,750
6.10%, 11/15/23 ............................................................... 8,300,000 8,598,136
Bexar County HFC, MFHR,
American Opportunity Housing, Series A, MBIA Insured, 5.80%, 1/01/31 .......... 6,000,000 6,297,960
Honey Creek Apartments Project, Series A, MBIA Insured, 6.125%, 4/01/20 ....... 1,000,000 1,071,760
Honey Creek Apartments Project, Series A, MBIA Insured, 6.20%, 4/01/30 ........ 2,845,000 3,049,328
Bexar Metropolitan Water District Waterworks Systems Revenue, Refunding,
MBIA Insured, 5.875%, 5/01/22 ................................................. 2,860,000 2,928,383
6.35%, 5/01/25 ................................................................ 1,890,000 1,935,927
Bridge City ISD, GO, Refunding, 5.375%, 2/15/32 ................................... 2,005,000 2,125,721
Carrollton GO, Improvement, FSA Insured, 5.25%, 8/15/19 ........................... 1,000,000 1,080,860
Castleberry ISD Revenue, Refunding, 6.00%, 8/15/25 ................................ 175,000 181,716
Dallas ISD, GO, Refunding, 5.25%, 2/15/20 ......................................... 2,000,000 2,164,340
Annual Report | 43
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
TEXAS (CONT.)
Dallas-Fort Worth International Airport Revenue, Refunding and Improvement,
Series A, FGIC Insured, 5.625%, 11/01/26 ........................................ $85,000,000 $ 91,619,800
Decatur Hospital Authority Hospital Revenue, Series A, ETM, 5.75%, 9/01/29 ........ 4,175,000 4,773,778
Duncanville ISD, GO, Refunding, Series B, 5.25%, 2/15/32 .......................... 9,900,000 10,453,410
Edcouch Elsa ISD, GO, 5.50%, 2/15/30 .............................................. 2,000,000 2,148,140
Gulf Coast Waste Disposal Authority Environmental Improvement Revenue, UXS
Corp. Projects, Refunding, 5.50%, 9/01/17 ....................................... 3,250,000 3,412,793
Gulf Coast Waste Disposal Authority Revenue, Valero Energy Corp. Project,
5.70%, 4/01/32 .................................................................. 3,000,000 3,044,850
Hidalgo County GO, Certificates of Obligation, FSA Insured, Pre-Refunded,
5.25%, 8/15/21 .................................................................. 2,500,000 2,780,350
Houston Airport System Revenue, sub. lien, Series B, FSA Insured,
5.50%, 7/01/30 .................................................................. 2,000,000 2,157,800
Houston Area Water Corp. Contract Revenue, Northeast Water Purification
Project, FGIC Insured, 5.125%, 3/01/28 .......................................... 15,000,000 15,697,200
Houston GO, Public Improvement, Refunding, MBIA Insured, 5.00%, 3/01/25 ........... 5,000,000 5,231,900
Houston Water and Sewer Systems Revenue, junior lien, Series B, FGIC Insured,
Pre-Refunded, 5.00%, 12/01/25 ................................................. 9,710,000 10,410,188
5.25%, 12/01/30 ............................................................... 14,000,000 15,499,680
Joshua ISD, GO, Refunding, Series B, 6.125%, 2/15/26 .............................. 20,000 20,083
Keller ISD, GO, Refunding, 5.375%, 8/15/25 ........................................ 1,500,000 1,600,155
Kerrville ISD, GO, Pre-Refunded, 6.00%, 8/15/13 ................................... 1,000,000 1,140,200
Laredo ISD, GO, Pre-Refunded, 5.25%, 8/01/24 ...................................... 4,000,000 4,355,760
Little Cypress Mauriceville Consolidated ISD, GO, Refunding, 5.90%, 8/01/29 ....... 2,130,000 2,359,870
Lower Colorado River Authority Revenue,
Refunding, FSA Insured, 5.00%, 5/15/31 ........................................ 10,000,000 10,353,200
Refunding and Improvement, Series A, MBIA Insured, 5.00%, 5/15/26 ............. 2,000,000 2,075,800
Lubbock HFC, SFMR, MBS Program, Refunding, Series A, GNMA Secured,
6.125%, 12/01/17 .............................................................. 280,000 290,741
Matagorda County Navigation District No. 1 PCR, Central Power and Light Co.
Project, Refunding, 6.00%, 7/01/28 .............................................. 19,200,000 19,467,456
North Central Texas Health Facility Development Corp. Revenue,
Children's Medical Center Dallas, Refunding, AMBAC Insured, 5.25%, 8/15/24 .... 19,335,000 20,738,721
Texas Health Resources System, Series B, MBIA Insured, 5.125%, 2/15/22 ........ 5,985,000 6,240,560
Northside ISD, GO, Refunding, 5.00%, 2/15/26 ...................................... 2,500,000 2,595,050
Nueces River Authority Environmental Improvement Revenue, Asarco Inc. Project,
Refunding, 5.60%, 1/01/27 ..................................................... 6,000,000 5,766,840
Series A, 5.60%, 4/01/18 ...................................................... 4,500,000 4,371,030
Onalaska ISD, GO, 5.375%, 2/15/32 ................................................. 2,840,000 3,028,036
Pasadena GO, Certificates of Obligation, FGIC Insured, 5.25%, 4/01/32 ............. 3,000,000 3,156,780
Port Corpus Christi IDC Revenue, Valero, Refunding, Series B, 5.40%, 4/01/18 ...... 4,000,000 4,112,440
Port Corpus Christi Nueces County General Revenue, Union Pacific, Refunding,
5.65%, 12/01/22 ................................................................. 15,000,000 15,871,800
Red River Authority PCR, West Texas Utilities Co. Project, Public Service Co. of
Oklahoma, Central Power and Light Co., Refunding, MBIA Insured, 6.00%, 6/01/20 .. 12,000,000 12,624,600
Richardson GO, Hotel Occupancy Certificates, Series A, FGIC Insured,
5.75%, 2/15/21 .................................................................. 2,500,000 2,760,550
Sabine River Authority PCR, Southwestern Electric Power Co., Refunding,
MBIA Insured, 6.10%, 4/01/18 .................................................... 9,000,000 9,433,890
44 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
TEXAS (CONT.)
San Antonio Water Revenue,
Refunding, FSA Insured, 5.00%, 5/15/28 ........................................ $ 5,000,000 $ 5,198,050
Systems, Refunding, FSA Insured, 5.00%, 5/15/25 ............................... 5,000,000 5,228,850
Southmost Regional Water Authority Water Supply Contract Revenue, MBIA Insured,
5.00%, 9/01/25 .................................................................. 5,000,000 5,236,850
Tarrant County Health Facilities Development Corp. Health System Revenue, Harris
Methodist Health System, FGIC Insured, ETM, 6.00%, 9/01/24 ...................... 4,000,000 4,816,600
Tarrant County Health Facilities Development Corp. Revenue, Bethesda Living
Centers, Series C, 5.75%,
8/15/18 ....................................................................... 1,570,000 1,534,251
8/15/28 ....................................................................... 3,900,000 3,630,471
Texas City IDC Marine Terminal Revenue, ARCO Pipe Line Co. Project, Refunding,
7.375%, 10/01/20 ................................................................ 500,000 677,360
Texas State GO, Veterans Housing Assistance, Fund I, Refunding, Series A,
6.15%, 12/01/25 ................................................................. 1,000,000 1,024,990
Tyler Health Facilities Development Corp. Hospital Revenue, East Texas Medical
Center Project, Series A, MBIA Insured, 5.50%, 11/01/17 ....................... 1,735,000 1,834,797
Series D, FSA Insured, 5.375%, 11/01/27 ....................................... 12,480,000 13,483,642
University of Texas University Revenues, Financing System, Series A, Pre-Refunded,
5.70%, 8/15/20 .................................................................. 1,000,000 1,107,650
Wylie ISD, GO,
Pre-Refunded, 7.00%, 8/15/24 .................................................. 660,000 797,042
Refunding, 7.00%, 8/15/24 ..................................................... 340,000 411,026
---------------
392,263,111
---------------
U.S. TERRITORIES 2.6%
Children's Trust Fund Tobacco Settlement Revenue, Asset Backed Bonds, Refunding,
5.375%, 5/15/33 ................................................................. 23,470,000 23,667,617
District of Columbia GO,
FGIC Insured, 5.00%, 6/01/28 .................................................. 22,475,000 23,429,064
Series A, FSA Insured, 5.375%, 6/01/24 ........................................ 3,580,000 3,851,113
Series A, FSA Insured, Pre-Refunded, 5.375%, 6/01/24 .......................... 1,420,000 1,563,874
Series E, MBIA Insured, ETM, 6.00%, 6/01/13 ................................... 15,000 15,045
District of Columbia Tobacco Settlement Financing Corp. Revenue, Asset Backed
Bonds, 6.50%, 5/15/33 ........................................................... 35,000,000 37,161,950
Puerto Rico Commonwealth GO,
AMBAC Insured, Pre-Refunded, 5.40%, 7/01/25 ................................... 250,000 261,478
Public Improvement, Pre-Refunded, 5.75%, 7/01/17 .............................. 250,000 268,425
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue,
Series Y,
5.00%, 7/01/36 ................................................................ 62,000,000 64,858,820
5.50%, 7/01/36 ................................................................ 7,000,000 7,757,540
Puerto Rico Electric Power Authority Revenue, Series X, Pre-Refunded,
5.50%, 7/01/25 .................................................................. 200,000 200,980
Puerto Rico Housing Bank and Financing Authority SFMR, Affordable Housing
Mortgage, First Portfolio, 6.25%, 4/01/29 ....................................... 130,000 133,068
Puerto Rico Industrial Medical and Environmental Pollution Control Facilities
Financing Authority Revenue, PepsiCo Inc. Project, 6.25%, 11/15/13 .............. 350,000 357,770
Annual Report | 45
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
U.S. TERRITORIES (CONT.)
