UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-03395
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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 94403-1906
(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, 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: 10/31/05
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ITEM 1. REPORTS TO STOCKHOLDERS.
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OCTOBER 31, 2005
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SEMIANNUAL REPORT AND SHAREHOLDER LETTER TAX-FREE INCOME
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WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
FRANKLIN FEDERAL
TAX-FREE INCOME FUND Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
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[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
FRANKLIN TEMPLETON INVESTMENTS
GAIN FROM OUR PERSPECTIVE(R)
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,
with offices in over 25 countries, Templeton offers
investors a truly global perspective.
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.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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Not part of the semiannual report
CONTENTS
SHAREHOLDER LETTER ..................................................... 1
SPECIAL FEATURE:
Understanding Interest Rates ........................................... 4
SEMIANNUAL REPORT
Franklin Federal Tax-Free Income Fund .................................. 7
Performance Summary .................................................... 11
Your Fund's Expenses ................................................... 14
Financial Highlights and Statement of Investments ...................... 16
Financial Statements ................................................... 52
Notes to Financial Statements .......................................... 56
Shareholder Information ................................................ 63
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SPECIAL FEATURE
UNDERSTANDING INTEREST RATES
DID YOU EVER WONDER WHY YOUR TAX-FREE INCOME FUND SHARE PRICE FLUCTUATES? OR WHY
THE DIVIDENDS YOU RECEIVE FROM YOUR TAX-FREE INCOME FUND AREN'T ALWAYS THE SAME?
AT FRANKLIN TEMPLETON INVESTMENTS, MAXIMIZING TAX-FREE INCOME AND PRESERVING OUR
SHAREHOLDERS' CAPITAL ARE OUR TOP PRIORITIES.1 EVEN SO, CHANGES IN THE ECONOMY
AND INTEREST RATES CAN HAVE AN IMPACT ON YOUR FUND'S SHARE PRICE AND DIVIDENDS.
BELOW, YOU'LL FIND ANSWERS TO COMMONLY ASKED QUESTIONS ABOUT THE RELATIONSHIP
BETWEEN MUNICIPAL BONDS AND INTEREST RATES. UNDERSTANDING WHAT AFFECTS YOUR
TAX-FREE INCOME FUND MAY HELP YOU BECOME A MORE EFFECTIVE INVESTOR.
Q. WHAT IS THE DIFFERENCE BETWEEN SHORT- AND LONG-TERM INTEREST RATES?
A. The Federal Reserve Board controls the Federal funds target rate (Fed
funds rate), which in turn influences the market for shorter-term
securities. The Fed closely monitors the economy and has the power to
raise or lower the Fed funds rate in order to keep inflation in check or
to help stimulate the economy. The Fed funds rate is the rate that banks
charge other banks for overnight loans.
Long-term interest rates, as represented by yields of the 10-year or
30-year Treasury bond, are market-driven and tend to move in anticipation
of changes in the economy and inflation.
Q. WHAT CAUSES INTEREST RATES TO RISE AND FALL?
A. Interest rate trends are primarily determined by economic factors such as
inflation, the strength of the U.S. dollar and the pace of economic
growth.
If the economy slows down, the Fed may lower the Fed funds rate to
stimulate economic growth, as we witnessed from January 2001 to June 2003.
On the other hand, strong economic growth can lead to inflation. If the
Fed becomes concerned about inflation, it may attempt to cool the economy
by raising the Fed funds rate, as it did in 2004 and 2005.
It should be noted that short- and long-term interest rates don't
necessarily move in tandem. While short-term rates rose in 2004, long-term
rates, despite some fluctuations, ended the year just about where they
started.
(1) For investors subject to alternative minimum tax, a small portion of fund
dividends may be taxable. Distributions of capital gains are generally
taxable.
[GRAPHIC Q&A]
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NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
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4 | Not part of the semiannual report
Q. HOW DO CHANGES IN INTEREST RATES AFFECT BOND PRICES?
A. Typically, bond prices, and thus a tax-free income fund's share price,
move in the opposite direction of interest rates. So, when interest rates
rise, bond prices fall, and conversely, when rates decline, bond prices
tend to rise in value.
When rates go up, newly issued bonds, with their new, higher yields become
more attractive than comparable existing bonds with lower yields. So,
investors who want to sell their existing bonds have to reduce their
prices to make them equally attractive.
[GRAPHIC OMITTED]
Generally, tax-free income fund portfolios comprising municipal bonds with
longer maturities are more sensitive to changes in long-term interest
rates than portfolios with shorter-term municipal bonds. Similarly, funds
with shorter-term municipal bonds are typically more influenced by
short-term rate changes than funds with longer-term municipal bonds.
But, while tax-free income fund prices will fluctuate with interest rate
changes, it's important to remember that price movement is only part of
the picture. As a tax-free income fund shareholder, you also receive
monthly tax-free income,1 which has historically been the largest
component of total return for municipal bonds.2 Total return includes
price movement (capital appreciation or depreciation) and income. And
since bonds generally pay interest whether prices move up or down, the
interest from municipal bonds can help cushion a fund's overall total
return, especially when rates are rising.
Q. HOW DO INTEREST RATES AFFECT MY TAX-FREE DIVIDENDS?
A. When interest rates decline, municipal bond issuers often "call" or redeem
existing higher-yielding bonds and replace them with new, lower-yielding
bonds to reduce the amount of interest they pay on the debt. As funds then
have to reinvest proceeds from the called bonds into new, lower-yielding
bonds, their investment earnings decline, and the dividends paid out to
shareholders also decline.
(2) Source: Lehman Brothers Municipal Bond Index, 9/30/05. Total return
includes compounded income and capital appreciation over the 20-year
period ending 9/30/05. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.
[GRAPHIC Q&A]
Not part of the semiannual report | 5
Higher interest rates may lead to higher dividends. When interest rates
rise, fewer bonds are called and fund managers may have the opportunity to
invest in new, higher-yielding bonds. As a result, the funds' investment
earnings can increase, and they are able to pay out higher dividends to
shareholders over time.
Q. WHAT IS THE BENEFIT OF FRANKLIN'S INVESTMENT APPROACH WHEN INTEREST RATES
ARE VOLATILE?
A. Since 1977, Franklin has consistently adhered to a strategy of investing
for high, current, tax-free income.(1)
Our straightforward, "plain-vanilla" approach to investing means we do not
use leverage or invest in speculative derivatives or futures, which could
increase the level of risk for our fund portfolios, especially when
interest rates are volatile. Similarly, we do not try to time the market
and predict interest rate movements. Instead, we carefully select bonds
for our fund portfolios that we believe should provide a high level of
stable income until maturity.
We generally invest in current coupon securities to maximize tax-free
income. Over time, as we invest in different interest rate climates, the
portfolios become well diversified with a broad range of securities. As a
result of this strategy, we own many older securities with higher coupons,
which are generally less sensitive to interest rate movements and help to
provide stability to our fund portfolios.
Our tax-free income fund investment strategy cannot eliminate interest
rate risk, but it may help to reduce this risk.
Q. WHAT ARE THE KEY BENEFITS OF INVESTING IN TAX-FREE INCOME FUNDS?
A. It's important to remember the reasons to own tax-free income funds don't
change when market conditions change. For long-term investors seeking
monthly, tax-free income and portfolio diversification, we believe
tax-free income funds are an attractive investment option. At Franklin, we
will continue to serve our shareholders by seeking to provide a high level
of tax-free income consistent with prudent investment management and the
preservation of shareholders' capital.
[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
[GRAPHIC Q&A]
6 | Not part of the semiannual report
SEMIANNUAL REPORT
FRANKLIN FEDERAL TAX-FREE INCOME FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Federal Tax-Free Income Fund
seeks to provide as high a level of income exempt from federal income taxes as
is consistent with prudent investment management and preservation of capital by
investing at least 80% of its total assets in investment-grade municipal
securities that pay interest free from such taxes.(1)
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CREDIT QUALITY BREAKDOWN*
Franklin Federal Tax-Free Income Fund
Based on Total Long-Term Investments as of 10/31/05**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA .................................... 57.7%
AA ..................................... 10.5%
A ...................................... 10.9%
BBB .................................... 13.1%
Below Investment Grade ................. 2.3%
Not Rated by S&P ....................... 5.5%
* 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.
** Does not include short-term investments and other net assets.
RATINGS MOODY'S INTERNAL
AAA or Aaa 3.1% 0.2%
AA or Aa 0.3% --
A 0.3% --
BBB or Baa 0.6% 0.1%
Below Investment Grade 0.2% 0.7%
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Total 4.5% 1.0%
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This semiannual report for Franklin Federal Tax-Free Income Fund covers the
period ended October 31, 2005.
(1) Dividends are generally subject to state and local taxes, if any. For
investors subject to 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 20.
Semiannual Report | 7
DIVIDEND DISTRIBUTIONS(2)
5/1/05-10/31/05
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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 4.70 cents 4.16 cents 4.16 cents 4.79 cents
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June 4.70 cents 4.20 cents 4.18 cents 4.79 cents
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July 4.70 cents 4.20 cents 4.18 cents 4.79 cents
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August 4.70 cents 4.20 cents 4.18 cents 4.79 cents
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September 4.60 cents 4.02 cents 4.03 cents 4.69 cents
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October 4.60 cents 4.02 cents 4.03 cents 4.69 cents
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TOTAL 28.00 CENTS 24.80 CENTS 24.76 CENTS 28.54 CENTS
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PERFORMANCE DATA 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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
PERFORMANCE OVERVIEW
Because bond yield and price typically move in opposite directions, as municipal
bond yields rose bond prices fell for the six-month reporting period. The Fund's
Class A share price, as measured by net asset value, decreased from $12.23 on
April 30, 2005, to $12.03 on October 31, 2005. The Fund's Class A shares paid
dividends totaling 28.00 cents per share for the same period.2 The Performance
Summary beginning on page 11 shows that at the end of this reporting period the
Fund's Class A shares' distribution rate was 4.39%, based on an annualization of
October's 4.6 cent per share dividend and the maximum offering price of $12.56
on October 31, 2005. An investor in the 2005 maximum federal personal income tax
bracket of 35.00% would need to earn a distribution rate of 6.75% from a taxable
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.
The Fund was subject to bond calls during the six months under review as many
municipal bond issuers sought to take advantage of lower interest rates and
exercised call options on their outstanding higher coupon bonds issued several
years ago. In general, we were limited to reinvesting the proceeds from these
bond calls as well as from cash inflows at current, lower interest rates, which
tended to reduce the Fund's income and cause dividend distributions to decline
slightly, as shown in the dividend distributions table.
(2) All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
8 | Semiannual Report
MUNICIPAL BOND MARKET OVERVIEW
For the six-month period ended October 31, 2005, the fixed income markets
continued to deliver positive performance despite record high oil prices,
increased fears of inflation, concerns about the dollar, mixed economic
releases, and the aftermath of Hurricanes Katrina and Rita. The U.S. Treasury
market continued to experience strong support from foreign buyers seeking
relatively higher yields. Municipal bonds, which have domestic tax advantages,
outperformed U.S. Treasury bonds, as the Lehman Brothers Municipal Bond Index
returned +0.59% for the period, while the Lehman Brothers U.S. Treasury Index
had a -0.09% return.(3)
During the reporting period, short-term interest rates steadily increased while
long-term interest rates experienced some volatility. The Federal Reserve Board
remained on track and raised the federal funds target rate from 2.75% to 3.75%
in four successive moves during the period under review. The Treasury yield
curve, which illustrates rates for Treasuries with short to long maturities,
flattened somewhat as short- and intermediate-term rates went up more than
longer-maturity rates. Over the six-month period, the 10-year Treasury bond
yield increased 36 basis points (100 basis points equal one percentage point),
while the 30-year Treasury bond yield increased 25 basis points. The 10-year
Treasury yielded 4.57% and the 30-year Treasury yielded 4.76% on October 31,
2005. According to Municipal Market Data, 10-year municipal bond yields
increased 35 basis points while 30-year yields increased 22 basis points.(4)
Consequently, long-maturity municipal bonds continued to outperform
intermediates.
Motivated by the relatively low interest rate environment, municipalities sought
to refinance existing debt or borrow for capital improvement, which resulted in
rising issuance during the reporting period. 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 $338.6 billion in new debt year-to-date in 2005.(5)
(3) Source: 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. 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.
Semiannual Report | 9
PORTFOLIO BREAKDOWN
10/31/05
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% OF TOTAL
LONG-TERM INVESTMENTS*
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Prerefunded 20.6%
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Utilities 17.8%
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Transportation 17.1%
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General Obligation 11.6%
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Hospital & Health Care 9.8%
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Subject to Government Appropriations 5.4%
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Tax-Supported 4.8%
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Other Revenue 4.7%
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Higher Education 3.9%
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Housing 2.2%
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Corporate-Backed 2.1%
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* Does not include short-term investments and other net assets.
Demand for municipal bonds remained strong as investors found municipal bonds
offered attractive taxable equivalent yields. Healthy demand came from a wide
range of traditional buyers including mutual funds, individuals, and property
and casualty companies, as well as crossover buyers. Crossover buyers 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 municipal yield curve compared to Treasuries, 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 continued 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 OCTOBER 31, 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,
COUNTRY, 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 | Semiannual Report
PERFORMANCE SUMMARY AS OF 10/31/05
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 does not reflect any taxes that a
shareholder would pay 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
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CLASS A (SYMBOL: FKTIX) CHANGE 10/31/05 4/30/05
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Net Asset Value (NAV) -$ 0.20 $ 12.03 $ 12.23
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DISTRIBUTIONS (5/1/05-10/31/05)
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Dividend Income $ 0.2800
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CLASS B (SYMBOL: FFTBX) CHANGE 10/31/05 4/30/05
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Net Asset Value (NAV) -$ 0.20 $ 12.02 $ 12.22
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DISTRIBUTIONS (5/1/05-10/31/05)
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Dividend Income $ 0.2480
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CLASS C (SYMBOL: FRFTX) CHANGE 10/31/05 4/30/05
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Net Asset Value (NAV) -$ 0.20 $ 12.03 $ 12.23
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DISTRIBUTIONS (5/1/05-10/31/05)
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Dividend Income $ 0.2476
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ADVISOR CLASS (SYMBOL: FAFTX) CHANGE 10/31/05 4/30/05
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Net Asset Value (NAV) -$ 0.19 $ 12.04 $ 12.23
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DISTRIBUTIONS (5/1/05-10/31/05)
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Dividend Income $ 0.2854
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Semiannual 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.
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CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return(1) +0.65% +3.69% +31.93% +70.67%
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Average Annual Total Return(2) -3.61% -0.72% +4.78% +5.04%
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Avg. Ann. Total Return (9/30/05)(3) +0.75% +5.08% +5.22%
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Distribution Rate(4) 4.39%
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Taxable Equivalent Distribution Rate(5) 6.75%
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30-Day Standardized Yield(6) 3.55%
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Taxable Equivalent Yield(5) 5.46%
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CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
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Cumulative Total Return(1) +0.38% +3.14% +28.33% +32.53%
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Average Annual Total Return(2) -3.55% -0.83% +4.79% +4.21%
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Avg. Ann. Total Return (9/30/05)(3) +0.68% +5.09% +4.35%
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Distribution Rate(4) 4.01%
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Taxable Equivalent Distribution Rate(5) 6.17%
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30-Day Standardized Yield(6) 3.16%
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Taxable Equivalent Yield(5) 4.86%
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CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return(1) +0.38% +3.13% +28.41% +61.33%
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Average Annual Total Return(2) -0.60% +2.14% +5.13% +4.90%
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Avg. Ann. Total Return (9/30/05)(3) +3.68% +5.43% +5.09%
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Distribution Rate(4) 4.02%
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Taxable Equivalent Distribution Rate(5) 6.18%
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30-Day Standardized Yield(6) 3.15%
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Taxable Equivalent Yield(5) 4.85%
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ADVISOR CLASS(7) 6-MONTH 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return(1) +0.69% +3.87% +32.44% +71.33%
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Average Annual Total Return(2) +0.69% +3.87% +5.78% +5.53%
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Avg. Ann. Total Return (9/30/05)(3) +5.35% +6.08% +5.72%
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Distribution Rate(4) 4.67%
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Taxable Equivalent Distribution Rate(5) 7.18%
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30-Day Standardized Yield(6) 3.80%
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Taxable Equivalent Yield(5) 5.85%
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PERFORMANCE DATA 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 | Semiannual 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 GENERALLY MOVE IN THE OPPOSITE DIRECTION FROM INTEREST
RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES,
THE FUND'S SHARE PRICE MAY DECLINE. 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. Six-month return has not been
annualized.