Puerto Rico Industrial Tourist Educational Medical and Environmental Control
Facilities Financing Authority Industrial Revenue,
Guaynabo Warehouse, Series A, 5.15%, 7/01/19 .................................. $ 850,000 $ 871,301
Teacher's Retirement System Revenue, Series B, ETM, 5.50%, 7/01/21 ............ 250,000 262,000
Puerto Rico PBA Revenue, Government Facilities, Series D,
5.25%, 7/01/27 ................................................................ 3,265,000 3,472,785
Pre-Refunded, 5.25%, 7/01/27 .................................................. 8,735,000 9,736,118
University of Puerto Rico Revenues, Series M, MBIA Insured, 5.25%, 6/01/25 285,000 289,839
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A,
5.50%, 10/01/18 ............................................................... 1,400,000 1,488,144
5.50%, 10/01/22 ............................................................... 5,000,000 5,291,750
5.625%, 10/01/25 .............................................................. 1,900,000 2,007,768
Virgin Islands Water and Power Authority Electric System Revenue, Refunding,
5.30%, 7/01/18 500,000 508,075
---------------
187,454,524
---------------
UTAH 0.6%
Carbon County Solid Waste Disposal Revenue, Laidlaw Inc. Project, Refunding,
Series A, 7.50%, 2/01/10 ........................................................ 5,050,000 5,172,261
Intermountain Power Agency Power Supply Revenue,
ETM, 6.15%, 7/01/14 ........................................................... 16,225,000 17,598,284
Series A, 6.15%, 7/01/14 ...................................................... 8,775,000 9,280,440
Salt Lake County College Revenue, Westminster College Project,
5.70%, 10/01/17 ............................................................... 1,000,000 1,053,610
5.75%, 10/01/27 ............................................................... 1,000,000 1,044,160
5.625%, 10/01/28 .............................................................. 3,305,000 3,475,141
South Jordan Sales Tax Revenue, AMBAC Insured, 5.20%, 8/15/26 4,770,000 5,036,023
Utah State HFAR, SFM,
Series B, 6.55%, 7/01/26 ...................................................... 285,000 286,496
Series E-1, 6.65%, 7/01/20 .................................................... 35,000 35,069
---------------
42,981,484
---------------
VERMONT 0.3%
Burlington Airport Revenue, Series A, MBIA Insured, 5.00%, 7/01/28 ................ 5,780,000 6,039,406
Vermont Educational and Health Buildings Financing Agency Revenue,
Fletcher Allen Health, Series A, AMBAC Insured, 6.125%, 12/01/27 ................ 13,000,000 14,835,730
Vermont HFA, SFHR, Series 5, 7.00%, 11/01/27 ...................................... 3,000,000 3,057,990
---------------
23,933,126
---------------
VIRGINIA 0.5%
Greater Richmond Convention Center Authority Hotel Tax Revenue, Refunding,
MBIA Insured, 5.00%, 6/15/30 .................................................... 12,260,000 12,916,155
Henrico County IDA Public Facilities Lease Revenue, Regional Jail Project,
Pre-Refunded, 6.00%, 8/01/15 .................................................... 7,250,000 7,312,930
Medical College Hospital Authority Revenue, General Revenue Bonds,
MBIA Insured, 5.125%, 7/01/18 ................................................... 2,000,000 2,106,220
Virginia State HDA Commonwealth Mortgage Revenue, Series H, Sub Series H-1,
MBIA Insured, 5.35%, 7/01/31 .................................................... 10,000,000 10,300,300
---------------
32,635,605
---------------
46 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
WASHINGTON 3.2%
Bellingham Housing Authority Revenue, Pacific Rim and Cascade Meadows
Project, Refunding, MBIA Insured, 5.20%, 11/01/27 ............................... $ 200,000 $ 203,700
Central Puget Sound Regional Transportation Authority Sales and Use Tax
Revenue, Series A, AMBAC Insured, 5.00%, 11/01/30 ............................... 20,000,000 20,994,600
Chelan County PUD No. 1 Chelan Hydroelectric Consolidated System Revenue,
Division V, Mandatory Put 7/01/27, Series A, 5.65%, 7/01/32 ..................... 5,000,000 5,229,700
Chelan County PUD No. 1 Consolidated Revenue, Chelan Hydroelectric,
Division I, Mandatory Put 7/01/28, Series A, FSA Insured, 5.25%, 7/01/33 ........ 200,000 206,546
Clark County PUD No. 1 Generating System Revenue,
FGIC Insured, ETM, 6.00%, 1/01/08 ............................................. 200,000 216,010
Refunding, FSA Insured, 5.50%, 1/01/25 ........................................ 15,015,000 16,334,668
Clark County Sewer Revenue, MBIA Insured, Pre-Refunded, 5.70%, 12/01/16 ........... 200,000 209,124
Energy Northwest Electric Revenue, Columbia Generating, Refunding, Series B,
FSA Insured, 5.35%, 7/01/18 ..................................................... 11,500,000 12,562,140
Goat Hill Properties Lease Revenue, Government Office Building Project,
MBIA Insured, 5.00%, 12/01/33 ................................................... 18,500,000 19,271,080
Grant County PUD No. 2 Priest Rapids Hydro Electric Revenue, Second Series B,
MBIA Insured, 5.875%, 1/01/26 ................................................... 100,000 103,662
Grant County PUD No. 2 Wanapum Hydro Electric Revenue, Refunding,
Second Series A, MBIA Insured, 5.20%, 1/01/23 ................................. 250,000 261,655
Series D, FSA Insured, 5.20%, 1/01/23 ......................................... 6,000,000 6,398,820
King County GO, Sewer, Refunding, Series C, 6.25%, 1/01/32 ........................ 8,715,000 9,332,371
King County Housing Authority Revenue, Woodridge Park Project, 6.25%, 5/01/15 ..... 175,000 175,644
King County School District No. 400 Mercer Island GO, Pre-Refunded,
5.90%, 12/01/15 ................................................................. 100,000 103,387
King County School District No. 408 Auburn GO, FSA Insured, 5.00%, 12/01/24 ....... 5,000,000 5,271,000
King County School District No. 412 Shoreline GO, Pre-Refunded, 6.10%, 6/01/13 .... 100,000 100,284
King County School District No. 415 Kent GO, FSA Insured, Pre-Refunded,
5.875%, 6/01/16 ................................................................. 200,000 206,722
Pierce County EDC Solid Waste Revenue, Occidental Petroleum Corp.,
5.80%, 9/01/29 .................................................................. 4,360,000 4,401,987
Pierce County School District No. 320 Sumner GO, FSA Insured, Pre-Refunded,
6.00%, 12/01/14 ................................................................. 2,000,000 2,290,400
Pierce County School District No. 403 Bethel GO, FGIC Insured, 5.25%, 12/01/22 .... 5,000,000 5,401,400
Pierce County Sewer Revenue, 5.70%, 2/01/17 ....................................... 100,000 101,923
Port Seattle Revenue, Refunding,
MBIA Insured, 5.00%, 7/01/33 .................................................. 10,000,000 10,337,700
Series A, FGIC Insured, 5.00%, 4/01/31 ........................................ 21,680,000 22,313,273
Seattle Housing Authority Low Income Housing Assistance Revenue, Kin On
Project, 7.40%, 11/20/36 .......................................................... 99,000 108,900
Seattle Municipal Light and Power Revenue, 5.40%, 12/01/25 ........................ 10,000,000 10,775,900
Seattle Water System Revenue, FGIC Insured, 5.00%, 10/01/23 ....................... 300,000 316,698
Snohomish County Housing Authority Revenue, Pooled, 6.30%, 4/01/16 ................ 200,000 203,284
Snohomish County USD No. 6 GO, 6.50%, 12/01/11 .................................... 7,000,000 8,244,810
Spokane County GO, Refunding, Pre-Refunded, 6.00%, 12/01/14 ....................... 130,000 136,527
Spokane County Water District No. 3 Water Revenue, Refunding, 5.90%, 1/01/14 ...... 15,000 15,064
Tacoma GO, Series A, MBIA Insured, 5.625%, 12/01/22 ............................... 300,000 314,802
Twenty-Fifth Avenue Properties Washington Student Housing Revenue, MBIA Insured,
5.125%, 6/01/22 ............................................................... 2,925,000 3,111,118
5.25%, 6/01/33 ................................................................ 9,770,000 10,312,430
Annual Report | 47
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
WASHINGTON (CONT.)
Washington State GO,
Motor Vehicle Fuel Tax, Series 1995D DD-15 and R-95C, Pre-Refunded,
6.00%, 9/01/20 .............................................................. $ 240,000 $ 242,767
Motor Vehicle Fuel Tax, Series B, FGIC Insured, 5.00%, 7/01/27 ................ 10,000,000 10,533,100
Series A, FGIC Insured, 5.00%, 7/01/27 ........................................ 10,000,000 10,533,100
Various Purpose, Series C, FSA Insured, 5.25%, 1/01/26 ........................ 10,120,000 10,817,774
Washington State Health Care Facilities Authority Revenue,
Multicare Health Systems, MBIA Insured, 5.00%, 8/15/22 ........................ 250,000 257,770
Providence Services, MBIA Insured, 5.50%, 12/01/26 ............................ 6,000,000 6,412,320
Washington State Higher Education Facilities Authority Revenue, Pacific
Lutheran University Project, Refunding, Connie Lee Insured, 5.70%, 11/01/26 ..... 200,000 210,650
Washington State Public Power Supply System Revenue, Nuclear Project No. 2,
Refunding, Series A, 6.30%, 7/01/12 ........................................... 7,700,000 9,001,223
---------------
223,576,033
---------------
WEST VIRGINIA 0.7%
Braxton County Solid Waste Disposal Revenue, Weyerhaeuser Co. Project,
6.50%, 4/01/25 ................................................................ 3,500,000 3,570,000
Refunding, 5.40%, 5/01/25 ..................................................... 10,000,000 10,170,300
Tyler County PCR, Union Carbide Corp., 7.625%, 8/01/05 ............................ 2,400,000 2,404,320
West Virginia State GO, Series A, FGIC Insured, 5.20%, 11/01/26 ................... 10,000,000 11,058,100
West Virginia State Water Development Water Revenue, Loan Program 2, Refunding,
Series B, AMBAC Insured, 5.00%, 11/01/29 ........................................ 7,500,000 7,887,675
West Virginia University Revenues, Improvement, West Virginia University Projects,
Series C, FGIC Insured, 5.00%, 10/01/34 ......................................... 10,000,000 10,465,600
---------------
45,555,995
---------------
WISCONSIN 0.7%
Janesville IDR, Simmons Manufacturing Co., 7.00%, 10/15/17 ........................ 2,200,000 2,206,952
Wisconsin Housing and EDA Homeownership Revenue, Refunding, Series A,
6.10%, 11/01/10 ................................................................. 7,920,000 8,103,348
Wisconsin State Health and Educational Facilities Authority Revenue,
Children's Hospital of Wisconsin Inc., AMBAC Insured, 5.375%, 2/15/28 ......... 21,050,000 21,726,547
Franciscan Sisters Christian, Series A, 5.50%, 2/15/18 ........................ 1,500,000 1,540,455
Franciscan Sisters Christian, Series A, 5.50%, 2/15/28 ........................ 1,000,000 1,017,120
Mercy Health Systems Corp., AMBAC Insured, 6.125%, 8/15/13 .................... 6,500,000 6,690,710
Mercy Health Systems Corp., AMBAC Insured, 6.125%, 8/15/17 .................... 7,500,000 7,720,050
Wisconsin State Petroleum Inspection Fee Revenue, Series A, Pre-Refunded,
6.00%, 7/01/11 .................................................................. 1,500,000 1,538,295
---------------
50,543,477
---------------
WYOMING 0.0%b
Wyoming CDA, MFMR, Series A,
6.90%, 6/01/12 ................................................................ 275,000 275,009
6.95%, 6/01/24 ................................................................ 815,000 815,123
---------------
1,090,132
---------------
TOTAL BONDS (COST $6,184,953,072) ................................................... 6,598,261,276
---------------
48 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON/STEP-UP BONDS 5.0%
CALIFORNIA 1.4%
Foothill/Eastern Corridor Agency Toll Road Revenue,
Capital Appreciation, Refunding, 1/15/24 ...................................... $ 65,000,000 $ 22,005,750
Convertible Capital Appreciation, Refunding, zero cpn. to 7/15/09, 5.85%
thereafter, 1/15/23 ......................................................... 35,000,000 29,568,000
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue,
Capital Appreciation, Refunding, Series A, zero cpn. to 1/15/07, 5.75%
thereafter, 1/15/21 ......................................................... 50,000,000 45,211,000
senior lien, ETM, 1/01/23 ..................................................... 7,000,000 3,157,350
---------------
99,942,100
---------------
COLORADO 0.0%b
Colorado Springs Airport Revenue, Series C,
1/01/07 ....................................................................... 1,675,000 1,578,001
1/01/08 ....................................................................... 800,000 720,056
1/01/11 ....................................................................... 1,450,000 1,127,853
---------------
3,425,910
---------------
FLORIDA 0.1%
Florida State Mid-Bay Bridge Authority Revenue, Series A, AMBAC Insured,
10/01/23 ...................................................................... 5,000,000 2,001,800
10/01/24 ...................................................................... 3,000,000 1,133,850
Miami-Dade County Special Obligation Revenue, Sub Series B, MBIA Insured,
10/01/34 5,500,000 1,113,970
---------------
4,249,620
---------------
ILLINOIS 1.0%
Metropolitan Pier and Exposition Authority Dedicated State Tax Revenue,
Capital Appreciation, 2002, Series A, FGIC Insured, 6/15/08 ................... 185,000 167,125
Capital Appreciation, 2002, Series A, FGIC Insured, 6/15/09 ................... 235,000 203,905
Capital Appreciation, 2002, Series A, FGIC Insured, ETM, 6/15/08 .............. 7,000,000 6,358,660
Capital Appreciation, 2002, Series A, FGIC Insured, ETM, 6/15/09 .............. 9,275,000 8,122,952
Capital Appreciation, McCormick Place, Refunding, Series B, 6/15/22 ........... 30,000,000 17,949,600
Capital Appreciation, McCormick Place, Refunding, Series B, MBIA Insured,
6/15/20 ..................................................................... 8,240,000 6,361,280
Capital Appreciation, McCormick Place, Refunding, Series B, MBIA Insured,
6/15/21 ..................................................................... 6,000,000 4,626,000
Capital Appreciation, Series A, FGIC Insured, ETM, 6/15/08 .................... 1,315,000 1,194,520
Capital Appreciation, Series A, FGIC Insured, ETM, 6/15/09 .................... 1,490,000 1,304,927
McCormick Place Expansion Project, Series A, FGIC Insured, 6/15/10 ............ 155,000 128,825
McCormick Place Expansion Project, Series A, FGIC Insured, ETM, 6/15/10 ....... 7,845,000 6,526,726
McCormick Place Expansion Project, Series A, FGIC Insured, ETM, 6/15/11 ....... 9,690,000 7,809,559
University of Illinois University Revenues, Auxiliary Facilities,
AMBAC Insured, 4/01/10 .......................................................... 14,250,000 11,937,653
---------------
72,691,732
---------------
KENTUCKY 1.2%
Jefferson County Capital Projects Corp. Lease Revenue, Refunding, Series A,
8/15/07 ....................................................................... 1,640,000 1,523,068
8/15/08 ....................................................................... 4,505,000 4,041,120
8/15/09 ....................................................................... 4,580,000 3,914,801
8/15/10 ....................................................................... 4,620,000 3,785,212
8/15/13 ....................................................................... 6,825,000 4,888,816
Annual Report | 49
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON/STEP-UP BONDS (CONT.)
KENTUCKY (CONT.)
Jefferson County Capital Projects Corp. Lease Revenue, Refunding, Series A, (cont.)
8/15/14 ....................................................................... $ 6,860,000 $ 4,689,908
8/15/16 ....................................................................... 7,005,000 4,339,668
8/15/17 ....................................................................... 7,115,000 4,184,260
Kentucky Economic Development Finance Authority Health System Revenue, Norton
Healthcare Inc.,
Refunding, Series B, MBIA Insured, 10/01/18 ................................... 10,000,000 5,441,700
Refunding, Series C, MBIA Insured, zero cpn. to 10/01/05, 6.05% thereafter,
10/01/19 .................................................................... 11,080,000 12,211,268
Series C, MBIA Insured, zero cpn. to 10/01/05, 6.10% thereafter, 10/01/21 ..... 8,925,000 9,791,974
Series C, MBIA Insured, zero cpn. to 10/01/05, 6.10% thereafter, 10/01/23 ..... 16,945,000 18,477,506
Owensboro Electric Light and Power Revenue, Series B, AMBAC Insured, 1/01/08 ...... 5,250,000 4,825,117
---------------
82,114,418
---------------
LOUISIANA 0.2%
Calcasieu Parish Memorial Hospital Service District Revenue, Lake Charles Parish
Memorial Hospital Project, Series A, Connie Lee Insured, 12/01/22 ............... 11,040,000 10,816,440
---------------
MICHIGAN 0.1%
Coldwater Community Schools GO, Capital Appreciation, MBIA Insured, Pre-Refunded,
5/01/18 ......................................................................... 5,935,000 2,950,170
Harrison Community Schools GO, AMBAC Insured, 5/01/20 ............................. 6,000,000 2,539,320
---------------
5,489,490
---------------
NEVADA 0.1%
Director of the State Department of Business and Industry Revenue, Las Vegas
Monorail Project, AMBAC Insured,
1/01/25 ....................................................................... 3,080,000 1,153,275
1/01/26 ....................................................................... 3,815,000 1,345,207
1/01/27 ....................................................................... 3,000,000 997,320
1/01/28 ....................................................................... 13,315,000 4,179,312
1/01/29 ....................................................................... 8,410,000 2,490,790
---------------
10,165,904
---------------
NEW JERSEY 0.1%
New Jersey State Turnpike Authority Turnpike Revenue, Growth and Income Securities,
Series B, AMBAC Insured, 1/01/35 ................................................ 10,000,000 6,366,400
---------------
TEXAS 0.3%
Hays Consolidated ISD, GO, Capital Appreciation, Pre-Refunded,
8/15/19 ....................................................................... 5,285,000 2,649,001
8/15/21 ....................................................................... 8,420,000 3,724,419
8/15/22 ....................................................................... 8,470,000 3,522,842
Texas State Turnpike Authority Central Texas Turnpike System Revenue, Capital
Appreciation, AMBAC Insured, 8/15/31 ............................................ 43,500,000 9,888,855
---------------
19,785,117
---------------
50 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON/STEP-UP BONDS (CONT.)