(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
October dividend and the maximum offering price (NAV for Classes B, C and
Advisor) per share on 10/31/05.
(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 10/31/05.
(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 +22.43% and +5.75%.
Semiannual Report | 13
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.
14 | Semiannual 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 4/30/05 VALUE 10/31/05 PERIOD* 4/30/05-10/31/05
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,006.50 $ 3.09
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,022.13 $ 3.11
- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,003.80 $ 5.91
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,019.31 $ 5.96
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,003.80 $ 5.91
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,019.31 $ 5.96
- --------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- --------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,006.90 $ 2.63
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,022.58 $ 2.65
- --------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.61%; B: 1.17%; C: 1.17%; and Advisor: 0.52%), multiplied by the average
account value over the period, multiplied by 184/365 to reflect the
one-half year period.
Semiannual Report | 15
FRANKLIN FEDERAL TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS
-----------------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2005 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2005 2004 2003 2002 2001
-----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period ... $ 12.23 $ 11.91 $ 11.99 $ 11.81 $ 11.77 $ 11.41
-----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............ 0.26 0.57 0.58 0.59 0.62 0.65
Net realized and unrealized gains
(losses) ......................... (0.18) 0.31 (0.10) 0.18 0.04 0.36
-----------------------------------------------------------------------------------------
Total from investment operations ....... 0.08 0.88 0.48 0.77 0.66 1.01
-----------------------------------------------------------------------------------------
Less distributions from net
investment income ................... (0.28) (0.56) (0.56) (0.59) (0.62) (0.65)
-----------------------------------------------------------------------------------------
Redemption fees ........................ --(c) --(c) -- -- -- --
-----------------------------------------------------------------------------------------
Net asset value, end of period ......... $ 12.03 $ 12.23 $ 11.91 $ 11.99 $ 11.81 $ 11.77
=========================================================================================
Total return(b)......................... 0.65% 7.62% 4.08% 6.72% 5.71% 9.07%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $ 6,272,816 $ 6,324,986 $ 6,357,878 $ 6,835,209 $ 6,633,281 $ 6,431,800
Ratios to average net assets:
Expenses ............................ 0.61%(d) 0.61% 0.61% 0.61% 0.59% 0.60%
Net investment income ............... 4.18%(d) 4.72% 4.79% 4.98% 5.20% 5.54%
Portfolio turnover rate ................ 5.46% 6.74% 6.94% 13.18% 12.95% 9.79%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
16 | See notes to financial statements. | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
-----------------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2005 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2005 2004 2003 2002 2001
-----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period ... $ 12.22 $ 11.90 $ 11.99 $ 11.81 $ 11.77 $ 11.41
-----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............ 0.22 0.50 0.51 0.53 0.55 0.58
Net realized and unrealized gains
(losses) ......................... (0.17) 0.31 (0.11) 0.18 0.04 0.37
-----------------------------------------------------------------------------------------
Total from investment operations ....... 0.05 0.81 0.40 0.71 0.59 0.95
-----------------------------------------------------------------------------------------
Less distributions from net
investment income ................... (0.25) (0.49) (0.49) (0.53) (0.55) (0.59)
-----------------------------------------------------------------------------------------
Redemption fees ........................ --(c) --(c) -- -- -- --
-----------------------------------------------------------------------------------------
Net asset value, end of period ......... $ 12.02 $ 12.22 $ 11.90 $ 11.99 $ 11.81 $ 11.77
=========================================================================================
Total return(b) ........................ 0.38% 7.00% 3.41% 6.13% 5.13% 8.47%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $ 275,203 $ 289,490 $ 298,252 $ 293,285 $ 220,757 $ 120,639
Ratios to average net assets:
Expenses ............................ 1.17%(d) 1.17% 1.17% 1.17% 1.16% 1.16%
Net investment income ............... 3.62%(d) 4.16% 4.23% 4.42% 4.63% 4.96%
Portfolio turnover rate ................ 5.46% 6.74% 6.94% 13.18% 12.95% 9.79%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
Semiannual Report | See notes to financial statements. | 17
FRANKLIN FEDERAL TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
-----------------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2005 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2005 2004 2003 2002 2001
-----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period ... $ 12.23 $ 11.90 $ 11.99 $ 11.81 $ 11.77 $ 11.41
-----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............ 0.22 0.50 0.51 0.53 0.55 0.58
Net realized and unrealized gains
(losses) ......................... (0.17) 0.32 (0.11) 0.18 0.04 0.36
-----------------------------------------------------------------------------------------
Total from investment operations ....... 0.05 0.82 0.40 0.71 0.59 0.94
-----------------------------------------------------------------------------------------
Less distributions from net investment
income .............................. (0.25) (0.49) (0.49) (0.53) (0.55) (0.58)
-----------------------------------------------------------------------------------------
Redemption fees ........................ --(c) --(c) -- -- -- --
-----------------------------------------------------------------------------------------
Net asset value, end of period ......... $ 12.03 $ 12.23 $ 11.90 $ 11.99 $ 11.81 $ 11.77
=========================================================================================
Total return(b) 0.38% 7.09% 3.39% 6.15% 5.13% 8.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $ 390,870 $ 371,438 $ 373,431 $ 394,026 $ 320,087 $ 242,255
Ratios to average net assets:
Expenses ............................ 1.17%(d) 1.17% 1.17% 1.17% 1.16% 1.16%
Net investment income ............... 3.62%(d) 4.16% 4.23% 4.42% 4.63% 4.97%
Portfolio turnover rate ................ 5.46% 6.74% 6.94% 13.18% 12.95% 9.79%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
18 | See notes to financial statements. | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2005 YEAR ENDED APRIL 30,
ADVISOR CLASS (UNAUDITED) 2005 2004 2003 2002(d)
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period ... $ 12.23 $ 11.92 $ 12.00 $ 11.82 $ 11.70
------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............ 0.26 0.58 0.59 0.60 0.07
Net realized and unrealized gains
(losses) ......................... (0.16) 0.30 (0.10) 0.18 0.10
------------------------------------------------------------------------------
Total from investment operations ....... 0.10 0.88 0.49 0.78 0.17
------------------------------------------------------------------------------
Less distributions from net investment
income .............................. (0.29) (0.57) (0.57) (0.60) (0.05)
------------------------------------------------------------------------------
Redemption fees ........................ --(c) --(c) -- -- --
------------------------------------------------------------------------------
Net asset value, end of period ......... $ 12.04 $ 12.23 $ 11.92 $ 12.00 $ 11.82
==============================================================================
Total return(b) 0.69% 7.71% 4.17% 6.81% 1.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $ 130,710 $ 112,032 $ 97,303 $ 88,142 $ 84,479
Ratios to average net assets:
Expenses ............................ 0.52%(e) 0.52% 0.52% 0.52% 0.51%(e)
Net investment income ............... 4.27%(e) 4.81% 4.88% 5.07% 5.17%(e)
Portfolio turnover rate ................ 5.46% 6.74% 6.94% 13.18% 12.95%
(a) Based on average daily shares outstanding.
(b) Total return is not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) For the period March 20, 2002 (effective date) to April 30, 2002.
(e) Annualized.
Semiannual Report | See notes to financial statements. | 19
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.3%
BONDS 93.6%
ALABAMA 0.9%
Alabama HFA, SFMR, Series D-2, GNMA Secured, 5.75%, 10/01/23 ............................... $ 1,745,000 $ 1,765,818
Anniston Regional Medical Center Board Revenue, Series A, AMBAC Insured, 5.125%,
6/01/28 ................................................................................. 7,000,000 7,228,620
Auburn University General Fee Revenue, AMBAC Insured, 5.00%, 6/01/34 ....................... 11,025,000 11,318,486
Courtland IDB Solid Waste Disposal Revenue, Champion International Corp. Project,
Refunding, 6.00%, 8/01/29 ............................................................... 12,000,000 12,453,840
Series A, 6.70%, 11/01/29 ............................................................... 4,000,000 4,303,360
Fairfield IDB Environmental Improvement Revenue, USX Corp. Project, Refunding, 5.45%,
9/01/14 ................................................................................. 1,445,000 1,508,175
University of Alabama General Revenue, Series A, MBIA Insured, 5.00%,
7/01/29 ................................................................................. 10,000,000 10,311,300
7/01/34 ................................................................................. 11,500,000 11,808,315
University of Alabama University Revenues, Hospital, Series A, MBIA Insured, 5.875%,
9/01/31 .................................................................................. 5,000,000 5,437,400
---------------
66,135,314
---------------
ALASKA 0.4%
Alaska State HFC Revenue, General Housing, Series A, FGIC Insured, 5.00%,
12/01/29 ................................................................................ 4,000,000 4,102,560
12/01/30 ................................................................................ 3,500,000 3,589,740
Alaska State International Airports Revenues, Series B,
AMBAC Insured, 5.25%, 10/01/27 .......................................................... 15,000,000 15,616,050
MBIA Insured, 5.00%, 10/01/28 ........................................................... 5,100,000 5,206,641
---------------
28,514,991
---------------
ARIZONA 1.9%
Maricopa County IDA Health Facilities Revenue, Catholic Healthcare West Project,
Refunding, Series A, 5.00%, 7/01/16 ...................................................... 23,000,000 23,604,900
Maricopa County IDA Hospital Facility Revenue, Mayo Clinic Hospital, 5.25%, 11/15/37 ....... 19,000,000 19,813,200
Mesa IDAR, Discovery Health System, Series A, MBIA Insured, Pre-Refunded, 5.75%, 1/01/25 ... 22,500,000 24,638,175
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 36,673,700
Series B, 5.00%, 1/01/25 ................................................................ 17,500,000 18,170,600
Scottsdale Municipal Property Corp. Excise Tax Revenue, Series A, 5.00%, 7/01/34 ........... 7,500,000 7,738,950
(a)University Medical Center Corp. Revenue, 5.00%, 7/01/35 .................................... 7,000,000 6,872,110
---------------
137,511,635
---------------
ARKANSAS 1.4%
Arkansas State Development Finance Authority HMR, Series B-1, GNMA Secured, 5.80%,
1/01/23 .................................................................................. 245,000 249,415
Arkansas State Development Finance Authority Revenue, White River Medical Center Project,
5.60%, 6/01/24 ........................................................................... 1,200,000 1,226,136
Arkansas State Development Finance Authority SFMR, MBS Program, Series B, 6.10%, 1/01/29 ... 220,000 223,953
Arkansas State Development Finance Authority Wastewater System Revenue, Revolving Loan
Fund, Series A, Pre-Refunded, 5.85%, 12/01/19 ............................................ 1,000,000 1,026,010
20 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
ARKANSAS (CONT.)
Arkansas State Student Loan Authority Revenue,
Refunding, Sub Series B, 5.60%, 6/01/14 .............................................. $ 325,000 $ 334,405
Sub Series B, Pre-Refunded, 6.25%, 6/01/10 ........................................... 500,000 508,645
Jefferson County PCR,
Arkansas Power and Light Co. Project, Refunding, 6.30%, 6/01/18....................... 1,865,000 1,888,387
Entergy Arkansas Inc. Project, Refunding, 5.60%, 10/01/17............................. 7,900,000 7,903,081
Pope County PCR, Arkansas Power and Light Co. Project, Refunding, 6.30%,
12/01/16 ............................................................................. 2,600,000 2,627,924
11/01/20 ............................................................................. 60,500,000 60,884,780
Pulaski County Health Facilities Board Revenue, Nazareth Sisters of Charity, St. Vincent's
Infirmary, MBIA Insured, ETM, 6.05%, 11/01/09 ........................................ 125,000 137,619
Saline County Retirement Housing and Healthcare Facilities Board Revenue, Refunding,
AMBAC Insured, 5.80%, 6/01/11 ........................................................... 195,000 199,282
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 1,034,400
Construction, University of Arkansas for Medical Sciences Campus, Series B,
MBIA Insured, 5.00%, 11/01/34 ..................................................... 9,000,000 9,282,780
Various Facility, Fayetteville Campus, FGIC Insured, 5.00%, 12/01/27 ................. 5,000,000 5,143,800
University of Central Arkansas Academic Facilities Revenue,
Series B, AMBAC Insured, 5.875%, 4/01/16 ............................................. 250,000 257,758
Series C, AMBAC Insured, 6.00%, 4/01/21 .............................................. 1,000,000 1,031,330
University of Central Arkansas Athletic Facilities Revenue, Series C, AMBAC Insured,
6.00%, 4/01/21 ....................................................................... 1,000,000 1,031,330
6.125%, 4/01/26 ...................................................................... 1,200,000 1,238,196
University of Central Arkansas Housing System Revenue, Refunding, Series A,
AMBAC Insured, 6.00%, 4/01/21 ........................................................ 1,000,000 1,031,330
---------------
97,260,561
---------------
CALIFORNIA 6.7%
Alhambra COP, Clubhouse Facility Project, 11.25%,
1/01/08 .............................................................................. 410,000 415,334
1/01/09 .............................................................................. 455,000 460,874
1/01/10 .............................................................................. 500,000 506,370
California Educational Facilities Authority Revenue, Pooled College and University
Projects, Series B, 6.00%, 12/01/20 ..................................................... 6,025,000 6,158,092
California Health Facilities Financing Authority Revenue, St. Francis Medical Center,
Refunding, Series H, AMBAC Insured, 6.30%, 10/01/15 ..................................... 2,800,000 2,868,936
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 25,236,960
California State GO,
5.90%, 5/01/08 ....................................................................... 235,000 238,168
6.00%, 5/01/18 ....................................................................... 535,000 542,105
6.00%, 5/01/20 ....................................................................... 850,000 862,758
5.90%, 4/01/23 ....................................................................... 1,200,000 1,212,072
5.00%, 2/01/24 ....................................................................... 5,000,000 5,145,150
5.00%, 2/01/26 ....................................................................... 20,000,000 20,514,800
5.125%, 2/01/26 ...................................................................... 7,500,000 7,793,175
Semiannual Report | 21
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
CALIFORNIA (CONT.)
California State GO, (cont.)
5.00%, 2/01/32 ....................................................................... $ 49,000,000 $ 49,836,920
Refunding, 5.125%, 6/01/25 ........................................................... 25,000,000 25,849,500
Refunding, 5.00%, 2/01/26 ............................................................ 27,000,000 27,578,610
Various Purpose, 5.25%, 11/01/25 ..................................................... 16,260,000 17,093,488
Various Purpose, 5.25%, 4/01/27 ...................................................... 17,500,000 18,322,500
Various Purpose, 5.00%, 8/01/33 ...................................................... 25,000,000 25,618,500
Various Purpose, 5.50%, 11/01/33 ..................................................... 2,500,000 2,704,650
California State Public Works Board Lease Revenue, Various University of California
Projects,
Series D, 5.00%, 5/01/27 ............................................................. 10,000,000 10,289,400
Foothill/Eastern Corridor Agency Toll Road Revenue,
Refunding, 5.75%, 1/15/40 ............................................................ 20,000,000 20,265,200
senior lien, Series A, Pre-Refunded, 6.50%, 1/01/32 .................................. 39,240,000 40,807,638
Golden State Tobacco Securitization Corp. Tobacco Settlement Revenue,
2003 Series A-1, 6.25%, 6/01/33 ...................................................... 26,000,000 28,543,060
Pre-Refunded, 5.375%, 6/01/28 ........................................................ 50,000,000 54,108,000
Hacienda La Puente USD, GO, Election of 2000, Series B, FSA Insured, 5.00%, 8/01/27 ........ 5,000,000 5,171,550
Los Angeles CRDA Housing Revenue, Refunding, Series A, AMBAC Insured, 6.55%, 1/01/27 ....... 2,490,000 2,517,340
(b)Los Angeles Regional Airports Improvement Corp. Lease Revenue,
Facilities Sub-Lease, International Airport, Refunding, 6.35%, 11/01/25 .............. 7,500,000 5,638,050
United Airlines, Los Angeles International, Refunding, 6.875%, 11/15/12 .............. 8,400,000 7,630,224
Los Angeles USD, GO, Series A, MBIA Insured, 5.00%, 1/01/28 ................................ 25,000,000 25,899,250
Los Angeles Wastewater System Revenue, Refunding, MBIA Insured, 5.00%, 6/01/25 ............ 10,000,000 10,363,200
Metropolitan Water District Southern California Waterworks Revenue, Series B-2,
FGIC Insured, 5.00%, 10/01/27 ........................................................ 9,645,000 10,001,672
Pajaro Valley USD, GO, Series A, FSA Insured, Pre-Refunded, 5.00%, 8/01/26 ................. 5,285,000 5,747,385
Pomona PFAR, Series Q, MBIA Insured, Pre-Refunded, 5.90%, 12/01/25 ......................... 4,000,000 4,089,880
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, senior lien, 5.00%,
1/01/33 .............................................................................. 5,000,000 4,649,200
---------------
474,680,011
---------------
COLORADO 3.0%
Colorado Health Facilities Authority Revenue,
Catholic Health Initiatives, Series A, 5.00%, 12/01/28 ............................... 2,000,000 2,027,660
Kaiser Permanente, Series A, ETM, 5.35%, 11/01/16 .................................... 13,250,000 13,652,402
Kaiser Permanente, Series B, ETM, 5.35%, 8/01/15 .................................... 20,200,000 20,548,248
Denver City and County Airport Revenue,
Refunding, Series E, MBIA Insured, 5.25%, 11/15/23 ................................... 43,000,000 44,735,480
System, Series A, XLCA Insured, 5.00%, 11/15/25 8,000,000 8,190,080
Denver City and County School District No. 1 COP, Denver School Facilities Leasing Corp.,
AMBAC Insured, 5.50%, 12/15/08 .......................................................... 1,000,000 1,025,770
(b)Denver City and County Special Facilities Airport Revenue, United Airlines Inc. Project,
Series A, 6.875%, 10/01/32 .............................................................. 47,980,000 43,258,288
Denver Convention Center Hotel Authority Revenue, Senior Series A, XLCA Insured, 4.75%,
12/01/28 ................................................................................ 13,500,000 13,607,730
E-470 Public Highway Authority Revenue, Refunding, Senior Series A, MBIA Insured,
5.00%, 9/01/21 .......................................................................... 12,715,000 13,138,791
22 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
COLORADO (CONT.)