U.S. TERRITORIES 0.2%
District of Columbia Revenue, Capital Appreciation, Georgetown University,
MBIA Insured, 4/01/22 ......................................................... $ 12,870,000 $ 5,228,309
MBIA Insured, 4/01/23 ......................................................... 14,160,000 5,393,969
Series A, MBIA Insured, 4/01/20 ............................................... 8,860,000 4,098,281
---------------
14,720,559
---------------
WASHINGTON 0.3%
Washington State Public Power Supply System Revenue, Nuclear Project No. 3,
Capital Appreciation, Series B, 7/01/14 ....................................... 12,450,000 8,477,952
Capital Appreciation, Series B, ETM, 7/01/14 .................................. 2,550,000 1,788,647
Refunding, Series B, 7/01/12 .................................................. 6,400,000 4,789,760
Refunding, Series B, 7/01/13 .................................................. 11,000,000 7,874,130
---------------
22,930,489
---------------
TOTAL ZERO COUPON/STEP-UP BONDS (COST $316,178,436) 352,698,179
---------------
TOTAL LONG TERM INVESTMENTS (COST $6,501,131,508) 6,950,959,455
---------------
SHORT TERM INVESTMENTS 0.4%
dCALIFORNIA 0.1%
California State GO, Kindergarten University, Series B-3, Daily VRDN and Put,
3.01%, 5/01/34 .................................................................. 9,150,000 9,150,000
Irvine 1915 Act Special Assessment, AD No. 03-19, Series A, Daily VRDN and Put,
3.01%, 9/02/29 .................................................................. 600,000 600,000
---------------
9,750,000
---------------
dFLORIDA 0.1%
Pinellas County Health Facilities Authority Revenue, Pooled Hospital Loan Program,
Refunding, AMBAC Insured, Daily VRDN and Put, 3.05%, 12/01/15 ................... 4,200,000 4,200,000
---------------
dGEORGIA 0.0%b
Atlanta Water and Wastewater Revenue, Series C, FSA Insured, Daily VRDN and Put,
3.05%, 11/01/41 ................................................................. 1,000,000 1,000,000
---------------
dLOUISIANA 0.0%b
Louisiana State Offshore Terminal Authority Deepwater Port Revenue, Loop Inc.
Project, First Stage, ACES, Refunding, Daily VRDN and Put, 3.05%, 9/01/17 ....... 300,000 300,000
---------------
dMARYLAND 0.0%b
Maryland State EDC Revenue, U.S. Pharmacopeial Project, Series A, AMBAC Insured,
Daily VRDN and Put, 3.05%, 7/01/34 ................................................ 1,300,000 1,300,000
---------------
dMASSACHUSETTS 0.0%b
Massachusetts State Health and Educational Facilities Authority Revenue, Capital
Assets Program, Series D, MBIA Insured, Daily VRDN and Put, 3.00%, 1/01/35 ...... 3,460,000 3,460,000
---------------
Annual Report | 51
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONT.)
dNEW YORK 0.2%
Long Island Power Authority Electric System Revenue,
Sub Series 2, Daily VRDN and Put, 3.02%, 5/01/33 .............................. $ 6,700,000 $ 6,700,000
Sub Series 3B, Daily VRDN and Put, 3.00%, 5/01/33 ............................. 1,900,000 1,900,000
New York City GO, Sub Series H-4, Daily VRDN and Put, 3.02%, 3/01/34 .............. 600,000 600,000
New York City Municipal Water Finance Authority Water and Sewer System Revenue,
Fiscal 2003, Refunding, Sub Series C-3, Daily VRDN and Put, 3.02%, 6/15/18 ...... 1,800,000 1,800,000
---------------
11,000,000
---------------
dRHODE ISLAND 0.0%b
Rhode Island Health and Educational Building Corp. Educational Institution Revenue,
Portsmouth Abbey School, Daily VRDN and Put, 3.05%, 10/01/31 .................... 1,435,000 1,435,000
---------------
TOTAL SHORT TERM INVESTMENTS (COST $32,445,000) 32,445,000
---------------
TOTAL INVESTMENTS (COST $6,533,576,508) 98.4% 6,983,404,455
OTHER ASSETS, LESS LIABILITIES 1.6% 114,541,250
---------------
NET ASSETS 100.0% $7,097,945,705
---------------
See Selected Portfolio Abbreviations on page 53.
aDefaulted securities. See Note 6.
bRounds to less than 0.05% of net assets.
cSecurity purchased on a when-issued or delayed delivery basis.
dVariable rate demand notes (VRDNs) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional
right of demand to receive payment of the principal balance plus accrued
interest at specified dates. The coupon rate shown represents the rate at
period end. VRDNs are valued at cost.
52 | See notes to financial statements. | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
SELECTED PORTFOLIO ABBREVIATIONS
ACES - Adjustable Convertible Exempt Securities
AD - Assessment District
AMBAC - American Municipal Bond Assurance Corp.
BIG - Bond Investors Insurance Co. (acquired by MBIA in 1989 and no longer
does business under this name)
CDA - Community Development Authority/Agency
COP - Certificate of Participation
CRDA - Community Redevelopment Authority/Agency
EDA - Economic Development Authority
EDC - Economic Development Corp.
EDR - Economic Development Revenue
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Authority/Agency
FNMA - Federal National Mortgage Association
FSA - Financial Security Assurance
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority/Agency
HFA - Housing Finance Authority/Agency
HFAR - Housing Finance Authority/Agency Revenue
HFC - Housing Finance Corp.
HMR - Home Mortgage Revenue
IDA - Industrial Development Authority/Agency
IDAR - Industrial Development Authority/Agency Revenue
IDB - Industrial Development Bond/Board
IDC - Industrial Development Corp.
IDR - Industrial Development Revenue or
International Depository Receipt
ISD - Independent School District
LP - Limited Partnership
MBIA - Municipal Bond Investors Assurance Corp.
MBS - Mortgage-Backed Securities
MF - Multi-Family
MFH - Multi-Family Housing
MFHR - Multi-Family Housing Revenue
MFMR - Multi-Family Mortgage Revenue
MFR - Multi-Family Revenue
MTA - Metropolitan Transit Authority
PBA - Public Building Authority
PCR - Pollution Control Revenue
PFAR - Public Financing Authority Revenue
PUD - Public Utility District
RDA - Redevelopment Agency/Authority
SF - Single Family
SFHR - Single Family Housing Revenue
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
USD - Unified/Union School District
XLCA - XL Capital Assurance
Annual Report | See notes to financial statements. | 53
<page>
Franklin Federal Tax-Free Income Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
April 30, 2005
Assets:
Investments in securities:
Cost ............................................................................................... $6,533,576,508
---------------
Value .............................................................................................. $6,983,404,455
Cash ................................................................................................ 58,965
Receivables:
Capital shares sold ................................................................................ 15,919,015
Interest ........................................................................................... 116,079,387
---------------
Total assets ................................................................................... 7,115,461,822
---------------
Liabilities:
Payables:
Investment securities purchased .................................................................... 5,055,000
Capital shares redeemed ............................................................................ 8,323,534
Affiliates ......................................................................................... 3,663,401
Other liabilities ................................................................................... 474,182
---------------
Total liabilities .............................................................................. 17,516,117
---------------
Net assets, at value .......................................................................... $7,097,945,705
---------------
Net assets consist of:
Undistributed net investment income ................................................................. $ 13,738,279
Net unrealized appreciation (depreciation) .......................................................... 449,827,947
Accumulated net realized gain (loss) ................................................................ (31,593,391)
Paid-in capital ..................................................................................... 6,665,972,870
---------------
Net assets, at value .......................................................................... $7,097,945,705
---------------
54 | See notes to financial statements. | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2005
CLASS A:
Net assets, at value ................................................................................ $6,324,986,333
---------------
Shares outstanding .................................................................................. 517,182,287
---------------
Net asset value per sharea .......................................................................... $12.23
---------------
Maximum offering price per share (net asset value per share/95.75%) ................................. $12.77
---------------
CLASS B:
Net assets, at value ................................................................................ $ 289,489,913
---------------
Shares outstanding .................................................................................. 23,686,360
---------------
Net asset value and maximum offering price per sharea ............................................... $12.22
---------------
CLASS C:
Net assets, at value ................................................................................ $ 371,437,612
---------------
Shares outstanding .................................................................................. 30,382,729
---------------
Net asset value and maximum offering price per sharea ............................................... $12.23
---------------
ADVISOR CLASS:
Net assets, at value ................................................................................ $ 112,031,847
---------------
Shares outstanding .................................................................................. 9,156,700
---------------
Net asset value and maximum offering price per sharea ............................................... $12.23
---------------
aRedemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
Annual Report | See notes to financial statements. | 55
<page>
Franklin Federal Tax-Free Income Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended April 30, 2005
Investment income:
Interest ............................................................................................ $ 373,992,169
---------------
Expenses:
Management fees (Note 3) ............................................................................ 31,876,783
Distribution fees: (Note 3)
Class A ............................................................................................ 5,532,790
Class B ............................................................................................ 1,878,111
Class C ............................................................................................ 2,362,014
Transfer agent fees (Note 3) ........................................................................ 3,281,938
Custodian fees ...................................................................................... 104,263
Reports to shareholders ............................................................................. 286,835
Registration and filing fees ........................................................................ 192,506
Professional fees ................................................................................... 109,929
Directors' fees and expenses ........................................................................ 110,302
Other ............................................................................................... 468,878
---------------
Total expenses ................................................................................. 46,204,349
---------------
Net investment income ........................................................................ 327,787,820
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ........................................................... 16,299,382
Net change in unrealized appreciation (depreciation) on investments ................................. 165,156,255
---------------
Net realized and unrealized gain (loss) .............................................................. 181,455,637
---------------
Net increase (decrease) in net assets resulting from operations ...................................... $ 509,243,457
---------------
56 | See notes to financial statements. | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended April 30, 2005 and 2004
---------------------------------
2005 2004
---------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................... $ 327,787,820 $ 352,125,997
Net realized gain (loss) from investments ........................................... 16,299,382 6,318,093
Net change in unrealized appreciation (depreciation) on investments ................. 165,156,255 (67,563,283)
---------------------------------
Net increase (decrease) in net assets resulting from operations ................. 509,243,457 290,880,807
---------------------------------
Distributions to shareholders from:
Net investment income:
Class A ............................................................................ (293,736,178) (309,470,374)
Class B ............................................................................ (11,959,143) (12,323,022)
Class C ............................................................................ (14,969,105) (15,932,608)
Advisor Class ...................................................................... (4,684,334) (4,493,944)
---------------------------------
Total distributions to shareholders .................................................. (325,348,760) (342,219,948)
---------------------------------
Capital share transactions: (Note 2)
Class A ............................................................................ (197,130,415) (432,193,504)
Class B ............................................................................ (16,379,740) 7,345,936
Class C ............................................................................ (11,503,182) (17,704,791)
Advisor Class ...................................................................... 12,196,210 10,093,071
---------------------------------
Total capital share transactions ..................................................... (212,817,127) (432,459,288)
---------------------------------
Redemption fees ...................................................................... 3,741 --
---------------------------------
Net increase (decrease) in net assets ........................................... (28,918,689) (483,798,429)
Net assets:
Beginning of year .................................................................... 7,126,864,394 7,610,662,823
---------------------------------
End of year .......................................................................... $7,097,945,705 $7,126,864,394
---------------------------------
Undistributed net investment income included in net assets:
End of year .......................................................................... $ 13,738,279 $ 11,475,839
---------------------------------
Annual Report | See notes to financial statements. | 57
<page>
Franklin Federal Tax-Free Income Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNT POLICIES
Franklin Federal Tax-Free Income Fund (the Fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end investment company.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Municipal securities generally trade in the over-the-counter market rather than
on a securities exchange. The Fund's pricing services use valuation models or
matrix pricing, which considers information with respect to comparable bond and
note transactions, quotations from bond dealers or by reference to other
securities that are considered comparable in such characteristics as rating,
interest rate and maturity date, to determine current value.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Some methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. If such an event occurs, the securities may be valued
using fair value procedures, which may include the use of independent pricing
services. All security valuation procedures are approved by the Fund's Board of
Directors.
B. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS
The Fund may purchase securities on a when-issued or delayed delivery basis,
with payment and delivery scheduled for a future date. These transactions are
subject to market fluctuations and are subject to the risk that the value at
delivery may be more or less than the trade date purchase price. Although the
Fund will generally purchase these securities with the intention of holding the
securities, it may sell the securities before the settlement date. Sufficient
assets have been segregated for these securities.
C. INCOME TAXES
No provision has been made for U.S. income taxes because the Fund's policy is to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code and to distribute substantially all of its income. Fund
distributions to shareholders are determined on an income tax basis and may
differ from net investment income and realized gains for financial reporting
purposes.
58 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNT POLICIES (CONTINUED)
D. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Discounts and premiums
on securities purchased are amortized over the lives of the respective
securities. Distributions to shareholders are recorded on the ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
E. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
F. REDEMPTION FEES
Effective June 1, 2004, redemptions and exchanges of Fund shares held five
trading days or less may be subject to the Fund's redemption fee, which is 2% of
the amount redeemed. Such fees are retained by the Fund and accounted for as
additional paid-in capital.
G. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified by the Fund against certain liabilities arising out of the
performance of their duties to the Fund. Additionally, in the normal course of
business, the Fund enters into contracts with service providers that contain
general indemnification clauses. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. However, based on experience, the
Fund expects the risk of loss to be remote.
2. CAPITAL STOCK
The Fund offers four classes of shares: Class A, Class B, Class C, and Advisor
Class. Effective March 1, 2005, Class B shares are only offered to existing
Class B shareholders in the form of reinvested distributions and certain
exchanges from other Franklin Templeton Class B shares. Each class of shares
differs by its initial sales load, contingent deferred sales charges,
distribution fees, voting rights on matters affecting a single class and its
exchange privilege.
Annual Report | 59
<page>
Franklin Federal Tax-Free Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
At April 30, 2005, there were ten billion shares authorized (no par value), of
which three billion each were designated as Class A and Class C, one hundred
million were designated to Class B and five hundred million were designated to
Advisor Class. Transactions in the Fund's shares were as follows:
----------------------------------------------------------------
YEAR ENDED APRIL 30,
----------------------------------------------------------------
2005 2004
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
CLASS A SHARES:
Shares sold ...................... 35,302,588 $ 425,107,576 35,378,870 $ 425,043,484
Shares issued in reinvestment
of distributions .................. 12,715,155 152,440,892 12,861,265 154,134,724
Shares redeemed .................. (64,650,759) (774,678,883) (84,299,385) (1,011,371,712)
----------------------------------------------------------------
Net increase (decrease) .......... (16,633,016) $(197,130,415) (36,059,250) $ (432,193,504)
----------------------------------------------------------------
CLASS B SHARES:
Shares sold ...................... 1,302,907 $ 15,656,956 3,226,868 $ 38,850,704
Shares issued in reinvestment
of distributions .................. 595,905 7,142,139 605,800 7,257,764
Shares redeemed .................. (3,275,089) (39,178,835) (3,240,847) (38,762,532)
----------------------------------------------------------------
Net increase (decrease) .......... (1,376,277) $ (16,379,740) 591,821 $ 7,345,936
----------------------------------------------------------------
CLASS C SHARES:
Shares sold ...................... 3,816,575 $ 46,010,614 5,535,561 $ 66,675,676
Shares issued in reinvestment
of distributions .................. 778,028 9,328,022 811,835 9,727,201
Shares redeemed .................. (5,582,812) (66,841,818) (7,849,918) (94,107,668)
----------------------------------------------------------------
Net increase (decrease) .......... (988,209) $ (11,503,182) (1,502,522) $ (17,704,791)
----------------------------------------------------------------
ADVISOR CLASS:
Shares sold ...................... 2,419,643 $ 29,232,794 2,198,599 $ 26,620,078
Shares issued in reinvestment
of distributions .................. 9,508 114,124 5,632 67,752
Shares redeemed .................. (1,438,483) (17,150,708) (1,383,783) (16,594,759)
----------------------------------------------------------------
Net increase (decrease) .......... 990,668 $ 12,196,210 820,448 $ 10,093,071
----------------------------------------------------------------
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers
and/or directors of the Fund are also officers and/or directors of the following
subsidiaries:
- ----------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- ----------------------------------------------------------------------------------------
Franklin Advisers Inc. (Advisers) Investment manager
Franklin Templeton Services LLC (FT Services) Administrative manager
Franklin Templeton Distributors Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services LLC (Investor Services) Transfer agent
60 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEE
The Fund pays an investment management fee to Advisers based on the month-end
net assets of the Fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.63% First $100 million
0.50% Over $100 million, up to and including $250 million
0.45% Over $250 million, up to and including $10 billion
Fees are further reduced on net assets over $10 billion.
B. ADMINISTRATIVE FEE
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
C. DISTRIBUTION FEES
The Fund reimburses Distributors up to 0.10%, 0.65%, and 0.65% per year of its
average daily net asset of Class A, Class B, and Class C, respectively, for
costs incurred in marketing the Fund's shares under a Rule 12b-1 plan. Under the
Class A distribution plan, costs exceeding the maximum for the current plan year
cannot be reimbursed in subsequent periods.