Littleton MFHR, Riverpointe I, Refunding, Series A, FSA Insured, 5.95%, 4/01/29 ............ $ 10,990,000 $ 11,510,926
Mesa State College Auxiliary Facilities Enterprise Revenue, XLCA Insured, 5.00%,
5/15/35 ................................................................................. 9,950,000 10,184,721
Northwest Parkway Public Highway Authority Revenue, Series A, AMBAC Insured, 5.125%,
6/15/31 ................................................................................. 7,500,000 7,858,200
Pueblo County School District No.060 GO, FGIC Insured, 5.00%, 12/15/22 ..................... 5,500,000 5,713,125
Thornton Water Enterprise Revenue, MBIA Insured, 5.00%, 12/01/34 ........................... 10,000,000 10,286,300
University of Colorado Hospital Authority Revenue, Series A, AMBAC Insured, 5.00%,
11/15/29 ................................................................................ 8,500,000 8,677,905
---------------
214,415,626
---------------
CONNECTICUT 0.3%
Connecticut State GO, Series D, 5.00%, 11/15/20 ............................................ 8,000,000 8,407,440
Connecticut State Special Tax Obligation Revenue, Transportation Infrastructure,
Series B, AMBAC Insured, Pre-Refunded, 5.00%, 12/01/17 .................................. 11,870,000 12,784,465
Meriden Housing Authority MFR, Connecticut Baptist Housing Project, GNMA Secured,
5.80%, 8/20/39 .......................................................................... 2,700,000 2,867,184
---------------
24,059,089
---------------
DELAWARE 0.0%(c)
Delaware State Housing Authority MFMR, Refunding, Series D, 6.75%, 7/01/06 ................. 705,000 709,787
---------------
DISTRICT OF COLUMBIA 1.0%
District of Columbia GO,
FGIC Insured, 5.00%, 6/01/28 ............................................................ 22,475,000 23,101,828
Series A, FSA Insured, 5.375%, 6/01/24 .................................................. 3,580,000 3,798,129
Series A, FSA Insured, Pre-Refunded, 5.375%, 6/01/24 .................................... 1,420,000 1,532,762
Series E, MBIA Insured, ETM, 6.00%, 6/01/13 ............................................. 15,000 15,035
District of Columbia Tobacco Settlement Financing CorpRevenue, Asset Backed Bonds,
6.50%, 5/15/33 .......................................................................... 35,000,000 39,663,050
---------------
68,110,804
---------------
FLORIDA 4.1%
Broward County School Board COP,
MBIA Insured, 5.00%, 7/01/28 ............................................................ 17,415,000 18,007,110
Series A, FSA Insured, 5.25%, 7/01/24 ................................................... 25,000,000 26,558,500
Callaway/Bay County Wastewater Systems Revenue, Series A, FGIC Insured, Pre-Refunded,
6.00%, 9/01/26 .......................................................................... 695,000 725,448
Escambia County Health Facilities Authority Revenue, Ascension Health Credit, Series A-2,
AMBAC Insured, Pre-Refunded, 5.75%, 11/15/29 ............................................ 10,000,000 10,954,000
Florida State Board of Education Capital Outlay GO, Public Education, Refunding,
Series D,
5.75%, 6/01/22 .......................................................................... 10,000,000 10,869,700
6.00%, 6/01/23 .......................................................................... 17,500,000 21,094,150
Hillsborough County IDAR, Refunding, Series A, 5.25%, 10/01/24 ............................ 13,500,000 13,931,190
Hillsborough County School Board COP,
MBIA Insured, 5.00%, 7/01/27 ............................................................ 5,000,000 5,163,450
Refunding, Series A, MBIA Insured, 5.00%, 7/01/25 ....................................... 5,000,000 5,177,750
Jacksonville Capital Improvement Revenue, Series A, AMBAC Insured, 5.00%, 10/01/30 ......... 20,175,000 20,803,855
Semiannual Report | 23
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
FLORIDA (CONT.)
Jacksonville Sales Tax Revenue, AMBAC Insured, 5.00%,
10/01/23 ................................................................................ $ 6,000,000 $ 6,242,340
10/01/26 ................................................................................ 20,000,000 20,691,600
Jacksonville Transportation Revenue, MBIA Insured, 5.00%, 10/01/31 ......................... 5,000,000 5,128,300
Lake County School Board COP, Series A, AMBAC Insured, 5.00%, 6/01/30 ...................... 12,000,000 12,321,240
(a)Miami-Dade County Aviation Revenue, Series A, CIFG Insured, 5.00%, 10/01/38 ................ 15,000,000 15,045,900
Miami-Dade County Public Facilities Revenue, Jackson Health System, Series A,
MBIA Insured, 5.00%,
6/01/29 ................................................................................. 6,265,000 6,466,921
6/01/30 ................................................................................. 6,580,000 6,786,941
Miami-Dade County Special Obligation Revenue, Juvenile Courthouse Project, Series A,
AMBAC Insured, 5.00%, 4/01/32 ........................................................... 10,000,000 10,299,000
Orlando and Orange County Expressway Authority Revenue, Series B, AMBAC Insured,
5.00%, 7/01/28 .......................................................................... 10,630,000 11,026,393
Orlando Utilities Commission Water and Electric Revenue, Refunding, 5.00%, 10/01/22 ........ 7,500,000 7,838,100
Palm Beach County School Board COP,
Refunding, Series D, FSA Insured, 5.00%, 8/01/28 ........................................ 25,000,000 25,747,750
Series A, FGIC Insured, Pre-Refunded, 6.00%, 8/01/23 .................................... 5,100,000 5,698,230
Tampa Bay Water Utility System Revenue, Series B, FGIC Insured, 5.00%, 10/01/26 ............ 5,245,000 5,409,798
5.00%, 10/01/31 ......................................................................... 10,000,000 10,256,600
Pre-Refunded, 5.00%, 10/01/26 ........................................................... 4,755,000 5,114,335
---------------
287,358,601
---------------
GEORGIA 3.8%
Atlanta Airport Passenger Facility Charge Revenue, General, sub. lien,
Series C, FSA Insured, 5.00%, 1/01/33 ................................................... 29,520,000 30,311,431
Series J, FSA Insured, 5.00%, 1/01/29 ................................................... 10,000,000 10,310,800
Atlanta Airport Revenue, General,
Series A, FGIC Insured, Pre-Refunded, 5.50%, 1/01/26 .................................... 18,295,000 19,932,220
Series G, FSA Insured, 5.00%, 1/01/30 ................................................... 18,285,000 18,825,687
Atlanta Development Authority Revenue,
Tuff Yamacraw LLC Project, Refunding, Series A, AMBAC Insured, 5.00%, 1/01/24 ........... 6,385,000 6,794,278
Tuff Yamacraw LLC Project, Refunding, Series A, AMBAC Insured, 5.00%, 1/01/25 ........... 6,955,000 7,388,714
Tuff Yamacraw LLC Project, Refunding, Series A, AMBAC Insured, 5.00%, 1/01/26 ........... 5,000,000 5,321,900
Tuff Yamacraw LLC Project, Refunding, Series A, AMBAC Insured, 5.00%, 1/01/27 ........... 5,000,000 5,303,350
Yamacraw Design Center Project, Series A, MBIA Insured, Pre-Refunded, 5.125%, 1/01/27 ... 5,000,000 5,403,400
Atlanta Development Authority Student Housing Revenue, Facilities, Piedmont/Ellis LLC,
Series A, XLCA Insured, 5.00%, 9/01/30 .................................................. 10,000,000 10,280,900
Atlanta Water and Wastewater Revenue,
FSA Insured, 5.00%, 11/01/34 ............................................................ 20,205,000 20,809,736
Refunding, Series A, MBIA Insured, 5.00%, 11/01/33 ...................................... 13,000,000 13,369,850
Cobb County Hospital Authority Revenue, AMBAC Insured, 5.00%, 4/01/28 ...................... 18,000,000 18,674,460
De Kalb County Water and Sewer Revenue, 5.25%, 10/01/25 .................................... 12,000,000 12,777,720
Griffin Combined Public Utility Revenue, Refunding and Improvement, AMBAC Insured,
5.00%, 1/01/25 .......................................................................... 5,000,000 5,208,600
Gwinnett County Hospital Authority Revenue, Anticipation Certificates, Gwinnett
Hospital
Systems Inc. Project, Series B, MBIA Insured, 5.30%, 9/01/27 ............................ 10,000,000 10,511,900
24 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
GEORGIA (CONT.)
Gwinnett County Water and Sewer Authority Revenue, 5.25%, 8/01/25 .......................... $ 20,000,000 $ 21,257,200
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 5,985,856
Metropolitan Atlanta Rapid Transit Authority Sales Tax Revenue, Second Indenture Series,
MBIA Insured, 5.00%,
7/01/23 ................................................................................ 10,150,000 10,526,362
7/01/25 ................................................................................ 12,160,000 12,573,075
7/01/26 ................................................................................ 12,800,000 13,226,880
Richmond County Development Authority Educational Facilities Revenue, MCG-PPG Cancer
Research Center, Series A, AMBAC Insured, 5.00%, 12/15/29 ............................... 5,000,000 5,181,250
---------------
269,975,569
---------------
HAWAII 1.1%
Hawaii State Airports System Revenue, Second Series,
ETM, 6.90%, 7/01/12 .................................................................... 500,000 559,875
MBIA Insured, ETM, 6.90%, 7/01/12 ...................................................... 400,000 448,824
Hawaii State Department of Budget and Finance Special Purpose Revenue,
Hawaiian Electric Co. Project, Series B, MBIA Insured, 5.875%, 12/01/26 ................ 500,000 515,485
Kaiser Permanente, Series A, ETM, 5.15%, 3/01/15 ....................................... 4,000,000 4,208,800
Kapiolani Health Obligation, Pre-Refunded, 6.25%, 7/01/21 .............................. 7,350,000 7,644,000
Pre-Refunded, 6.00%, 7/01/11 ........................................................... 1,000,000 1,038,380
Pre-Refunded, 6.20%, 7/01/16 ........................................................... 2,000,000 2,079,360
Queens Health System, Series A, Pre-Refunded, 6.05%, 7/01/16 ........................... 1,000,000 1,039,040
Queens Health System, Series A, Pre-Refunded, 6.00%, 7/01/20 ........................... 120,000 124,646
Queens Health System, Series A, Pre-Refunded, 5.75%, 7/01/26 ........................... 7,000,000 7,259,700
Wilcox Memorial Hospital Projects, 5.25%, 7/01/13 ...................................... 600,000 625,350
Wilcox Memorial Hospital Projects, 5.35%, 7/01/18 ...................................... 2,040,000 2,127,720
Wilcox Memorial Hospital Projects, 5.50%, 7/01/28 ...................................... 2,410,000 2,469,431
Hawaii State GO,
Refunding, Series BW, 6.375%, 3/01/11 .................................................. 95,000 107,573
Series BW, ETM, 6.375%, 3/01/11 ........................................................ 5,000 5,685
Series CA, 6.00%, 1/01/09 .............................................................. 100,000 107,943
Series CT, FSA Insured, Pre-Refunded, 5.875%, 9/01/19 .................................. 5,000,000 5,497,600
Hawaii State Housing Finance and Development Corp. SFM Purchase Revenue, Series A,
FNMA Insured, 5.75%, 7/01/30 ............................................................ 830,000 831,950
Honolulu City and County GO,
Series 1992, ETM, 6.00%, 12/01/14 ...................................................... 150,000 173,510
Series C, FGIC Insured, 5.00%, 7/01/20 ................................................. 5,250,000 5,471,865
Honolulu City and County MFHR, Waipahu Towers Project, Series A, 6.90%, 6/20/35 ............ 1,205,000 1,223,786
Honolulu City and County Wastewater System Revenue,
First Bond Resolution, Senior Series, AMBAC Insured, 5.125%, 7/01/31 ................... 8,000,000 8,255,040
Second Bond Resolution, Junior Series, FGIC Insured, 5.00%, 7/01/23 .................... 10,000,000 10,368,800
Senior Series A, FGIC Insured, 5.00%, 7/01/30 .......................................... 15,000,000 15,522,000
Honolulu City and County Water Supply Board Water System Revenue, Pre-Refunded, 5.80%,
7/01/21 ................................................................................. 1,785,000 1,834,891
Kauai County GO, Refunding, Series C, AMBAC Insured, 5.95%, 8/01/10 ........................ 220,000 243,564
---------------
79,784,818
---------------
Semiannual Report | 25
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
IDAHO 0.0%(c)
Idaho Housing Agency Revenue, Refunding, Series D-1, 6.45%, 7/01/19 ........................ $ 430,000 $ 432,090
---------------
ILLINOIS 4.7%
Chicago Board of Education GO, Chicago School Reform, MBIA Insured, Pre-Refunded,
6.00%, 12/01/16 ......................................................................... 9,700,000 10,193,924
Chicago COP, AMBAC Insured, 7.75%, 7/15/11 ................................................. 11,700,000 13,509,288
Chicago GO, Lakefront Millennium Parking Facilities, MBIA Insured, 5.75%, 1/01/23 .......... 8,955,000 10,411,889
Chicago Sales Tax Revenue, FGIC Insured, Pre-Refunded, 5.375%, 1/01/27 ..................... 3,060,000 3,255,565
Chicago SFMR, Collateralized, Series A, GNMA Secured, 7.25%, 9/01/28 ....................... 90,000 91,085
Cook County GO, Capital Improvement, Refunding, FGIC Insured, 5.90%, 12/01/14 .............. 10,000,000 10,221,300
Cook County Tinley Park School District No. 140 GO, Refunding, Series A, AMBAC Insured,
6.00%, 12/01/15 ......................................................................... 8,750,000 9,178,312
Illinois Development Finance Authority Hospital Revenue,
Adventist Health System, Sunbelt Obligation, 5.65%, 11/15/24 ............................ 6,030,000 6,288,144
Adventist Health System, Sunbelt Obligation, 5.50%, 11/15/29 ............................ 20,000,000 20,605,800
Sisters of St. Francis Health Services, Refunding, MBIA Insured, 5.375%, 11/01/27 ....... 5,000,000 5,227,950
Illinois Development Finance Authority PCR, Illinois Power Co. Project, Series A,
Pre-Refunded, 7.375%, 7/01/21 ........................................................... 26,550,000 27,787,761
Illinois Development Finance Authority Revenue, Provena Health, Series A, MBIA Insured,
5.50%, 5/15/21 .......................................................................... 10,000,000 10,515,000
Illinois HDA Revenue,
MF Program, Series 1, 6.625%, 9/01/12 ................................................... 8,855,000 8,875,898
MF Program, Series 1, 6.75%, 9/01/21 .................................................... 5,655,000 5,658,845
MFH, Refunding, Series A, 7.10%, 7/01/26 ................................................ 9,305,000 9,311,979
Illinois Health Facilities Authority Revenue,
Children's Memorial Hospital, Series A, AMBAC Insured, Pre-Refunded, 5.75%, 8/15/25 ..... 9,120,000 9,978,466
Loyola University Health Systems, Refunding, Series A, MBIA Insured, 5.625%, 7/01/18 .... 7,090,000 7,405,859
Loyola University Health Systems, Series A, MBIA Insured, ETM, 5.625%, 7/01/18 .......... 2,105,000 2,410,499
Methodist Medical Center, Refunding, MBIA Insured, 5.25%, 11/15/21 ...................... 2,885,000 3,022,384
Northwestern Medical Facility Foundation, Refunding, MBIA Insured, 5.125%, 11/15/28 ..... 7,500,000 7,710,600
South Suburban Hospital, ETM, 7.00%, 2/15/18 ............................................ 4,200,000 5,102,958
Victory Health Services, Series A, 5.75%, 8/15/27 ....................................... 8,015,000 7,774,550
Illinois State GO, FSA Insured, 5.00%, 9/01/29 ............................................. 12,000,000 12,413,760
Kane County School District No. 129 GO, Series A, FGIC Insured, Pre-Refunded, 5.25%,
2/01/22 ................................................................................. 5,285,000 5,753,092
Metropolitan Pier and Exposition Authority Dedicated State Tax Revenue,
FGIC Insured, ETM, 6.50%, 6/15/07 ....................................................... 5,000 5,021
McCormick Place Expansion Project, Refunding, Series A, FGIC Insured, 5.25%, 12/15/28 ... 39,580,000 41,057,126
McCormick Place Expansion Project, Series A, 6.50%, 6/15/22 ............................. 5,000 5,023
McCormick Place Expansion Project, Series A, 6.50%, 6/15/27 ............................. 555,000 557,542
McCormick Place Expansion Project, Series A, FGIC Insured, 6.65%, 6/15/12 ............... 250,000 251,187
McCormick Place Expansion Project, Series A, MBIA Insured, 5.00%, 12/15/28 .............. 26,795,000 27,510,426
26 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (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 ..................................................................... $ 360,000 $ 366,415
ETM, 7.00%, 7/01/26 ..................................................................... 12,000,000 15,654,120
Pre-Refunded, 6.25%, 7/01/17 ............................................................ 3,500,000 3,642,380
Regional Transportation Authority Revenue, Series A, AMBAC Insured, 7.20%, 11/01/20 ........ 1,000,000 1,243,320
Southwestern Illinois Development Authority IDR, Spectrulite Consortium Inc. Project,
6.625%, 2/01/10 ......................................................................... 3,050,000 3,056,008
University of Illinois University Revenues,
Auxiliary Facilities, Refunding, Series A, AMBAC Insured, 5.00%, 4/01/30 ................ 5,000,000 5,099,450
Auxiliary Facilities System, Refunding, Series B, FGIC Insured, 5.125%, 4/01/26 ......... 12,000,000 12,385,200
Upper River Valley Development Authority Environmental Facilities Revenue, General
Electric Co. Project, 5.45%, 2/01/23 .................................................... 3,600,000 3,744,648
Will County Exempt Facilities Revenue, Mobil Oil Refining Corp. Project, 6.00%, ............ 7,130,000 7,331,922
2/01/27
---------------
334,614,696
---------------
INDIANA 1.4%
Carmel EDR, Cool Creek Assn., Refunding, 6.50%, 9/01/15 .................................... 945,000 947,173