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the year:
Net sales charges received ................................. $964,444
Contingent deferred sales charges retained ................. $615,060
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $3,281,938, of which $2,289,834 was
retained by Investor Services.
4. INCOME TAXES
At April 30, 2005, the Fund had tax basis capital losses of $31,556,566, which
may be carried over to offset future capital gains. Such losses expire as
follows:
Capital loss carryovers expiring in:
2009 ..................................................... $ 4,844,273
2010 ..................................................... 133,009
2012 ..................................................... 26,579,284
-----------
$31,556,566
-----------
Annual Report | 61
<page>
Franklin Federal Tax-Free Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The tax character of distributions paid during the years ended April 30, 2005
and 2004, was as follows:
------------------------------------------
2005 2004
------------------------------------------
Distributions paid from --
tax-exempt income ................... $325,348,760 $342,219,948
At April 30, 2005, the cost of investments, net unrealized appreciation
(depreciation) and undistributed tax exempt income for income tax purposes were
as follows:
Cost of investments ................................. $6,532,474,554
---------------
Unrealized appreciation ............................. $ 465,782,072
Unrealized depreciation ............................. (14,852,171)
---------------
Net unrealized appreciation (depreciation) .......... $ 450,929,901
---------------
Undistributed tax exempt income ..................... $ 13,989,377
Undistributed ordinary income ....................... 29,811
---------------
Distributable earnings .............................. $ 14,019,188
---------------
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities and bond
discounts.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatment of wash sales, bond workout expenditures
and bond discounts.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term securities) for the
year ended April 30, 2005, aggregated $464,297,495 and $734,564,312,
respectively.
6. DEFAULTED SECURITIES
The Fund held defaulted securities and/or other securities for which the income
has been deemed uncollectible. At April 30, 2005, the value of these securities
was $48,542,703, representing 0.68% of the Fund's net assets. The Fund
discontinues accruing income on securities for which income has been deemed
uncollectible and provides an estimate for losses on interest receivable. For
information as to specific securities, see the accompanying Statement of
Investments.
62 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REGULATORY MATTERS
INVESTIGATIONS AND SETTLEMENTS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the
National Association of Securities Dealers, Inc. ("NASD"), relating to certain
practices in the mutual fund industry, including late trading, market timing and
marketing support payments to securities dealers who sell fund shares, Franklin
Resources, Inc. and certain of its subsidiaries (as used in this section,
together, the "Company"), as well as certain current or former executives and
employees of the Company, provided documents and information in response to
subpoenas and/or requests for documents, information and/or testimony. Beginning
in August 2004, the Company entered into settlements with certain of the
regulators and a governmental entity investigating the mutual fund industry
practices noted above. The Company believes that settlement of each of the
matters is in the best interest of the Company and shareholders of the Franklin,
Templeton, and Mutual Series mutual funds (the "funds").
Two of the settlement agreements, those with the SEC and the CAGO concerning
marketing support payments, provide that the distribution of settlement monies
are to be made to the relevant funds, not to individual shareholders. The CAGO
has approved the distribution plan pertaining to the distribution of the monies
owed under the CAGO settlement agreement and, in accordance with the terms and
conditions of that settlement, the monies were disbursed to the participating
funds. The Fund did not participate in the CAGO settlement. The SEC has not yet
approved the distribution plan pertaining to the SEC settlement. When approved,
disbursements of settlement monies under the SEC's settlement will be made
promptly in accordance with the terms and conditions of that order.
OTHER LEGAL PROCEEDINGS
On April 12, 2005, the Attorney General of West Virginia filed a complaint in
the Circuit Court of Marshall County, West Virginia against a number of
companies engaged in the mutual fund industry, including Franklin Resources,
Inc. and its subsidiary, Franklin Advisers, Inc., and certain other parties
alleging violations of the West Virginia Consumer Credit and Protection Act and
seeking, among other things, civil penalties and attorneys' fees and costs. To
the extent applicable to the Company, the complaint arises from activity that
occurred in 2001 and duplicates, in whole or in part, the allegations asserted
in the February 4, 2004 Massachusetts Administrative Complaint concerning one
instance of market timing (the "Administrative Complaint") and the SEC's
findings regarding market timing in its August 2, 2004 Order (the "SEC Order"),
both of which matters were previously reported.
Annual Report | 63
<page>
Franklin Federal Tax-Free Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REGULATORY MATTERS (CONTINUED)
OTHER LEGAL PROCEEDINGS (CONTINUED)
The Fund, in addition to the Company and other funds, and certain current and
former officers, employees, and directors have been named in multiple lawsuits
in different courts alleging violations of various federal securities laws and
seeking, among other relief, monetary damages, restitution, removal of fund
trustees, directors, advisers, administrators, and distributors, rescission of
management contracts and 12b-1 plans, and/or attorneys' fees and costs.
Specifically, the lawsuits claim breach of duty with respect to alleged
arrangements to permit market timing and/or late trading activity, or breach of
duty with respect to the valuation of the portfolio securities of certain
Templeton funds managed by Franklin Resources, Inc. subsidiaries, resulting in
alleged market timing activity. The majority of these lawsuits duplicate, in
whole or in part, the allegations asserted in the Administrative Complaint and
the SEC's findings regarding market timing in the SEC Order. The lawsuits are
styled as class actions, or derivative actions on behalf of either the named
funds or Franklin Resources, Inc.
The Fund, in addition to the Company and other funds, and certain current and
former officers, employees, and directors, have been named in multiple lawsuits
alleging violations of various securities laws and pendent state law claims
relating to the disclosure of marketing support payments and/or payment of
allegedly excessive commissions and/or advisory or distribution fees, and
seeking, among other relief, monetary damages, restitution, rescission of
advisory contracts, including recovery of all fees paid pursuant to those
contracts, an accounting of all monies paid to the named advisers, declaratory
relief, injunctive relief, and/or attorneys' fees and costs. These lawsuits are
styled as class actions or derivative actions brought on behalf of the named
funds.
The Company and fund management strongly believe that the claims made in each of
the lawsuits described above are without merit and intends to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. Public trust and confidence are critical to the Company's business and
any material loss of investor and/or client confidence could result in a
significant decline in assets under management by the Company, which would have
an adverse effect on future financial results. If it is determined that the
Company bears responsibility for any unlawful or inappropriate conduct that
caused losses to the Fund, it is committed to making the Fund or its
shareholders whole, as appropriate. The Company is committed to taking all
appropriate actions to protect the interests of its funds' shareholders.
64 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF FRANKLIN FEDERAL TAX-FREE INCOME
FUND
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Federal Tax-Free Income
Fund (the "Fund") at April 30, 2005, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at April
30, 2005 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
June 10, 2005
Annual Report | 65
<page>
Franklin Federal Tax-Free Income Fund
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(5)(A) of the Internal Revenue Code, the Fund hereby
designates 100% of the distributions paid from net investment income as
exempt-interest dividends for the fiscal year ended April 30, 2005. A portion of
the Fund's exempt-interest dividends may be subject to the federal alternative
minimum tax. In January 2006, shareholders will be notified of amounts for use
in preparing their 2005 income tax returns.
66 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
BOARD MEMBERS AND OFFICERS
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Fund, principal occupations during the
past five years and number of portfolios overseen in the Franklin Templeton
Investments fund complex are shown below. Each board member will serve until
that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK H. ABBOTT, III (84) Director Since 1982 115 None
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Director, Abbott Corporation (an investment company).
- ------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (73) Director Since 1982 143 Director, Bar-S Foods (meat packing
One Franklin Parkway company).
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief
Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT F. CARLSON (77) Director Since 1998 51 None
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Member and past President, Board of Administration, California Public Employees Retirement Systems (CALPERS); and FORMERLY,
member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield of California; and Chief
Counsel, California Department of Transportation.
- ------------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (72) Director Since 1989 144 None
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)).
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK W.T. LAHAYE (76) Director Since 1982 117 Director, The California Center for
One Franklin Parkway Land Recycling (redevelopment).
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 67
<page>
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (77) Director Since 1992 143 Director, Martek Biosciences
One Franklin Parkway Corporation, MedImmune, Inc.
San Mateo, CA 94403-1906 (biotechnology), and Overstock.com
(Internet services); and FORMERLY,
Director, MCI Communication
Corporation (subsequently known as
MCI WorldCom, Inc. and WorldCom,
Inc.) (communications services)
(1988-2002), White Mountains
Insurance Group, Ltd. (holding
company) (1987-2004); and
Spacehab, Inc. (aerospace services)
(1994-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004);
Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992);
and President, National Association of Securities Dealers, Inc. (1970-1987).