Carmel Industrial RDA County Option Income Tax Lease Rent Revenue, MBIA Insured,
Pre-Refunded, 5.25%, 1/01/18 ............................................................ 1,090,000 1,116,574
Indiana Bond Bank Revenue, Special Program, Hendricks Redevelopment, Series B,
Pre-Refunded, 6.20%, 2/01/23 ............................................................ 3,500,000 3,694,635
Indiana Health Facility Financing Authority Hospital Revenue,
Community Foundation Northwest Indiana, Series A, 6.375%, 8/01/21 ....................... 17,500,000 18,522,350
Jackson County Schneck Memorial Hospital, Refunding, 5.25%, 2/15/22 ..................... 1,200,000 1,218,732
Indiana Health Facility Financing Authority Revenue, Greenwood Village South Project,
Refunding, 5.625%, 5/15/28 .............................................................. 1,750,000 1,753,080
Indiana State Development Financing Authority Environmental Revenue, 6.25%, 7/15/30 ........ 2,000,000 2,087,320
Indiana State Educational Facilities Authority Revenue,
DePauw University Project, Refunding, 5.30%, 7/01/16 .................................... 600,000 631,686
Valparaiso University, AMBAC Insured, 5.125%, 10/01/23 .................................. 2,015,000 2,095,479
Indiana State HFA, SFMR,
GNMA Secured, 6.10%, 7/01/22 ............................................................ 220,000 227,238
Refunding, Series A, 6.75%, 1/01/10 ..................................................... 2,940,000 2,958,434
Refunding, Series A, 6.80%, 1/01/17 ..................................................... 12,835,000 13,038,050
Indiana Transportation Finance Authority Highway Revenue,
5.375%, 12/01/25 ........................................................................ 12,765,000 13,582,088
Pre-Refunded, 5.375%, 12/01/25 .......................................................... 2,235,000 2,424,014
Indianapolis Local Public Improvement Bond Bank Revenue, Waterworks Project, Series A,
MBIA Insured, 5.25%, 7/01/33 ............................................................ 19,020,000 19,754,362
Jasper County EDR, Georgia-Pacific Corp. Project,
5.625%, 12/01/27 ........................................................................ 3,500,000 3,508,015
Refunding, 6.70%, 4/01/29 ............................................................... 3,000,000 3,132,150
Madison County Authority Anderson Hospital Revenue, Refunding, Series A, BIG Insured,
8.00%, 1/01/14 .......................................................................... 95,000 95,828
Semiannual Report | 27
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
INDIANA (CONT.)
New Albany Floyd County School Building Corp. Revenue, first mortgage, MBIA Insured,
Pre-Refunded, 5.375%, 1/15/18 ........................................................... $ 1,500,000 $ 1,609,995
Penn-Harris-Madison Multi-School Building Corp. Industry Revenue, first mortgage,
FSA Insured, Pre-Refunded, 5.90%, 7/15/14 ............................................... 1,000,000 1,052,080
Petersburg PCR, 5.75%, 8/01/21 ............................................................. 5,000,000 5,226,850
Purdue University of Indiana University Revenue, Student Fee, Series Q, 5.375%,
7/01/07 ................................................................................. 1,355,000 1,401,802
Rochester Community Multi-School Building Corp. Revenue, first mortgage, AMBAC Insured,
5.20%, 1/15/18 .......................................................................... 1,000,000 1,052,860
---------------
101,130,795
---------------
KANSAS 0.5%
Burlington PCR, Kansas Gas and Electric Co. Project, Refunding, Series A, MBIA Insured,
5.30%, 6/01/31 .......................................................................... 18,000,000 19,001,520
Kansas State Department of Transportation and Highway Revenue, Refunding, 5.50%,
9/01/06 ................................................................................. 1,000,000 1,020,160
Kansas State Development Finance Authority Hospital Revenue, Susan B. Allen Memorial
Hospital, Series Z, Radian Insured, 5.25%, 12/15/23 ..................................... 2,000,000 2,091,300
Kansas State Development Finance Authority Revenue, Water Pollution Control Revolving
Fund, Series II, 5.125%, 11/01/18 ....................................................... 5,000,000 5,313,600
Newton Hospital Revenue, Newton Healthcare Corp., Refunding, Series A, 5.70%,
11/15/18 ................................................................................ 1,875,000 1,903,050
Shawnee County USD No. 437 Auburn-Washburn GO, Refunding, FSA Insured, 5.00%,
9/01/20 ................................................................................. 2,500,000 2,589,225
---------------
31,918,855
---------------
KENTUCKY 0.9%
(b)Kenton County Airport Board Airport Revenue, Special Facilities, Delta Airlines Inc.
Project,
Series A, 7.50%, 2/01/20 .............................................................. 10,000,000 6,294,200
Series A, 7.125%, 2/01/21 ............................................................. 9,330,000 5,863,905
Series B, 7.25%, 2/01/22 .............................................................. 3,350,000 2,104,403
Kentucky Economic Development Finance Authority Health System Revenue, Norton
Healthcare Inc., Refunding, Series C, MBIA Insured,
6.05%, 10/01/19 ....................................................................... 11,080,000 12,518,959
6.10%, 10/01/21 ....................................................................... 8,925,000 10,107,384
6.10%, 10/01/23 ....................................................................... 16,945,000 19,165,473
Kentucky Economic Development Finance Authority Hospital System Revenue, Appalachian
Regional Health Center Facility, Refunding and Improvement,
5.80%, 10/01/12 ....................................................................... 1,000,000 983,220
5.85%, 10/01/17 ....................................................................... 5,615,000 5,446,213
---------------
62,483,757
---------------
28 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
LOUISIANA 1.7%
Calcasieu Parish Inc. IDB, PCR, Gulf States Utilities Co. Project, Refunding, 6.75%,
10/01/12 ................................................................................ $ 14,285,000 $ 14,368,710
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 4,730,742
6.50%, 12/01/18 ....................................................................... 5,530,000 6,595,189
6.65%, 12/01/21 ....................................................................... 3,145,000 3,154,970
East Baton Rouge Mortgage Finance Authority SFM Purchase Revenue,
Series A, 6.80%, 10/01/28 ............................................................. 1,220,000 1,228,991
Series C, 7.00%, 4/01/32 .............................................................. 65,000 65,174
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 15,199,800
Greater New Orleans Expressway Commission Revenue, Refunding, AMBAC Insured, 5.00%,
11/01/27 ................................................................................ 5,655,000 5,793,491
Jefferson Parish Home Mortgage Authority SFMR, Refunding, Series G-2, GNMA Secured,
5.55%, 6/01/32 .......................................................................... 1,525,000 1,547,189
Lafayette Public Improvement Sales Tax GO, Series B, MBIA Insured, 4.75%, 3/01/30 .......... 5,055,000 5,047,468
Louisiana Local Government Environmental Facilities CDA Revenue,
Jefferson Parking Garage Project, AMBAC Insured, 5.00%, 9/01/31 ....................... 4,290,000 4,356,838
MBIA Insured, 5.00%, 12/01/26 ......................................................... 5,605,000 5,738,904
Louisiana Public Facilities Authority Revenue,
Ochsner Clinic Foundation Project, Series B, 5.75%, 5/15/23 ........................... 10,000,000 10,339,000
Tulane University, Refunding, Series A, AMBAC Insured, 5.00%, 7/01/32 ................. 5,000,000 5,081,750
Louisiana State Gas and Fuels Tax Revenue, Series A, AMBAC Insured, 5.00%, 6/01/27 ......... 19,250,000 19,594,575
Louisiana State GO, Series A, FGIC Insured, Pre-Refunded, 5.00%, 11/15/19 .................. 9,000,000 9,643,680
Pointe Coupee Parish PCR, Gulf States Utilities Co. Project, Refunding, 6.70%, 3/01/13 ..... 2,200,000 2,206,270
West Feliciana Parish PCR, Gulf State Utility Co. Project, 7.00%, 11/01/15 ................. 3,050,000 3,139,243
---------------
117,831,984
---------------
MAINE 0.4%
Jay Solid Waste Disposal Revenue, International Paper Co. Project, Refunding, Series B,
6.20%, 9/01/19 .......................................................................... 8,000,000 8,566,720
Maine Health and Higher Educational Facilities Authority Revenue, Series A, MBIA Insured,
5.00%,
7/01/29 ................................................................................. 10,300,000 10,699,331
7/01/32 ................................................................................. 6,045,000 6,207,127
Maine State Housing Authority Mortgage Purchase Revenue, Refunding, Series D-1, 5.05%,
11/15/16 ................................................................................ 75,000 75,074
---------------
25,548,252
---------------
MARYLAND 0.4%
Gaithersburg Hospital Facilities Revenue, Shady Grove Adventist Hospital, Refunding and
Improvement, FSA Insured, 6.00%, 9/01/21 ................................................ 10,110,000 10,369,524
Maryland State Health and Higher Educational Facilities Authority Revenue, Johns Hopkins
University, Series A, 5.00%, 7/01/33 .................................................... 10,000,000 10,362,000
Semiannual Report | 29
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MARYLAND (CONT.)
Price Georges County GO, Conservation Public Improvement, Series A, 5.00%, 10/01/23 ........ $ 5,385,000 $ 5,687,098
---------------
26,418,622
---------------
MASSACHUSETTS 3.9%
Massachusetts Bay Transportation Authority Revenue, General Transportation System,
Refunding, Series C, 5.00%, 3/01/24 ................................................... 14,000,000 14,313,180
Series A, FGIC Insured, 5.00%, 3/01/23 ................................................ 1,035,000 1,070,418
Series A, FGIC Insured, Pre-Refunded, 5.00%, 3/01/23 .................................. 2,965,000 3,060,562
Massachusetts Bay Transportation Authority Revenue Special Assessment,
Refunding, Series A, 5.25%, 7/01/30 ................................................... 6,785,000 7,089,172
Series A, Pre-Refunded, 5.25%, 7/01/30 ................................................ 25,740,000 27,729,445
Massachusetts Bay Transportation Authority Sales Tax Revenue, Senior Series A, 5.00%,
7/01/28 ................................................................................. 10,000,000 10,705,200
Massachusetts Special Obligation Revenue, Consolidation Loan, Series A, FGIC Insured,
Pre-Refunded, 5.00%, 6/01/22 ............................................................ 15,070,000 16,077,128
Massachusetts State Development Finance Agency Revenue, Massachusetts/Saltonstall
Redevelopment Building Corp., Series A, MBIA Insured, 5.125%, 8/01/28 ................... 6,735,000 7,054,508
Massachusetts State GO,
MBIA Insured, Pre-Refunded, 5.00%, 8/01/22 ............................................ 4,100,000 4,379,989
Series B, ETM, 6.50%, 8/01/08 ......................................................... 5,900,000 6,344,978
Massachusetts State Health and Educational Facilities Authority Revenue,
Berkshire Health System, Series E, 6.25%, 10/01/31 .................................... 2,250,000 2,387,745
Berkshire Health System, Series E, Radian Insured, 5.70%, 10/01/25 .................... 4,500,000 4,877,730
Harvard University, Series FF, 5.00%, 7/15/22 ......................................... 13,550,000 14,192,676
Melrose-Wakefield Hospital, Series B, ETM, 6.35%, 7/01/06 ............................. 565,000 577,272
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 2,063,132
5.50%, 5/15/27 ........................................................................ 5,000,000 5,258,950
Massachusetts State Industrial Finance Agency Revenue, D'Youville Senior Care,
5.65%, 10/01/17 ....................................................................... 2,295,000 2,387,443
5.70%, 10/01/27 ....................................................................... 7,375,000 7,648,686
Massachusetts State Port Authority Revenue, Special Facilities, Bosfuel Project,
MBIA Insured, 5.75%, 7/01/39 ............................................................ 10,150,000 10,518,851
Massachusetts State School Building Authority Dedicated Sales Tax Revenue, Series A,
FSA Insured, 5.00%, 8/15/30 ............................................................. 15,000,000 15,503,250
Massachusetts State Turnpike Authority Metropolitan Highway System Revenue,
Refunding, Sub Series A, AMBAC Insured, 5.25%, 1/01/29 ................................ 5,000,000 5,236,800
Series A, MBIA Insured, 5.00%, 1/01/37 ................................................ 52,130,000 52,841,053
sub. lien, Refunding, Series B, MBIA Insured, 5.125%, 1/01/37 ......................... 21,350,000 21,750,312
Massachusetts State Water Pollution Abatement Trust Revenue,
Massachusetts Water Revenue Abatement Program, Series A, 5.00%, 8/01/32 ............... 5,000,000 5,140,750
Water Revenue Authority Program, Sub Series A, 5.75%, 8/01/29 ......................... 5,210,000 5,627,269
Water Revenue Authority Program, Sub Series A, Pre-Refunded, 5.75%, 8/01/29 ........... 1,290,000 1,410,370
Route 3 North Transportation Improvement Assn. Massachusetts Lease Revenue,
MBIA Insured, Pre-Refunded, 5.375%, 6/15/29 ............................................. 16,405,000 17,748,734
---------------
272,995,603
---------------
30 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MICHIGAN 3.6%
Anchor Bay School District GO, Refunding, 5.00%, 5/01/29 ................................... $ 6,300,000 $ 6,451,830
Belding Area Schools GO, FGIC Insured,
6.10%, 5/01/26 ........................................................................ 810,000 829,642
Pre-Refunded, 6.10%, 5/01/26 .......................................................... 2,995,000 3,071,223
Chippewa Valley School GO, Refunding, 5.125%, 5/01/27 ...................................... 5,310,000 5,531,480
Detroit City School District GO,
School Building and Site Improvements, Series A, FGIC Insured, Pre-Refunded, 5.00%,
5/01/23 ............................................................................. 2,000,000 2,153,900
School Building and Site Improvements, Series B, FGIC Insured, 5.00%, 5/01/33 ......... 16,870,000 17,325,996
Series A, FSA Insured, Pre-Refunded, 5.125%, 5/01/31 .................................. 14,925,000 16,142,880
Detroit Sewage Disposal Revenue,
second lien, Series A, MBIA Insured, 5.00%, 7/01/30 ................................... 10,000,000 10,371,800
senior lien, Refunding, Series A, FGIC Insured, 5.125%, 7/01/31 ....................... 10,000,000 10,328,900
Series A, MBIA Insured, 5.00%, 7/01/27 ................................................ 15,000,000 15,318,900
Detroit Water Supply System Revenue,
second lien, Series B, FGIC Insured, 5.50%, 7/01/33 ................................... 5,000,000 5,368,900
senior lien, Series A, FGIC Insured, 5.00%, 7/01/30 ................................... 17,575,000 17,991,176
senior lien, Series A, FGIC Insured, 5.25%, 7/01/33 ................................... 6,170,000 6,448,761
senior lien, Series A, FGIC Insured, Pre-Refunded, 5.25%, 7/01/33 ..................... 7,060,000 7,643,933
Detroit/Wayne County Stadium Authority Revenue, FGIC Insured, 5.25%, 2/01/27 ............... 8,625,000 8,967,671
Jackson County Building Authority Revenue, AMBAC Insured, Pre-Refunded, 5.60%,
5/01/30 ................................................................................. 4,145,000 4,522,112
Kalamazoo EDC Revenue, Limited Obligation, Friendship Village, Refunding, Series A, 6.25%,
5/15/27 ................................................................................. 1,750,000 1,790,460
Kent Hospital Finance Authority Health Care Revenue, Butterworth Health System, Series A,
MBIA Insured, Pre-Refunded, 5.625%, 1/15/26 ............................................. 2,500,000 2,563,025
Michigan State Building Authority Revenue, Facilities Program, Refunding, Series I, 5.00%,
10/15/24 ................................................................................ 31,350,000 32,457,282
Michigan State Hospital Finance Authority Revenue, Ascension Health Credit, Series A,
MBIA Insured, Pre-Refunded, 6.125%, 11/15/23 ............................................ 18,000,000 19,933,560
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 10,359,500
Michigan State Trunk Line Revenue, Series A, FSA Insured, Pre-Refunded,
5.00%, 11/01/25 ........................................................................ 16,250,000 17,358,412
5.25%, 11/01/30 ........................................................................ 10,000,000 10,815,300
Royal Oak Hospital Finance Authority Revenue, William Beaumont Hospital, Series M,
MBIA Insured, 5.25%, 11/15/31 ........................................................... 10,000,000 10,344,200
Southgate Community School District GO, FGIC Insured, 5.00%, 5/01/25 ....................... 5,500,000 5,680,620
West Ottawa Public School District GO, Series A, 5.00%, 5/01/27 ............................ 5,000,000 5,160,700
---------------
254,932,163
---------------
MINNESOTA 2.5%
Cloquet PCR, Potlatch Corp. Projects, Refunding, 5.90%, 10/01/26 ........................... 9,100,000 9,166,976
Golden Valley Revenue, Covenant Retirement Communities, Series A, 5.50%, 12/01/29 .......... 1,500,000 1,550,775
International Falls PCR, Boise Cascade Corp. Project, Refunding, 5.65%, 12/01/22 ........... 3,500,000 3,547,950
Semiannual Report | 31
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MINNESOTA (CONT.)
Minneapolis and St. Paul Metropolitan Airports Commission Airport Revenue,
Refunding, Sub Series A, AMBAC Insured, 5.00%, 1/01/30 .................................... $ 10,000,000 $ 10,280,600
Refunding, Sub Series C, FGIC Insured, 5.00%, 1/01/28 ..................................... 5,595,000 5,773,089
Series A, FGIC Insured, 5.125%, 1/01/31 ................................................... 10,000,000 10,301,300
Series A, FGIC Insured, 5.25%, 1/01/32 .................................................... 32,025,000 33,478,294
Series A, FGIC Insured, Pre-Refunded, 5.75%, 1/01/32 ...................................... 5,000,000 5,495,550
Series C, FGIC Insured, 5.25%, 1/01/26 .................................................... 19,000,000 19,942,970
Minnesota Agriculture and Economic Development Board Revenue, Health Care System,
Refunding, Series A, MBIA Insured, 5.75%, 11/15/26 ........................................ 510,000 542,038
Series A, MBIA Insured, Pre-Refunded, 5.75%, 11/15/26 ..................................... 25,300,000 27,055,061
Minnesota State Municipal Power Agency Electric Revenue, 5.00%, 10/01/30 ..................... 5,000,000 5,046,500
Minnetonka MFHR, Ridgepointe II Project, Refunding, Series A, GNMA Secured, 5.95%,
10/20/33 ................................................................................... 11,075,000 11,586,665
Rochester Health Care Facilities Revenue, Mayo Foundation, Series A, 5.50%, 11/15/27 ......... 20,000,000 21,045,000
Roseville MFHR, Rosepointe I Project, Refunding, Series A, GNMA Secured, 5.95%,
10/20/33 ................................................................................... 8,150,000 8,511,942
University of Minnesota Revenue, Refunding, Series A, 5.75%, 7/01/13 ......................... 1,250,000 1,403,563
---------------
174,728,273
---------------
MISSISSIPPI 1.3%
Claiborne County PCR, Systems Energy Resources Inc., Refunding, 6.20%, 2/01/26 ............... 36,500,000 36,996,035
Jackson County Environmental Improvement Revenue, International Paper Co. Project,
6.70%, 5/01/24 ............................................................................. 3,500,000 3,744,510
Mississippi Business Finance Corp. PCR, System Energy Resource Inc. Project,
5.875%, 4/01/22 .............................................................................. 40,000,000 40,546,400
Refunding, 5.90%, 5/01/22 .................................................................... 8,250,000 8,363,520
Mississippi State GO, Refunding, 5.75%, 12/01/12 ............................................. 2,000,000 2,230,780
---------------
91,881,245
---------------
MISSOURI 1.2%
Jackson County Special Obligation Revenue, MBIA Insured, 5.00%, 12/01/22 ..................... 9,095,000 9,490,905
Missouri Development Finance Board Cultural Facilities Revenue, Nelson Gallery
Foundation, Series A, MBIA Insured, 5.00%, 12/01/30 ........................................ 11,500,000 11,839,365
Missouri State Board of Public Buildings Special Obligation Revenue, Series A, 4.75%,
10/15/28 ................................................................................... 8,250,000 8,320,455
Missouri State Health and Educational Facilities Authority Revenue, SSM Health Care,
Refunding, Series A, MBIA Insured, 5.00%, 6/01/22 ......................................... 230,000 235,474
Series A, AMBAC Insured, 5.25%, 6/01/21 ................................................... 8,740,000 9,337,554
Series A, AMBAC Insured, Pre-Refunded, 5.25%, 6/01/21 ..................................... 8,760,000 9,570,037
Series A, MBIA Insured, Pre-Refunded, 5.00%, 6/01/22 ...................................... 4,270,000 4,499,043
St. Louis Airport Revenue,
Airport Development Program, Series A, MBIA Insured, 5.00%, 7/01/20 ....................... 5,000,000 5,235,300
Airport Development Program, Series A, MBIA Insured, 5.00%, 7/01/21 ....................... 7,250,000 7,561,387
Capital Improvement Program, Series A, MBIA Insured, 5.00%, 7/01/27 ....................... 12,390,000 12,713,751
Taney County IDA Hospital Revenue, The Skaggs Community Hospital Assn., 5.40%,
5/15/28 .................................................................................... 4,000,000 4,017,440
---------------
82,820,711
---------------
32 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MONTANA 0.8%
Forsyth PCR,
The Montana Power Co., Refunding, MBIA Insured, 5.90%, 12/01/23 ........................... $ 20,385,000 $ 20,437,797
Puget Sound Energy, Refunding, Series A, AMBAC Insured, 5.00%, 3/01/31 .................... 30,000,000 30,946,200
Montana State Board of Housing Revenue, SF Program, Refunding, Series B-1, 6.25%,
12/01/21 ................................................................................... 6,025,000 6,145,380
---------------
57,529,377
---------------
NEBRASKA 0.2%
Omaha Convention Hotel Corp. Revenue, Convention Center, first tier, Series A,
AMBAC Insured, 5.125%, 4/01/26 ............................................................. 12,500,000 13,064,875
---------------
NEVADA 2.0%
Clark County Airport Revenue, sub. lien,
Series A-2, FGIC Insured, 5.125%, 7/01/27 ................................................. 10,000,000 10,385,400
Series B, FGIC Insured, Pre-Refunded, 5.25%, 7/01/31 ...................................... 20,000,000 21,654,200
Clark County IDR, Nevada Power Co. Project, Refunding, Series C, 7.20%, 10/01/22 ............. 12,500,000 12,694,625
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 23,697,853
1/01/34 ................................................................................ 15,000,000 16,119,450
Henderson Health Care Facility Revenue, Catholic Healthcare West, Series A,
5.25%, 7/01/18 ......................................................................... 13,815,000 14,183,999
Pre-Refunded, 5.25%, 7/01/18 ........................................................... 9,870,000 10,438,709
Humboldt County PCR, Sierra Pacific Power Co., Refunding, Series A, AMBAC Insured,
6.30%, 7/01/22 ............................................................................. 4,500,000 4,549,455
Nevada Housing Division Revenue, SF Program, senior issue, Refunding,
Series A-1, 6.25%, 10/01/26 ............................................................ 665,000 668,259
Series C-2, FHA Insured, 6.75%, 10/01/26 ............................................... 590,000 591,569
Nevada State GO, Municipal Bond Bank Project No. 40-41, Series A, ETM, 6.375%,
12/01/17 ................................................................................... 10,275,000 10,303,359
Sparks RDA Tax Allocation Revenue, Refunding, Series A, Radian Insured, 6.00%,
1/15/23 .................................................................................... 5,000,000 5,371,050
Washoe County Gas and Water Facilities Revenue, Refunding, AMBAC Insured, 6.30%,
12/01/14 ................................................................................... 5,000,000 5,039,450
Washoe County GO, Reno Sparks Convention, Refunding, Series A, FGIC Insured, 5.00%,
7/01/24 .................................................................................... 5,000,000 5,136,000
---------------
140,833,378
---------------
NEW HAMPSHIRE 0.3%
Nashua Housing Authority MFR, Clocktower Project, Refunding, GNMA Secured, 6.25%,
6/20/33 .................................................................................... 5,754,000 5,961,834
New Hampshire Health and Education Facilities Authority Revenue, Exeter Project,
6.00%, 10/01/24 ........................................................................ 2,000,000 2,158,680
5.75%, 10/01/31 ........................................................................ 1,000,000 1,052,730
New Hampshire Higher Educational and Health Facilities Authority Revenue,
The Hitchcock Clinic, MBIA Insured, Pre-Refunded, 6.00%, 7/01/27 ....................... 4,275,000 4,550,909
New Hampshire Catholic Charities, 5.80%, 8/01/22 ....................................... 1,000,000 1,004,230
Rivier College, 5.60%, 1/01/28 ......................................................... 4,590,000 4,717,969
Semiannual Report | 33
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (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 .......................................................................... $ 540,000 $ 542,695
6.80%, 7/01/25 .......................................................................... 430,000 433,612
--------------
20,422,659
--------------
NEW JERSEY 2.3%
Health Care Facilities Financing Authority Revenue, Englewood Hospital, MBIA Insured,
5.00%, 8/01/23 ............................................................................ 5,000,000 5,223,550
Hudson County Improvement Authority Solid Waste Systems Revenue, Refunding,
Series 1, 6.00%, 1/01/19 ................................................................ 2,100,000 2,108,211
Series 1, 6.00%, 1/01/29 ................................................................ 5,000,000 5,010,450
Series 2, 6.125%, 1/01/19 ............................................................... 2,000,000 2,016,920
Series 2, 6.125%, 1/01/29 ............................................................... 5,000,000 5,033,150
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 5,458,050
New Jersey EDA Revenue,
Cigarette Tax, 5.75%, 6/15/29 ........................................................... 20,000,000 20,995,600
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/29 ................. 10,000,000 10,405,700
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/34 ................. 5,000,000 5,152,050
School Facilities Construction, Series C, MBIA Insured, 4.75%, 6/15/25 .................. 7,500,000 7,588,800
School Facilities Construction, Series O, 5.125%, 3/01/28 ............................... 20,000,000 20,865,000
New Jersey State Transportation Trust Fund Authority Revenue, Transportation System,
Series B, MBIA Insured, Pre-Refunded, 5.00%, 12/15/21 ..................................... 12,400,000 13,323,800
New Jersey State Turnpike Authority Turnpike Revenue,
Series A, MBIA Insured, Pre-Refunded, 5.60%, 1/01/22 .................................... 7,500,000 8,134,800
Series A, MBIA Insured, Pre-Refunded, 5.50%, 1/01/25 .................................... 13,000,000 14,050,270
Series C, FSA Insured, 5.00%, 1/01/30 ................................................... 15,845,000 16,481,811
Tobacco Settlement Financing Corp. Revenue, Asset Backed, Refunding, 5.75%, 6/01/32 ......... 23,075,000 23,968,464
--------------
165,816,626
--------------
NEW MEXICO 0.0%c
New Mexico State Highway Commission Tax Revenue, senior sub. lien, Series A,
Pre-Refunded, 6.00%, 6/15/13 .............................................................. 1,000,000 1,106,130
--------------
NEW YORK 12.6%
Liberty Development Corp. Revenue, Goldman Sachs Headquarters, 5.25%, 10/01/35 .............. 25,000,000 27,409,000
Long Island Power Authority Electric System Revenue, General, Refunding, Series A,
MBIA Insured, 5.25%, 12/01/26 ............................................................. 10,000,000 10,458,400
MTA Commuter Facilities Revenue, Series A,
FGIC Insured, Pre-Refunded, 6.00%, 7/01/16 .............................................. 8,950,000 9,588,672
Pre-Refunded, 5.25%, 7/01/28 ............................................................ 5,000,000 5,440,250
Pre-Refunded, 6.125%, 7/01/29 ........................................................... 15,040,000 16,503,994
MTA Dedicated Tax Fund Revenue, Series A,
FGIC Insured, Pre-Refunded, 6.00%, 4/01/30 .............................................. 12,500,000 13,847,500
FGIC Insured, Pre-Refunded, 5.00%, 11/15/31 ............................................. 14,250,000 15,387,292
MBIA Insured, ETM, 6.25%, 4/01/11 ....................................................... 1,280,000 1,450,086
34 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW YORK (CONT.)