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**HARMON E. BURNS (60) Director and Director since 36 None
One Franklin Parkway Vice President 1994 and Vice
San Mateo, CA 94403-1906 President since
1986
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
- ------------------------------------------------------------------------------------------------------------------------------------
Vice Chairman, Member-Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; and officer and/or director or trustee, as the
case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (72) Director and Director since 143 None
One Franklin Parkway Chairman of 1982 and
San Mateo, CA 94403-1906 the Board Chairman of the
Board since 1993
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member-Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton
Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of
some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
68 | Annual Report
<page>
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**RUPERT H. JOHNSON, JR. (64) Director, Director since 127 None
One Franklin Parkway President and 1982, President
San Mateo, CA 94403-1906 Chief since 1993 and
Executive Chief Executive
Officer- Officer-
Investment Investment
Management Management
since 2002
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member-Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Director, Franklin Advisers, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and
officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of
the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
SHEILA AMOROSO (45) Vice President Since 1999 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
RAFAEL R. COSTAS, JR. (40) Vice President Since 1999 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (53) Chief Since July 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin Resources, Inc.;
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
LAURA FERGERSON (43) Treasurer Since July 2004 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 34 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and
Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton
Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
MARTIN L. FLANAGAN (45) Vice President Since 1995 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Co-President and Chief Executive Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin
Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice
President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.;
Executive Vice President, Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC;
Chairman, Franklin Templeton Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 69
<page>
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (57) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 Chief Executive
Fort Lauderdale, FL Officer-
33394-3091 Finance and
Administration
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (58) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources,
Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer
and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000).
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC,
Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin
Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin
Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment
companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant
and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts)
(until 1979).
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL O. MAGDOL (68) Vice President Since 2002 Not Applicable Not Applicable
600 Fifth Avenue -AML
Rockefeller Center Compliance
New York, NY 10020-2302
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch Chemicals,
Inc. and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (68) Vice President Since 2000 Not Applicable Not Applicable
and Secretary
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of the
subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY,
Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director,
Templeton Asset Management Ltd. (until 1999).
- ------------------------------------------------------------------------------------------------------------------------------------
70 | Annual Report
<page>
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (53) Chief Financial Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief
Fort Lauderdale, FL Accounting
33394-3091 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton Services,
LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP.
- ------------------------------------------------------------------------------------------------------------------------------------
THOMAS WALSH (43) Vice President Since 1999 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton
Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers.
**Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested persons of the Fund under the federal securities
laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc. (Resources), which is the
parent company of the Fund's adviser and distributor. Harmon E. Burns is considered to be an interested person of the Trust under
the federal securities laws due to his position as officer and director of Resources.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE
FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND
RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED FRANK W.T. LAHAYE AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. LAHAYE QUALIFIES AS SUCH AN EXPERT
IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS PRESIDENT AND DIRECTOR OF MCCORMICK SELPH
ASSOCIATES FROM 1954 THROUGH 1965; DIRECTOR AND CHAIRMAN OF TELEDYNE CANADA LTD. FROM 1966 THROUGH 1971; DIRECTOR AND CHAIRMAN OF
QUARTERDECK CORPORATION FROM 1982 THROUGH 1998; AND SERVICES AS A DIRECTOR OF VARIOUS OTHER PUBLIC COMPANIES INCLUDING U.S.
TELEPHONE INC. (1981-1984), FISHER IMAGING INC. (1991-1998) AND DIGITAL TRANSMISSIONS SYSTEMS (1995-1999). IN ADDITION, MR. LAHAYE
SERVED FROM 1981 TO 2000 AS A DIRECTOR AND CHAIRMAN OF PEREGRINE VENTURE MANAGEMENT CO., A VENTURE CAPITAL FIRM, AND HAS BEEN A
MEMBER AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE ITS INCEPTION. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF
DIRECTORS BELIEVES THAT MR. LAHAYE HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL
STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND
ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY
COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN
UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. LAHAYE IS AN INDEPENDENT DIRECTOR AS THAT TERM IS DEFINED UNDER THE RELEVANT
SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
</FN>
Annual Report | 71
<page>
Franklin Federal Tax-Free Income Fund
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT
At a meeting held February 28, 2005, the Board of Directors ("Board"), including
a majority of non-interested or independent Directors, approved renewal of the
investment advisory contract for the Fund. In reaching this decision, the Board
took into account information furnished throughout the year at regular Board
meetings, as well as information prepared specifically in connection with the
annual renewal review process. Information furnished and discussed throughout
the year included investment performance reports and related financial
information for the Fund, as well as periodic reports on shareholder services,
legal compliance, pricing, brokerage commissions and execution and other
services provided by the Investment Manager ("Manager") and its affiliates.
Information furnished specifically in connection with the renewal process
included a report for the Fund prepared by Lipper Financial Services ("Lipper"),
an independent organization, as well as a Fund profitability analysis report
prepared by management. The Lipper reports compared the Fund's investment
performance and expenses with those of other mutual funds deemed comparable to
the Fund as selected by Lipper. The Fund profitability analysis report discussed
the profitability to Franklin Templeton Investments from its overall U.S. fund
operations, as well as on an individual fund-by-fund basis. Included with such
profitability analysis report was information on a fund-by-fund basis listing
portfolio managers and other accounts they manage, as well as information on
management fees charged by the Manager including management's explanation of
differences where relevant and a three year expense analysis with an explanation
for any increase in expense ratios. Additional information accompanying such
report were a memorandum prepared by management describing enhancements to the
services provided to the Funds by the Franklin Templeton Investments
organization, as well as a memorandum relating to economies of scale.
In considering such materials, the independent Directors received assistance and
advice from and met separately with independent counsel. In approving
continuance of the investment advisory contract for the Fund, the Board,
including a majority of independent Directors, determined that the existing
management fee structure was fair and reasonable and that continuance of the
investment advisory contract was in the best interests of the Fund and its
shareholders. While attention was given to all information furnished, the
following discusses the primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Fund and its shareholders. In addition to investment performance and
expenses of the Fund discussed later, the Board's opinion was based, in part,
upon periodic reports furnished them showing that the investment policies and
restrictions for the Fund were consistently complied with as well as other
reports periodically furnished the Board covering matters such as the compliance
of portfolio managers and other management personnel with the code of ethics
adopted throughout the Franklin Templeton fund complex, the adherence to fair
value pricing procedures established by the Board, and the accuracy of net asset
value calculations. The Board also noted the extent of benefits provided Fund
shareholders from being part of the Franklin Templeton family of funds,
including the right to exchange investments between the same class of funds
without a sales charge, the ability to reinvest Fund
72 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
dividends into other funds and the right to combine holdings in other funds to
obtain a reduced sales charge. Favorable consideration was given to management's
efforts and expenditures in establishing back-up systems and recovery procedures
to function in the event of a natural disaster, it being noted by the Board that
such systems and procedures had functioned smoothly during the hurricanes and
blackout experienced last year in Florida. Other factors taken into account by
the Board were the Manager's best execution trading policies, as well as the
compliance procedures and qualifications of the Chief Compliance Officer
established in accordance with recently adopted SEC requirements. Consideration
was also given to the experience of the Fund's portfolio management team, the
number of accounts managed and general method of compensation. In this latter
respect, the Board noted that a primary factor in management's determination of
the amount of a portfolio manager's bonus compensation was the relative
investment performance of the funds he or she managed so as to be aligned with
the interests of Fund shareholders. The Board also took into account the
transfer agent and shareholder services provided Fund shareholders by an
affiliate of the Manager, noting continuing expenditures by management to
increase and improve the scope of such services, periodic favorable reports on
such service conducted by third parties such as Dalbar, and the firsthand
experience of the individual Directors who deal with the shareholder services
department in their capacities as shareholders in one or more of the various
Franklin Templeton funds.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings during the year, particular attention in assessing
such performance was given to the Lipper report furnished for the contract
renewal. The Lipper report prepared for the Fund showed its investment
performance of its Class A shares during 2004, as well as the previous ten years
ending December 31, 2004, in comparison to a performance universe consisting of
all retail and institutional general municipal debt funds as selected by Lipper.
The Board noted that the income performance for the Fund during 2004 and in each
of the previous ten years was in the first or top quintile of its Lipper
performance universe and that its total return during 2004 was also in the first
or top quintile for 2004 and for the previous three, five and ten year periods
was in the second highest quintile on an annualized basis. The Board expressed
its satisfaction with such performance.
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fees and total expense ratios of the Fund compared with those of a
group of other funds selected by Lipper as its appropriate Lipper expense group
under the Lipper report. Prior to making such comparison, the Board relied upon
a survey showing that the scope of management advisory services covered under
the Fund's investment advisory contract was similar to those provided by fund
managers to other mutual fund groups which would be used as a basis of
comparison in the Lipper report. In reviewing comparative costs, emphasis was
given to the Fund's management fee in comparison with the effective management
fee that would have been charged by other funds within its Lipper
Annual Report | 73
<page>
Franklin Federal Tax-Free Income Fund
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
expense group assuming they were the same size as the Fund, as well as the
actual total expenses of the Fund in comparison with those of its Lipper expense
group. The Lipper effective management fee analysis includes administrative
charges as being part of a management fee, and total expenses, for comparative
consistency, are shown by Lipper for Fund Class A shares. The results of such
expense comparisons showed the effective management fee rate for the Fund to be
in the third or middle quintile of its expense group. Its actual total expenses
were in the lowest quintile of its Lipper expense group, and in the second
lowest quintile on a comparative basis excluding 12b-1 fees. While realizing
that other factors such as the Manager's profitability and economies of scale
bear on the reasonableness of fees, the Board was satisfied with the management
fee and total expenses of the Fund in comparison to its expense group as shown
in the Lipper report.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
the Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each of the individual funds. The Board also considered the extent to which the
Manager and its affiliates might derive ancillary benefits from fund operations,
including its interest in a joint venture entity which finances up-front
commissions paid to brokers/dealers who sold Fund Class B shares, as well as
potential benefits resulting from allocation of fund brokerage and the use of
"soft" commission dollars to pay for research. Specific attention was given to
the methodology followed in allocating costs to the Fund, it being recognized
that allocation methodologies are inherently subjective and various allocation
methodologies may each be reasonable while producing different results. In this
respect, the Board noted that the cost allocation methodology was consistent
with that followed in profitability report presentations for the Fund made in
prior years and that it had engaged on a biennial basis the Fund's independent
accountants to perform certain procedures specified by the Board solely for its
purpose and use. It was also noted that legal costs and payments incurred by
Franklin Templeton in resolving various legal proceedings arising from its U.S.
fund operations had not been allocated to the Fund for purposes of determining
profitability. Included in the analysis for the Fund were the revenue and
related costs broken down separately from the management, underwriting and
shareholder services functions provided by the Manager and its affiliates to the
Fund, as well as the relative contribution of the Fund to the profitability of
the Manager's parent. In reviewing and discussing such analysis, management
discussed with the Board its belief that costs incurred in establishing the
infrastructure necessary to the type of mutual fund operations conducted by the
Manager and its corporate affiliates may not be fully reflected in the expenses
allocated to the Fund in determining its profitability, as well as the fact that
the level of profits, to a certain extent, reflected operational cost savings
and efficiencies initiated by management. The Board also took into account
management's expenditures in improving shareholder services provided the Fund,
as well as the need to meet additional regulatory and compliance requirements
resulting from the Sarbanes-Oxley Act and recent SEC requirements. In addition,
the Board considered a third party study comparing the profitability of the
Manager's parent on an overall basis as compared to other publicly held
74 | Annual Report
<page>
Franklin Federal Tax-Free Income Fund
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
managers broken down to show profitability from management operations exclusive
of distribution expenses, as well as profitability including distribution
expenses. Based upon their consideration of all these factors, the Board
determined that the level of profits realized by the Manager under its
investment advisory contract with the Fund was not excessive in view of the
nature, quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Fund grows larger and the extent to which this is
reflected in the level of management fees charged. While recognizing that any
precise determination is inherently subjective, the Board noted that based upon
the Fund profitability analysis, it appears that as some funds get larger, at
some point economies of scale do result in the Manager realizing a larger profit
margin on management services provided such a fund. The Board also noted that
economies of scale are shared with a fund and its shareholders through
management fee breakpoints so that as a fund grows in size, its effective
management fee rate declines. The fee structure under the Fund's investment
advisory contract provides an initial fee of 0.625% on the first $100 million of
assets; 0.50% on the next $150 million of assets and 0.45% on the next $9.75
billion of assets, with breakpoints continuing in stages thereafter until
declining to a final breakpoint of 0.36% on assets in excess of $20 billion. The
Fund had assets of approximately $7 billion at the end of 2004 and the Board
believes that to the extent any economies of scale may be realized by the
Manager and its affiliates, the schedule of fees under the investment advisory
contract provides a sharing of benefits with the Fund and its shareholders.
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
Annual Report | 75
<page>
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<page>
Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL SECTOR TAX-FREE INCOME6
Mutual European Fund Franklin Biotechnology Discovery Fund NATIONAL FUNDS
Templeton China World Fund Franklin DynaTech Fund Double Tax-Free Income Fund
Templeton Developing Markets Trust Franklin Global Communications Fund Federal Tax-Free Income Fund
Templeton Foreign Fund Franklin Global Health Care Fund High Yield Tax-Free Income Fund
Templeton Foreign Smaller Companies Fund Franklin Gold and Precious Metals Fund Insured Tax-Free Income Fund7
Templeton International (Ex EM) Fund Franklin Natural Resources Fund
Franklin Real Estate Securities Fund LIMITED-TERM FUNDS
GLOBAL Franklin Technology Fund California Limited-Term Tax-Free Income Fund
Mutual Discovery Fund Franklin Utilities Fund Federal Limited-Term Tax-Free Income Fund
Templeton Global Long-Short Fund Mutual Financial Services Fund New York Limited-Term Tax-Free Income Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund ASSET ALLOCATION INTERMEDIATE-TERM FUNDS
Templeton Growth Fund Franklin Templeton Corefolio California Intermediate-Term
Templeton World Fund Allocation Fund Tax-Free Income Fund
Franklin Templeton Founding Funds Federal Intermediate-Term
GROWTH Allocation Fund Tax-Free Income Fund
Franklin Aggressive Growth Fund Franklin Templeton Perspectives New York Intermediate-Term
Franklin Capital Growth Fund Allocation Fund Tax-Free Income Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund TARGET FUNDS
Franklin Small Cap Growth Fund II1 Franklin Templeton Conservative Target Fund STATE-SPECIFIC
Franklin Templeton Growth Target Fund
VALUE Franklin Templeton Moderate Target Fund Alabama Michigan7
Franklin Balance Sheet Arizona Minnesota7
Investment Fund2 INCOME California8 Missouri
Franklin Equity Income Fund Franklin Adjustable U.S. Government Colorado New Jersey
Franklin Large Cap Value Fund Securities Fund4 Connecticut New York8
Franklin MicroCap Value Fund2 Franklin's AGE High Income Fund Florida8 North Carolina
Franklin Small Cap Value Fund Franklin Floating Rate Daily Access Fund Georgia Ohio7
Mutual Beacon Fund Franklin Income Fund Kentucky Oregon
Mutual Qualified Fund Franklin Limited Maturity Louisiana Pennsylvania
Mutual Recovery Fund3 U.S. Government Securities Fund4,5 Maryland Tennessee
Mutual Shares Fund Franklin Low Duration Total Return Fund Massachusetts7 Virginia
Franklin Real Return Fund
BLEND Franklin Strategic Income Fund
Franklin Blue Chip Fund Franklin Strategic Mortgage Portfolio INSURANCE FUNDS
Franklin Convertible Securities Fund Franklin Templeton Hard Currency Fund Franklin Templeton Variable Insurance
Franklin Growth Fund Franklin Total Return Fund Products Trust9
Franklin Rising Dividends Fund Franklin U.S. Government Securities Fund4
Franklin U.S. Long-Short Fund Templeton Global Bond Fund
1.The fund is closed to new investors. Existing shareholders can continue adding
to their accounts.
2.The fund is only open to existing shareholders and select retirement plans.
3.The fund is a continuously offered, closed-end fund. Shares may be purchased
daily; there is no daily redemption. However, each quarter, pending board
approval, the fund will authorize the repurchase of 5%-25% of the outstanding
number of shares. Investors may tender all or a portion of their shares during
the tender period.
4.An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5.Formerly Franklin Short-Intermediate U.S. Government Securities Fund.
Effective 9/1/04, the fund's name changed; its investment goal and strategy
remained the same.
6.For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital
gains are generally taxable.
7.Portfolio of insured municipal securities.
8.These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA) and
limited-term, intermediate-term and money market portfolios (CA and NY).
9.The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
01/05 Not part of the annual report
<page>
[Logo Omitted]
[Logo Omitted]
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
[ }WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN FEDERAL
TAX-FREE INCOME FUND
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
116 A2005 06/05
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(A), the Registrant is attaching as an exhibit a copy of
its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial expert is Frank W.T. LaHaye and he is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $128,679 for the fiscal year ended April 30, 2005 and $67,631 for the
fiscal year ended April 30, 2004.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4.
The aggregate fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of their financial statements
were $0 for the fiscal year ended April 30, 2005 and $52,158 for the fiscal year
ended April 30, 2004. The services for which these fees were paid included
attestation services.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $17,060 for the fiscal year ended
April 30, 2005 and $0 for the fiscal year ended April 30, 2004. The services for
which these fees were paid included tax compliance and advise.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended April 30, 2005
and $3,721 for the fiscal year ended April 30, 2004. The services for which
these fees were paid included review of materials provided to the fund Board in
connection with the investment management contract renewal process.
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant not reported
in paragraphs (a)-(c) of Item 4 were $4,500 for the fiscal year ended April 30,
2005 and $96,279 for the fiscal year ended April 30, 2004. The services for
which these fees were paid included review of materials provided to the fund
Board in connection with the investment management contract renewal process and
the review of the ICI transfer agent survey.
(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to the
Fund by the auditors;
(iii)pre-approval of all non-audit related services to be provided to the
registrant by the auditors to the registrant's investment adviser or to any
entity that controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations or
financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were pre-approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and the registrant's
investment adviser and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant were $21,560 for the fiscal year ended April 30, 2005 and $152,158
for the fiscal year ended April 30, 2004.
(h) The registrant's audit committee of the board of trustees has considered
whether the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT
COMPANIES. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT
INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have
been no changes to the procedures by which shareholders may recommend nominees
to the Registrant's Board of Trustees that would require disclosure herein.
ITEM 11. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
ITEM 12. EXHIBITS.
(A) Code of Ethics
(B) (1) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(B) (2) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
By /s/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date June 20, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/JIMMY D. GAMBILL
----------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date June 20, 2005
By /s/GALEN G. VETTER
----------------
Galen G. Vetter
Chief Financial Officer
Date June 20, 2005