MTA Revenue,
Refunding, Series E, 5.25%, 11/15/31 .................................................... $ 10,000,000 $ 10,472,300
Refunding, Series U, 5.125%, 11/15/31 ................................................... 20,720,000 21,480,424
Series A, MBIA Insured, 4.75%, 11/15/27 ................................................. 15,000,000 15,215,100
MTA Transit Facilities Revenue,
Series A, FSA Insured, Pre-Refunded, 6.00%, 7/01/16 ..................................... 3,630,000 3,889,037
Series A, Pre-Refunded, 6.00%, 7/01/24 .................................................. 5,000,000 5,465,350
Series A, Pre-Refunded, 5.625%, 7/01/27 ................................................. 10,800,000 11,503,620
Service Contract, Series 8, Pre-Refunded, 5.375%, 7/01/21 ............................... 15,000,000 16,598,700
Nassau County GO,
Improvement, Series F, 6.625%, 3/01/08 .................................................. 7,325,000 7,732,783
Water Utility Improvements, Series F, 6.625%, 3/01/07 ................................... 7,070,000 7,380,019
Nassau Health Care Corp. Health System Revenue, Nassau County Guaranteed, FSA Insured,
Pre-Refunded, 5.75%, 8/01/29 .............................................................. 10,000,000 11,021,500
New York City GO,
Refunding, Series E, 6.00%, 8/01/26 ..................................................... 145,000 150,079
Refunding, Series H, 6.125%, 8/01/25 .................................................... 55,990,000 59,038,096
Refunding, Series J, 6.00%, 8/01/21 ..................................................... 9,470,000 9,965,754
Series B, 6.20%, 8/15/06 ................................................................ 1,200,000 1,220,340
Series B, 6.125%, 8/01/09 ............................................................... 5,000 5,065
Series B, 6.00%, 8/15/26 ................................................................ 70,000 72,524
Series B, Pre-Refunded, 6.00%, 8/15/26 .................................................. 1,930,000 2,002,664
Series D, 8.00%, 8/01/16 ................................................................ 5,000 5,058
Series D, 5.50%, 6/01/24 ................................................................ 23,940,000 25,626,573
Series E, 6.50%, 12/01/12 ............................................................... 20,000 20,055
Series E, Pre-Refunded, 6.00%, 8/01/26 .................................................. 2,855,000 2,959,322
Series F, 5.25%, 1/15/23 ................................................................ 20,000,000 21,000,200
Series F, Pre-Refunded, 6.00%, 8/01/13 .................................................. 14,000,000 14,506,240
Series G, Pre-Refunded, 6.00%, 10/15/26 ................................................. 15,335,000 16,296,351
Series H, 6.25%, 8/01/15 ................................................................ 10,265,000 10,848,976
Series H, Pre-Refunded, 6.25%, 8/01/15 .................................................. 2,770,000 2,937,779
Series H, Pre-Refunded, 6.125%, 8/01/25 ................................................. 9,795,000 10,367,714
Series I, 6.25%, 4/15/13 ................................................................ 1,515,000 1,589,538
Series I, Pre-Refunded, 6.25%, 4/15/13 .................................................. 35,095,000 36,965,212
Series I, Pre-Refunded, 6.25%, 4/15/27 .................................................. 7,000,000 7,378,140
Series J, Pre-Refunded, 6.00%, 8/01/21 .................................................. 18,790,000 19,849,192
New York City Municipal Water Finance Authority Water and Sewer System Revenue,
Refunding, 5.50%, 6/15/33 ............................................................... 55,000,000 58,997,950
Refunding, Series B, FGIC Insured, Pre-Refunded, 5.25%, 6/15/29 ......................... 4,855,000 5,059,687
Series A, FGIC Insured, Pre-Refunded, 5.50%, 6/15/32 .................................... 10,000,000 10,839,800
Series A, Pre-Refunded, 5.75%, 6/15/30 .................................................. 8,000,000 8,739,520
Series B, AMBAC Insured, Pre-Refunded, 5.25%, 6/15/29 ................................... 8,000,000 8,337,280
Series B, FSA Insured, Pre-Refunded, 5.25%, 6/15/29 ..................................... 4,030,000 4,199,905
Series B, MBIA Insured, 5.75%, 6/15/26 .................................................. 1,865,000 1,912,595
Series B, MBIA Insured, Pre-Refunded, 5.75%, 6/15/26 .................................... 1,135,000 1,165,032
Series B, Pre-Refunded, 5.75%, 6/15/29 .................................................. 15,000,000 15,749,550
Semiannual Report | 35
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (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 D, 5.25%, 6/15/25 .................................................................... $ 10,000,000 $ 10,625,000
Series G, FSA Insured, 5.125%, 6/15/32 ...................................................... 24,215,000 25,042,669
New York City Transitional Finance Authority Revenue, Future Tax Secured,
Refunding, Series C, Pre-Refunded, 5.50%, 11/01/20 .......................................... 265,000 290,872
Series B, 5.00%, 5/01/30 .................................................................... 7,500,000 7,695,750
Series B, Pre-Refunded, 6.00%, 11/15/29 ..................................................... 10,000,000 11,191,900
Series C, Pre-Refunded, 5.50%, 11/01/20 ..................................................... 4,735,000 5,197,278
Series C, Pre-Refunded, 5.50%, 11/01/24 ..................................................... 4,200,000 4,610,046
Series D, 5.00%, 2/01/27 .................................................................... 10,000,000 10,324,200
Series E, 5.00%, 2/01/28 .................................................................... 8,885,000 9,128,804
New York City Transportation Authority MTA Triborough COP, Series A, AMBAC Insured,
Pre-Refunded, 5.40%, 1/01/19 ................................................................ 15,000,000 16,315,050
New York City Trust Cultural Resources Revenue, Museum of Modern Art 2001, Series D,
AMBAC Insured, 5.125%, 7/01/31 .............................................................. 8,000,000 8,321,920
New York State Dormitory Authority Lease Revenue, Court Facilities, Pre-Refunded, 6.00%,
5/15/39 ..................................................................................... 16,000,000 17,871,200
New York State Dormitory Authority Revenue, State University Educational Facilities,
5.125%, 5/15/21 ............................................................................. 7,165,000 7,466,073
New York State Dormitory Authority Revenues,
City University System, Consolidated Third, Series 1, 5.25%, 7/01/25 ........................ 10,000,000 10,371,100
City University System, Third General Residence, Series 2, Pre-Refunded, 6.00%, 7/01/20 ..... 16,860,000 17,512,819
City University System, Third General Residence, Series 2, Pre-Refunded, 6.00%, 7/01/26 ..... 5,500,000 5,712,960
Interfaith Medical Center, Series D, 5.40%, 2/15/28 ......................................... 8,000,000 8,281,840
Mental Health Services, Series A, Pre-Refunded, 6.00%, 8/15/17 .............................. 14,290,000 15,073,949
Mental Health Services, Series A, Pre-Refunded, 5.75%, 2/15/27 .............................. 4,830,000 5,079,904
Second Hospital, Interfaith Medical Center, Series D, 5.30%, 2/15/19 ........................ 5,000,000 5,179,800
Supported Debt, Mental Health Services, Refunding, Series A, 5.75%, 2/15/27 ................. 80,000 83,714
Supported Debt, Mental Health Services, Series A, 6.00%, 8/15/17 ............................ 245,000 257,292
Supported Debt, Mental Health Services, Series A, Pre-Refunded, 6.00%, 8/15/17 .............. 3,465,000 3,655,090
Supported Debt, Mental Health Services, Series A, Pre-Refunded, 5.75%, 2/15/27 .............. 90,000 94,657
Supported Debt, Upstate Community Colleges, Refunding, Series A, 5.00%, 7/01/28 ............. 6,570,000 6,705,868
Supported Debt, Upstate Community Colleges, Series A, Pre-Refunded, 5.00%, 7/01/28 .......... 3,430,000 3,656,140
New York State HFA Service Contract Obligation Revenue, Refunding, Series C, 5.50%, 9/15/22 .... 17,505,000 18,295,351
New York State HFAR, Housing Project Mortgage, Refunding, Series A, FSA Insured,
6.10%, 11/01/15 ............................................................................. 4,860,000 5,044,972
6.125%, 11/01/20 ............................................................................ 3,760,000 3,902,918
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 1,585,331
New York State Thruway Authority Service Contract Revenue, Local Highway and Bridge,
Pre-Refunded, 5.75%, 4/01/16 ................................................................ 13,200,000 13,610,124
New York State Urban Development Corp. Revenue, Youth Facilities, Pre-Refunded, 6.00%,
4/01/17 ..................................................................................... 11,720,000 12,411,480
36 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW YORK (CONT.)
Onondaga County GO,
5.875%, 2/15/12 ............................................................................. $ 300,000 $ 336,444
ETM, 5.875%, 2/15/12 ........................................................................ 700,000 788,795
Triborough Bridge and Tunnel Authority Revenues, General Purpose,
Refunding, Series A, 5.00%, 1/01/27 ......................................................... 5,000,000 5,141,050
Series A, Pre-Refunded, 5.00%, 1/01/32 ...................................................... 20,000,000 21,386,074
Series B, Pre-Refunded, 5.50%, 1/01/30 ...................................................... 15,000,000 17,020,950
Series X, ETM, 6.625%, 1/01/12 .............................................................. 1,800,000 2,073,222
Series Y, ETM, 5.90%, 1/01/07 ............................................................... 500,000 515,880
Series Y, ETM, 6.00%, 1/01/12 ............................................................... 1,000,000 1,105,160
------------
887,613,864
------------
NORTH CAROLINA 3.3%
Charlotte Airport Revenue, Series A, MBIA Insured, 5.00%, 7/01/34 .............................. 6,000,000 6,156,540
Charlotte COP, Transit Projects, Phase II, Series E, 5.00%, 6/01/30 ............................ 14,440,000 14,860,348
Charlotte-Mecklenberg Hospital Authority Health Care System Revenue,
5.90%, 1/15/16 .............................................................................. 7,010,000 7,180,904
Pre-Refunded, 5.90%, 1/15/16 ................................................................ 2,890,000 2,964,100
North Carolina Eastern Municipal Power Agency Power System Revenue,
Refunding, Series A, 5.75%, 1/01/26 ......................................................... 65,350,000 68,763,884
Refunding, Series B, 6.00%, 1/01/22 ......................................................... 1,250,000 1,415,700
Refunding, Series B, 6.25%, 1/01/23 ......................................................... 39,030,000 45,343,102
Refunding, Series B, 5.75%, 1/01/24 ......................................................... 35,140,000 37,007,691
Refunding, Series B, FGIC Insured, 6.25%, 1/01/23 ........................................... 1,280,000 1,287,590
Refunding, Series D, 5.125%, 1/01/23 ........................................................ 12,000,000 12,284,280
Refunding, Series D, 5.125%, 1/01/26 ........................................................ 3,000,000 3,049,200
Refunding, Series D, 6.75%, 1/01/26 ......................................................... 5,000,000 5,513,750
Series D, 6.70%, 1/01/19 .................................................................... 2,000,000 2,207,360
North Carolina Medical Care Commission Revenue, Rowan Regional Medical Center,
FSA Insured, 4.75%, 9/01/24 . . ................................................ 6,970,000 6,969,582
University Hospital Chapel Hill Revenue, Refunding, AMBAC Insured, 5.00%, 2/15/21 .............. 5,000,000 5,138,450
Winston-Salem Water and Sewer System Revenue, Pre-Refunded, 5.125%, 6/01/28 .................... 11,000,000 11,919,160
------------
232,061,641
------------
OHIO 3.1%
Akron Bath Copley Joint Township Hospital District Revenue, Hospital Improvement
Children's Hospital Center, FSA Insured, 5.00%, 11/15/31 .................................... 9,250,000 9,497,992
Akron Income Tax Revenue, Community Learning, FGIC Insured, 5.00%,
12/01/26 .................................................................................... 6,085,000 6,305,642
12/01/27 .................................................................................... 3,185,000 3,296,093
Cleveland Airport System Revenue, Series A, FSA Insured, 5.00%, 1/01/31 ........................ 20,000,000 20,417,800
Cleveland State University General Receipt Revenue, FGIC Insured, 5.00%, 6/01/29 ............... 5,000,000 5,172,500
Columbus City School District GO, School Facilities Construction and Improvement,
FGIC Insured, 5.00%, 12/01/28 ............................................................... 16,000,000 16,508,320
Cuyahoga County Hospital Facilities Revenue, Canton Inc. Project, 7.50%, 1/01/30 ............... 17,100,000 19,007,163
Semiannual Report | 37
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OHIO (CONT.)
Dayton Special Facilities Revenue, Emery Air Freight Corp., Emery Worldwide Air Inc.,
Refunding,
Series A, 5.625%, 2/01/18 ............................................................... $ 6,000,000 $ 6,394,380
Series E, 6.05%, 10/01/09 ............................................................... 4,000,000 4,351,360
Series F, 6.05%, 10/01/09 ............................................................... 2,750,000 2,991,560
Franklin County Convention Facilities Authority Revenue, Tax and Lease Revenue,
MBIA Insured, Pre-Refunded, 5.00%, 12/01/27 ............................................. 6,145,000 6,425,519
Refunding, MBIA Insured, 5.00%, 12/01/27 ................................................ 1,355,000 1,384,160
Hamilton County Sales Tax Revenue, Series B, AMBAC Insured, 5.25%, 12/01/32 ................. 10,000,000 10,490,400
Kettering City School District GO, School Improvement, FGIC Insured, 5.00%, 12/01/30 ........ 7,450,000 7,694,583
Montgomery County Health System Revenue, Series B-2, Pre-Refunded, 8.10%, 7/01/18 ........... 10,490,000 11,022,782
Montgomery County Hospital Facilities Revenue, Grandview Hospital and Medical Center,
Pre-Refunded,
5.50%, 12/01/10 ......................................................................... 1,300,000 1,402,063
5.60%, 12/01/11 ......................................................................... 1,000,000 1,082,290
5.65%, 12/01/12 ......................................................................... 925,000 1,002,867
Nordonia Hills Local School District GO, School Improvement, AMBAC Insured,
5.375%, 12/01/20 ........................................................................ 4,275,000 4,620,505
5.45%, 12/01/25. ........................................................................ 3,000,000 3,235,470
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 18,866,700
Pickerington Local School District GO, School Facilities Construction and Improvement,
FGIC Insured, 5.00%, 12/01/28 ............................................................. 15,000,000 15,394,350
Springboro Community City School District GO, School Improvement, MBIA Insured, 5.00%,
12/01/27 .................................................................................. 10,350,000 10,729,431
University of Akron General Receipts Revenue, FGIC Insured, Pre-Refunded, 5.75%,
1/01/29 ................................................................................... 11,305,000 12,425,439
University of Cincinnati COP,
Jefferson Avenue Residence Hall, MBIA Insured, 5.125%, 6/01/28 .......................... 4,000,000 4,115,880
University Center Project, MBIA Insured, Pre-Refunded, 5.125%, 6/01/24 .................. 10,500,000 10,826,340
University of Cincinnati General Receipts Revenue, Series A, FGIC Insured, 5.25%,
6/01/24 ................................................................................... 5,000,000 5,269,450
----------------
219,931,039
----------------
OKLAHOMA 0.5%
Stillwater Medical Center Authority Revenue,
Series A, Pre-Refunded, 6.10%, 5/15/09 .................................................. 1,925,000 2,001,865
Series B, Pre-Refunded, 6.35%, 5/15/12 .................................................. 1,130,000 1,192,930
Series B, Pre-Refunded, 6.50%, 5/15/19 .................................................. 3,390,000 3,621,164
Tulsa Industrial Authority Hospital Revenue, St. John Medical Center Project, Series A,
Pre-Refunded, 6.25%, 2/15/14 .............................................................. 2,000,000 2,018,600
Tulsa Municipal Airport Trust Revenue,
American Airlines Project, Refunding, 6.25%, 6/01/20 .................................... 18,530,000 15,612,452
AMR Corp., Refunding, Series B, 6.00%, 6/01/35 .......................................... 10,000,000 9,512,400
Valley View Hospital Authority Revenue, Valley View Regional Medical Center, Refunding,
6.00%, 8/15/14 ............................................................................ 4,000,000 4,137,720
----------------
38,097,131
----------------
38 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OREGON 0.9%
Health Sciences University Revenue, Series A, MBIA Insured, 5.00%, 7/01/26 .................. $ 10,500,000 $ 10,915,485
Jackson County School District No. 6 Central Point GO, FGIC Insured, Pre-Refunded, 5.25%,
6/15/20 ................................................................................... 4,000,000 4,306,480
Lane County School District No. 19 Springfield GO, Refunding, FGIC Insured, 6.00%,
10/15/13 .................................................................................. 1,250,000 1,430,687
Oregon State Department of Administrative Services COP, Series A, AMBAC Insured,
Pre-Refunded, 6.00%, 5/01/26 .............................................................. 10,000,000 11,161,100
Oregon State EDR, Georgia Pacific Corp. Project,
Refunding, Series 183, 5.70%, 12/01/25 .................................................. 3,500,000 3,528,875
(d)Series CLVII, 6.35%, 8/01/25 ............................................................ 5,500,000 5,507,810
Oregon State GO, State Board of Higher Education, Series A, 5.00%,
8/01/26 ................................................................................. 18,630,000 19,333,994
8/01/27 ................................................................................. 6,955,000 7,265,541
----------------
63,449,972
----------------
PENNSYLVANIA 4.8%
Allegheny County Hospital Development Authority Revenue, Health System, Series A,
MBIA Insured, 6.50%, 11/15/30 ............................................................. 10,000,000 11,396,600
Allegheny County IDAR, Environmental Improvement, USX Corp., Refunding,
5.50%, 12/01/29 ......................................................................... 10,000,000 10,391,700
Series A, 6.70%, 12/01/20 ............................................................... 5,250,000 5,319,248
Allegheny County Port Authority Special Revenue, Transportation, FGIC Insured, 5.00%,
3/01/29 ................................................................................... 10,000,000 10,255,500
Berks County GO, AMBAC Insured, 5.00%, 11/15/25 ............................................. 5,000,000 5,087,100
Butler Area School District GO, FGIC Insured, Pre-Refunded, 5.60%, 4/01/28 .................. 5,000,000 5,446,900
Delaware County Authority University Revenue, Villanova University, Series A, MBIA
Insured, 5.00%, 12/01/18 .................................................................... 7,090,000 7,327,160
Delaware River Port Authority Pennsylvania and New Jersey Delaware River Bridges Revenue,
FSA Insured, 5.75%,
1/01/22 ................................................................................. 8,500,000 9,162,405
1/01/26 ................................................................................. 10,000,000 10,767,400
Delaware Valley Regional Finance Authority Local Government Revenue, Series B,
AMBAC Insured, 5.60%, 7/01/17 ............................................................. 5,000,000 5,552,050
Erie Water Authority Water Revenue, Series A, MBIA Insured, Pre-Refunded, 5.20%,
12/01/30 .................................................................................. 18,700,000 20,287,817
Montgomery County IDA Retirement Community Revenue, Adult Community Total Services
Retirement-Life Communities Inc., 5.25%, 11/15/28 ......................................... 2,500,000 2,514,200
Northampton County General Purpose Authority Revenue, County Agreement, FSA Insured,
5.25%, 10/01/30 ........................................................................... 12,150,000 12,700,273
Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue,
MacMillan LP Project, Pre-Refunded, 7.60%, 12/01/20 ....................................... 5,000,000 5,117,850
Pennsylvania State GO, First Series, FGIC Insured, Pre-Refunded, 5.00%, 2/01/20 ............. 5,000,000 5,373,600
Pennsylvania State Turnpike Commission Revenue, AMBAC Insured, Pre-Refunded, 5.00%,
7/15/31 ................................................................................... 5,850,000 6,325,547
Philadelphia Authority for Industrial Development Lease Revenue, Series B, FSA Insured,
5.25%, 10/01/30 ........................................................................... 15,630,000 16,196,900
Semiannual Report | 39
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
PENNSYLVANIA (CONT.)
Philadelphia Gas Works Revenue,
Fifth Series A-1, FSA Insured, 5.00%, 9/01/29 ........................................... $ 5,000,000 $ 5,139,800
Refunding, First Series A, FSA Insured, 5.00%, 7/01/26 .................................. 5,000,000 5,090,300
Philadelphia GO, MBIA Insured, 5.00%, 5/15/25 .............................................. 5,000,000 5,073,500
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 3,422,932
Mortgage, North Philadelphia Health Systems, Series A, FHA Insured, 5.35%, 1/01/23 ...... 5,690,000 5,888,752
Mortgage, North Philadelphia Health Systems, Series A, FHA Insured, 5.375%, 1/01/28 ..... 3,700,000 3,814,293
Temple University Hospital, 5.875%, 11/15/23 ............................................ 5,000,000 5,019,800
Philadelphia Parking Authority Parking Revenue, Airport, FSA Insured, 5.25%, 9/01/29 ....... 15,000,000 15,732,300
Philadelphia RDA Revenue, Neighborhood Transformation, Series C, FGIC Insured, 5.00%,
4/15/29 ................................................................................. 10,965,000 11,331,779
4/15/30 ................................................................................. 12,000,000 12,382,800
Philadelphia School District GO, Series A, FSA Insured, Pre-Refunded, 5.75%, 2/01/30 ....... 14,050,000 15,530,589
Philadelphia Water and Wastewater Revenue, Series A, FGIC Insured, 5.00%, 11/01/31 ......... 25,000,000 25,592,250
Pittsburgh and Allegheny County Public Auditorium Hotel Room Revenue, AMBAC Insured,
5.125%, 2/01/35 ......................................................................... 15,000,000 15,414,750
Pittsburgh and Allegheny County Public Auditorium Revenue, Regional Asset District Sales
Tax, AMBAC Insured, 5.25%, 2/01/31 ...................................................... 5,000,000 5,221,850
Southmoreland School District GO, MBIA Insured, 5.00%,
4/01/25 ................................................................................. 6,800,000 7,068,804
4/01/27 ................................................................................. 5,125,000 5,307,706
State Public School Building Authority School Revenue,
Daniel Boone School District Project, MBIA Insured, 5.00%, 4/01/28 ...................... 9,500,000 9,796,115
Philadelphia School District Project, FSA Insured, 5.00%, 6/01/33 ....................... 32,000,000 32,809,920
Washington County Authority Revenue, Capital Projects and Equipment Program, Refunding,
AMBAC Insured, 6.15%, 12/01/29 .......................................................... 2,400,000 2,527,416
---------------
341,387,906
---------------
RHODE ISLAND 1.0%
Narragansett Bay Commission Wastewater System Revenue, Series A, MBIA Insured, 5.00%,
8/01/30 ................................................................................. 7,990,000 8,257,186
Providence GO, Special Obligation Tax Increment, Series A, 7.65%, 6/01/16 .................. 9,900,000 9,962,964
Rhode Island Health and Educational Building Corp. Revenue, Hospital Financing, Series A,
5.875%, 9/15/23 ......................................................................... 2,000,000 2,043,920
6.00%, 9/15/33 .......................................................................... 3,000,000 3,072,540
Rhode Island Housing and Mortgage Finance Corp. Revenue, Homeownership Opportunity,
Refunding, Series 25-A, 4.95%, 10/01/16 ................................................. 140,000 140,641
Series 10-A, 6.50%, 10/01/22 ............................................................ 475,000 475,788
Series 10-A, 6.50%, 4/01/27 ............................................................. 265,000 265,204
Series 15-A, 6.85%, 10/01/24 ............................................................ 620,000 622,034
Rhode Island State Economic Development Corp. Airport Revenue, Series B, MBIA Insured,
5.00%, 7/01/30 .......................................................................... 14,965,000 15,438,493
40 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (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 $ 8,850,828
(a)Higher Education Facility, University of Rhode Island, Refunding, Series A,
AMBAC Insured, 5.00%, 9/15/30 ........................................................ 10,000,000 10,370,100
Hospital Financing, Lifespan Obligation Group, 6.375%, 8/15/21 .......................... 7,000,000 7,780,990
---------------
67,280,688
---------------
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 8,003,968
Dorchester County Waterworks and Sewer System Revenue, Refunding, MBIA Insured, 5.00%,
10/01/28 ................................................................................ 8,000,000 8,268,880
Lancaster Educational Assistance Program Inc. Revenue, School District of Lancaster County
Project, 5.00%, 12/01/26 ................................................................ 10,000,000 9,896,800
Medical University of South Carolina Hospital Authority Hospital Facilities Revenue,
Mortgage, Refunding, Series A, MBIA Insured, 5.00%, 8/15/31 ............................. 13,860,000 14,165,474
Newberry Investing In Childrens Education Revenue, Installment Newberry County School
District Project, 5.00%, 12/01/30 ....................................................... 4,000,000 3,943,600
South Carolina Public Service Authority Revenue, Series B, FSA Insured, 5.25%, 1/01/33 ..... 31,835,000 33,105,216
---------------
77,383,938
---------------
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 16,408,807
---------------
TENNESSEE 0.4%
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 7,625,940
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 5,172,950
Knoxville Wastewater System Revenue, Improvement, Series A, MBIA Insured, 5.00%, 4/01/30 ... 7,850,000 8,129,853
Memphis GO, Pre-Refunded, 5.00%, 4/01/17 ................................................... 3,000,000 3,149,190
Metropolitan Government of Nashville and Davidson County District Energy Revenue, Series A,
AMBAC Insured, 5.00%, 10/01/25 .......................................................... 5,460,000 5,659,781
Tennessee HDA Revenue, Homeownership Program, Refunding, Series 1D, 4.70%, 7/01/15 ......... 595,000 603,883
---------------
30,341,597
---------------
TEXAS 5.3%
Austin Electric Utility System Revenue, Refunding, MBIA Insured, 5.00%, 11/15/28 ........... 10,000,000 10,284,100
Bexar County Health Facilities Development Corp. Revenue, Incarnate Word Health Services,
FSA Insured, ETM,
6.00%, 11/15/15 ......................................................................... 7,500,000 7,783,275
6.10%, 11/15/23 ......................................................................... 8,300,000 8,579,212
Semiannual Report | 41
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
TEXAS (CONT.)
Bexar County HFC, MFHR,
American Opportunity Housing, Series A, MBIA Insured, 5.80%, 1/01/31 ................... $ 6,000,000 $ 6,205,260
Honey Creek Apartments Project, Series A, MBIA Insured, 6.125%, 4/01/20 ................ 1,000,000 1,058,030
Honey Creek Apartments Project, Series A, MBIA Insured, 6.20%, 4/01/30 ................. 2,845,000 3,011,489
Bexar Metropolitan Water District Waterworks Systems Revenue, Refunding, MBIA Insured,
5.875%, 5/01/22 ........................................................................ 2,860,000 2,922,348
6.35%, 5/01/25 ......................................................................... 1,890,000 1,931,656
Bridge City ISD, GO, Refunding, 5.375%, 2/15/32 ............................................ 2,005,000 2,099,015
Brownsville Utility System Revenue, Refunding and Improvement, Series A, AMBAC Insured,
5.00%, 9/01/31 ......................................................................... 15,500,000 15,984,840
Carrollton GO, Improvement, FSA Insured, 5.25%, 8/15/19 .................................... 1,000,000 1,062,320
Castleberry ISD Revenue, Refunding, 6.00%, 8/15/25 ......................................... 175,000 178,792
Dallas ISD, GO, Refunding, 5.25%, 2/15/20 .................................................. 2,000,000 2,122,720
Dallas-Fort Worth International Airport Revenue, Refunding and Improvement, Series A,
FGIC Insured, 5.625%, 11/01/26 ......................................................... 85,000,000 90,112,750
Decatur Hospital Authority Hospital Revenue, Series A, ETM, 5.75%, 9/01/29 ................. 4,135,000 4,587,038
Duncanville ISD, GO, Refunding, Series B, 5.25%, 2/15/32 ................................... 9,900,000 10,345,797
Edcouch Elsa ISD, GO, Pre-Refunded, 5.50%, 2/15/30 ......................................... 2,000,000 2,161,840
Gulf Coast Waste Disposal Authority Environmental Improvement Revenue, UXS Corp. Projects,
Refunding, 5.50%, 9/01/17 .............................................................. 3,250,000 3,378,895
Gulf Coast Waste Disposal Authority Revenue, Valero Energy Corp. Project, 5.70%, 4/01/32 ... 3,000,000 3,040,170
Hidalgo County GO, Certificates of Obligation, FSA Insured, Pre-Refunded, 5.25%, 8/15/21 ... 2,500,000 2,704,000
Houston Airport System Revenue, sub. lien, Series B, FSA Insured, 5.50%, 7/01/30 ........... 2,000,000 2,124,560
Houston Area Water Corp. Contract Revenue, Northeast Water Purification Project,
FGIC Insured, 5.125%, 3/01/28 .......................................................... 15,000,000 15,485,250
Houston GO, Public Improvement, Refunding, MBIA Insured, 5.00%, 3/01/25 .................... 5,000,000 5,152,700
Houston Water and Sewer Systems Revenue, junior lien, Series B, FGIC Insured,
Pre-Refunded,
5.00%, 12/01/25 ........................................................................ 9,710,000 10,203,948
5.25%, 12/01/30 ........................................................................ 14,000,000 15,036,000
Joshua ISD, GO, Refunding, Series B, 6.125%, 2/15/26 ....................................... 20,000 20,103
Keller ISD, GO, Refunding, 5.375%, 8/15/25 ................................................. 1,500,000 1,586,220
Kerrville ISD, GO, Pre-Refunded, 6.00%, 8/15/13 ............................................ 1,000,000 1,109,630
Laredo ISD, GO, Pre-Refunded, 5.25%, 8/01/24 ............................................... 4,000,000 4,260,800
Little Cypress Mauriceville Consolidated ISD, GO, Refunding, 5.90%, 8/01/29 ................ 2,130,000 2,290,772
Lower Colorado River Authority Revenue,
Refunding, FSA Insured, 5.00%, 5/15/31 ................................................. 10,000,000 10,234,700
Refunding and Improvement, Series A, MBIA Insured, 5.00%, 5/15/26 ...................... 2,000,000 2,047,480
Lubbock HFC, SFMR, MBS Program, Refunding, Series A, GNMA Secured, 6.125%, 12/01/17 ........ 240,000 246,600
North Central Texas Health Facility Development Corp. Revenue,
Children's Medical Center Dallas, Refunding, AMBAC Insured, 5.25%, 8/15/24 ............. 19,335,000 20,341,774
Texas Health Resources System, Series B, MBIA Insured, 5.125%, 2/15/22 ................. 5,985,000 6,161,737
Northside ISD, GO, Refunding, 5.00%, 2/15/26 ............................................... 2,500,000 2,579,375
Onalaska ISD, GO, 5.375%, 2/15/32 .......................................................... 2,840,000 2,995,149
Pasadena GO, Certificates of Obligation, FGIC Insured, 5.25%, 4/01/32 ...................... 3,000,000 3,118,560
42 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
TEXAS (CONT.)
Port Corpus Christi IDC Revenue, Valero, Refunding, Series B, 5.40%, 4/01/18 ............... $ 4,000,000 $ 4,185,320
Port Corpus Christi Nueces County General Revenue, Union Pacific, Refunding, 5.65%,
12/01/22 ................................................................................ 15,000,000 15,832,350
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 12,429,600
Richardson GO, Hotel Occupancy Certificates, Series A, FGIC Insured, 5.75%, 2/15/21 ........ 2,500,000 2,693,950
Sabine River Authority PCR, Southwestern Electric Power Co., Refunding, MBIA Insured,
6.10%, 4/01/18 .......................................................................... 9,000,000 9,287,460
San Antonio Water Revenue,
Refunding, FSA Insured, 5.00%, 5/15/28 ................................................. 5,000,000 5,123,000
Systems, Refunding, FSA Insured, 5.00%, 5/15/25 ........................................ 5,000,000 5,145,800
Southmost Regional Water Authority Water Supply Contract Revenue, MBIA Insured, 5.00%,
9/01/25 ................................................................................. 5,000,000 5,151,200
Tarrant County Health Facilities Development Corp. Health System Revenue, Harris Methodist
Health System, FGIC Insured, ETM, 6.00%, 9/01/24 ........................................ 4,000,000 4,657,280
Tarrant County Health Facilities Development Corp. Revenue, Bethesda Living Centers,
Series C, 5.75%,
8/15/18 ................................................................................ 1,570,000 1,517,484
8/15/28 ................................................................................ 3,900,000 3,580,317
Texas City IDC Marine Terminal Revenue, ARCO Pipe Line Co. Project, Refunding, 7.375%,
10/01/20 ................................................................................ 500,000 649,140
Texas State GO, Veterans Housing Assistance, Fund I, Refunding, Series A, 6.15%, 12/01/25 .. 1,000,000 1,016,460
Tyler Health Facilities Development Corp. Hospital Revenue, East Texas Medical Center
Project,
Series A, MBIA Insured, 5.50%, 11/01/17 ................................................ 1,735,000 1,810,681
Series D, FSA Insured, 5.375%, 11/01/27 ................................................ 12,480,000 13,134,326
University of Texas University Revenues, Financing System, Series A, Pre-Refunded, 5.70%,
8/15/20 .................................................................................. 1,000,000 1,081,690
Wylie ISD, GO,
Pre-Refunded, 7.00%, 8/15/24 ........................................................... 660,000 771,665
Refunding, 7.00%, 8/15/24 .............................................................. 340,000 394,454
---------------
373,011,082
---------------
U.S. TERRITORIES 1.9%
Children's Trust Fund Tobacco Settlement Revenue, Asset-Backed Bonds, Refunding, 5.375%,
5/15/33 .................................................................................. 22,880,000 23,545,350
Puerto Rico Commonwealth GO,
AMBAC Insured, Pre-Refunded, 5.40%, 7/01/25 ............................................ 250,000 257,565
Public Improvement, Pre-Refunded, 5.75%, 7/01/17 ....................................... 250,000 263,320
Puerto Rico Commonwealth Highway and Transportation Authority Highway Revenue, Series Y,
5.00%, 7/01/36 ......................................................................... 62,000,000 62,763,220
5.50%, 7/01/36 ......................................................................... 7,000,000 7,556,360
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series K, 5.00%,
7/01/30 .................................................................................. 19,190,000 19,408,766
Puerto Rico Housing Bank and Financing Authority SFMR, Affordable Housing Mortgage,
First Portfolio, 6.25%, 4/01/29 .......................................................... 130,000 132,033
Puerto Rico Industrial Medical and Environmental Pollution Control Facilities Financing
Authority Revenue, PepsiCo Inc. Project, 6.25%, 11/15/13 ................................. 350,000 355,898
Semiannual Report | 43
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (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 $ 857,216
Teacher's Retirement System Revenue, Series B, ETM, 5.50%, 7/01/21 ..................... 250,000 258,700
Puerto Rico PBA Revenue, Guaranteed Government Facilities, Series D,
5.25%, 7/01/27 ......................................................................... 3,265,000 3,406,309
Pre-Refunded, 5.25%, 7/01/27 ........................................................... 8,735,000 9,479,135
University of Puerto Rico Revenues, Series M, MBIA Insured, 5.25%, 6/01/25 ................. 285,000 290,700
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A,
5.50%, 10/01/18 ........................................................................ 1,400,000 1,460,564
5.50%, 10/01/22 ........................................................................ 5,000,000 5,200,950
5.625%, 10/01/25 ....................................................................... 1,900,000 1,977,482
Virgin Islands Water and Power Authority Electric System Revenue, Refunding, 5.30%,
7/01/18 .................................................................................. 500,000 500,165
---------------
137,713,733
---------------
UTAH 0.6%
Intermountain Power Agency Power Supply Revenue,
ETM, 6.15%, 7/01/14 .................................................................... 16,225,000 17,166,212
Series A, 6.15%, 7/01/14 ............................................................... 8,775,000 9,106,695
Salt Lake County College Revenue, Westminster College Project,
5.70%, 10/01/17 ........................................................................ 1,000,000 1,039,650
5.75%, 10/01/27 ........................................................................ 1,000,000 1,037,750
5.625%, 10/01/28 ....................................................................... 3,305,000 3,441,926
South Jordan Sales Tax Revenue, AMBAC Insured, 5.20%, 8/15/26 .............................. 4,770,000 4,960,180
South Valley Water Reclamation Facility Sewer Revenue, AMBAC Insured, 5.00%, 8/15/30 ....... 5,730,000 5,917,658
Utah State HFAR, SFM, Series B, 6.55%, 7/01/26 ............................................. 200,000 200,356
---------------
42,870,427
---------------
VERMONT 0.5%
Burlington Airport Revenue, Series A, MBIA Insured, 5.00%, 7/01/28 ......................... 5,780,000 5,942,534
University of Vermont and State Agricultural College Revenue, MBIA Insured, 5.00%,
10/01/30 ................................................................................. 12,210,000 12,663,724
Vermont Educational and Health Buildings Financing Agency Revenue, Fletcher Allen Health,
Series A, AMBAC Insured, 6.125%, 12/01/27 ................................................ 13,000,000 14,401,790
Vermont HFA, SFHR, Series 5, 7.00%, 11/01/27 ............................................... 2,565,000 2,594,061
---------------
35,602,109
---------------
VIRGINIA 0.4%
Greater Richmond Convention Center Authority Hotel Tax Revenue, Refunding, MBIA Insured,
5.00%, 6/15/30 ........................................................................... 12,260,000 12,656,243
Medical College Hospital Authority Revenue, General Revenue Bonds, MBIA Insured, 5.125%,
7/01/18 .................................................................................. 2,000,000 2,077,460
Virginia State HDA Commonwealth Mortgage Revenue, Series H, Sub Series H-1,
MBIA Insured, 5.35%, 7/01/31 ............................................................. 10,000,000 10,244,300
---------------
24,978,003
---------------
44 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
WASHINGTON 3.0%
Bellingham Housing Authority Revenue, Pacific Rim and Cascade Meadows Project,
Refunding, MBIA Insured, 5.20%, 11/01/27 ................................................ $ 200,000 $ 202,096
Central Puget Sound Regional Transportation Authority Sales and Use Tax Revenue,
Series A, AMBAC Insured, 5.00%, 11/01/30 ................................................ 20,000,000 20,718,800
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 5,207,350
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 ............................ 200,000 203,956
Clark County PUD No. 1 Generating System Revenue
FGIC Insured, ETM, 6.00%, 1/01/08 ....................................................... 200,000 211,636
Refunding, FSA Insured, 5.50%, 1/01/25 .................................................. 15,015,000 16,011,846
Clark County Sewer Revenue, MBIA Insured, Pre-Refunded, 5.70%, 12/01/16 ..................... 200,000 205,680
Energy Northwest Electric Revenue, Columbia Generating, Refunding, Series B, FSA
Insured, 5.35%, 7/01/18 ................................................................. 11,500,000 12,288,440
Goat Hill Properties Lease Revenue, Government Office Building Project, MBIA Insured,
5.00%, 12/01/33 ......................................................................... 18,500,000 18,988,215
Grant County PUD No. 2 Priest Rapids Hydro Electric Revenue, Second Series B,
MBIA Insured, 5.875%, 1/01/26 .......................................................... 100,000 102,365
Grant County PUD No. 2 Wanapum Hydro Electric Revenue, Refunding,
Second Series A, MBIA Insured, 5.20%, 1/01/23 ........................................... 250,000 258,185
Series D, FSA Insured, 5.20%, 1/01/23 ................................................... 6,000,000 6,285,900
King County GO, Sewer, Refunding, Series C, 6.25%, 1/01/32 .................................. 8,715,000 9,173,845
King County Housing Authority Revenue, Woodridge Park Project, 6.25%, 5/01/15 ............... 175,000 175,250
King County School District No. 400 Mercer Island GO, Pre-Refunded, 5.90%, 12/01/15 ......... 100,000 103,050
King County School District No. 408 Auburn GO, FSA Insured, 5.00%, 12/01/24 ................. 5,000,000 5,161,150
King County School District No. 415 Kent GO, FSA Insured, Pre-Refunded, 5.875%,
6/01/16 ................................................................................. 200,000 203,264
Pierce County School District No. 320 Sumner GO, FSA Insured, Pre-Refunded, 6.00%,
12/01/14 ................................................................................ 2,000,000 2,231,680
Pierce County School District No. 403 Bethel GO, FGIC Insured, 5.25%, 12/01/22 .............. 5,000,000 5,296,400
Pierce County Sewer Revenue, Pre-Refunded, 5.70%, 2/01/17 ................................... 100,000 100,669
Port Seattle Revenue, Refunding,
MBIA Insured, 5.00%, 7/01/33 ............................................................ 10,000,000 10,209,900
Series A, FGIC Insured, 5.00%, 4/01/31 .................................................. 21,680,000 22,134,846
Seattle Municipal Light and Power Revenue, 5.40%, 12/01/25 .................................. 10,000,000 10,642,000
Seattle Water System Revenue, FGIC Insured, 5.00%, 10/01/23 ................................. 300,000 307,995
Snohomish County Housing Authority Revenue, Pooled, 6.30%, 4/01/16 .......................... 200,000 201,318
Snohomish County USD No. 6 GO, 6.50%, 12/01/11 .............................................. 7,000,000 8,000,510
Spokane County GO, Pre-Refunded, 6.00%, 12/01/14 ............................................ 130,000 134,102
Spokane County Water District No. 3 Water Revenue, Refunding, 5.90%, 1/01/14 ................ 15,000 15,057
Tacoma GO, Series A, MBIA Insured, 5.625%, 12/01/22 ......................................... 300,000 312,291
Twenty-Fifth Avenue Properties Washington Student Housing Revenue, MBIA Insured,
5.125%, 6/01/22 ......................................................................... 2,925,000 3,060,164
5.25%, 6/01/33 .......................................................................... 9,770,000 10,143,409
Washington State GO,
Motor Vehicle Fuel Tax, Series B, FGIC Insured, 5.00%, 7/01/27 .......................... 10,000,000 10,379,500
Series A, FGIC Insured, 5.00%, 7/01/27 .................................................. 10,000,000 10,379,500
Various Purpose, Series C, FSA Insured, 5.25%, 1/01/26 .................................. 10,120,000 10,670,326
Semiannual Report | 45
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
WASHINGTON (CONT.)
Washington State Health Care Facilities Authority Revenue,
Multicare Health Systems, MBIA Insured, 5.00%, 8/15/22 .................................. $ 250,000 $ 254,985
Providence Services, MBIA Insured, 5.50%, 12/01/26 ...................................... 6,000,000 6,296,220
Washington State Higher Education Facilities Authority Revenue, Pacific Lutheran
University Project, Refunding, Connie Lee Insured, 5.70%, 11/01/26 ...................... 200,000 207,926
Washington State Public Power Supply System Revenue, Nuclear Project No. 2,
Refunding, Series A, 6.30%, 7/01/12 ..................................................... 7,700,000 8,750,203
-------------
215,230,029
-------------
WEST VIRGINIA 0.6%
Braxton County Solid Waste Disposal Revenue, Weyerhaeuser Co. Project, Refunding,
5.40%, 5/01/25 .......................................................................... 10,000,000 10,099,100
West Virginia State GO, Series A, FGIC Insured, 5.20%, 11/01/26 ............................. 10,000,000 10,814,200
West Virginia State Water Development Water Revenue, Loan Program 2, Refunding,
Series B, AMBAC Insured, 5.00%, 11/01/29 ................................................ 7,500,000 7,758,000
West Virginia University Revenues, Improvement, West Virginia University Projects,
Series C, FGIC Insured, 5.00%, 10/01/34 ................................................. 10,000,000 10,289,300
-------------
38,960,600
-------------
WISCONSIN 0.7%
Janesville IDR, Simmons Manufacturing Co., 7.00%, 10/15/17 .................................. 2,200,000 2,206,116
Wisconsin Housing and EDA Homeownership Revenue, Refunding, Series A, 6.10%,
11/01/10 ................................................................................ 7,920,000 8,022,802
Wisconsin State Health and Educational Facilities Authority Revenue,
Children's Hospital of Wisconsin Inc., AMBAC Insured, 5.375%, 2/15/28 ................... 21,050,000 21,527,414
Franciscan Sisters Christian, Series A, 5.50%, 2/15/18 .................................. 1,500,000 1,529,625
Franciscan Sisters Christian, Series A, 5.50%, 2/15/28 .................................. 1,000,000 1,010,540
Mercy Health Systems Corp., AMBAC Insured, 6.125%, 8/15/13 .............................. 6,500,000 6,670,040
Mercy Health Systems Corp., AMBAC Insured, 6.125%, 8/15/17 .............................. 7,500,000 7,696,200
-------------
48,662,737
-------------
WYOMING 0.0%(c)
Wyoming CDA, MFMR, Series A,
6.90%, 6/01/12 .......................................................................... 260,000 260,107
6.95%, 6/01/24 .......................................................................... 815,000 815,342
-------------
1,075,449
-------------
TOTAL BONDS (COST $6,293,197,782) ........................................................... 6,617,087,649
-------------
ZERO COUPON/STEP-UP BONDS 4.7%
ARIZONA 0.2%
Phoenix Civic Improvement Corp. Distribution Revenue, Convertible Capital
Appreciation, Civic Plaza, Series B, FGIC Insured, zero cpn. to 7/01/13, 5.50%
thereafter,
7/01/32 ................................................................................. 6,000,000 4,471,800
7/01/34 ................................................................................. 5,000,000 3,727,850
7/01/35 ................................................................................. 9,860,000 7,350,717
-------------
15,550,367
-------------
46 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON/STEP-UP BONDS (CONT.)
CALIFORNIA 1.4%
Foothill/Eastern Corridor Agency Toll Road Revenue,
Capital Appreciation, Refunding, 1/15/24 .................................................... $ 65,000,000 $ 22,392,500
Convertible Capital Appreciation, Refunding, zero cpn. to 7/15/09, 5.85% thereafter,
1/15/23 ................................................................................... 35,000,000 29,921,500
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 44,908,000
senior lien, ETM, 1/01/23 ................................................................... 7,000,000 3,169,880
---------------
100,391,880
---------------
COLORADO 0.0%(c)
Colorado Springs Airport Revenue, Series C,
1/01/07 ................................................................................... 1,675,000 1,608,134
1/01/08 ................................................................................... 800,000 730,192
1/01/11 ................................................................................... 1,450,000 1,142,600
---------------
3,480,926
---------------
DISTRICT OF COLUMBIA 0.2%
District of Columbia Revenue, Capital Appreciation, Georgetown University,
MBIA Insured, 4/01/22 ..................................................................... 12,870,000 5,326,249
MBIA Insured, 4/01/23 ..................................................................... 14,160,000 5,499,178
Series A, MBIA Insured, 4/01/20 ........................................................... 8,860,000 4,152,771
---------------
14,978,198
---------------
FLORIDA 0.1%
Florida State Mid-Bay Bridge Authority Revenue, Series A, AMBAC Insured,
10/01/23 .................................................................................. 5,000,000 1,982,350
10/01/24 .................................................................................. 3,000,000 1,122,900
Miami-Dade County Special Obligation Revenue, Sub Series B, MBIA Insured,10/01/34 ............. 5,500,000 1,114,410
---------------
4,219,660
---------------
ILLINOIS 1.0%
Metropolitan Pier and Exposition Authority Dedicated State Tax Revenue,
Capital Appreciation, 2002, Series A, FGIC Insured, 6/15/08 ............................... 185,000 169,073
Capital Appreciation, 2002, Series A, FGIC Insured, 6/15/09 ............................... 235,000 206,257
Capital Appreciation, 2002, Series A, FGIC Insured, ETM, 6/15/08 .......................... 7,000,000 6,403,950
Capital Appreciation, 2002, Series A, FGIC Insured, ETM, 6/15/09 .......................... 9,275,000 8,157,919
Capital Appreciation, McCormick Place, Refunding, Series B, 6/15/22 ....................... 30,000,000 17,825,400
Capital Appreciation, McCormick Place, Refunding, Series B, MBIA Insured, 6/15/20 ......... 8,240,000 6,328,073
Capital Appreciation, McCormick Place, Refunding, Series B, MBIA Insured, 6/15/21 ......... 6,000,000 4,612,560
Capital Appreciation, Series A, FGIC Insured, ETM, 6/15/08 ................................ 1,315,000 1,203,028
Capital Appreciation, Series A, FGIC Insured, ETM, 6/15/09 ................................ 1,490,000 1,310,545
McCormick Place Expansion Project, Series A, FGIC Insured, 6/15/10 ........................ 155,000 130,451
McCormick Place Expansion Project, Series A, FGIC Insured, ETM, 6/15/10 ................... 7,845,000 6,611,452
McCormick Place Expansion Project, Series A, FGIC Insured, ETM, 6/15/11 ................... 9,690,000 7,791,632
University of Illinois University Revenues, Auxiliary Facilities, AMBAC Insured,4/01/10 ....... 14,250,000 12,069,750
---------------
72,820,090
---------------
Semiannual Report | 47
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON/STEP-UP BONDS (CONT.)
KENTUCKY 0.6%
Jefferson County Capital Projects Corp. Lease Revenue, Refunding, Series A,
8/15/07 ................................................................................... $ 1,640,000 $ 1,543,486
8/15/08 ................................................................................... 4,505,000 4,078,016
8/15/09 ................................................................................... 4,580,000 3,945,578
8/15/10 ................................................................................... 4,620,000 3,795,884
8/15/13 ................................................................................... 6,825,000 4,867,590
8/15/14 ................................................................................... 6,860,000 4,660,547
8/15/16 ................................................................................... 7,005,000 4,321,455
8/15/17 ................................................................................... 7,115,000 4,163,342
Kentucky Economic Development Finance Authority Health System Revenue, Norton
Healthcare Inc., Refunding, Series B, MBIA Insured, 10/01/18 .............................. 10,000,000 5,517,000
Owensboro Electric Light and Power Revenue, Series B, AMBAC Insured, 1/01/08 .................. 5,250,000 4,868,640
---------------
41,761,538
---------------
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 11,006,549
---------------
MICHIGAN 0.1%
Coldwater Community Schools GO, Capital Appreciation, MBIA Insured, Pre-Refunded,
5/01/18 ................................................................................... 5,935,000 2,964,354
Harrison Community Schools GO, AMBAC Insured, 5/01/20 ......................................... 6,000,000 2,567,340
---------------
5,531,694
---------------
NEVADA 0.2%
Director of the State Department of Business and Industry Revenue, Las Vegas Monorail
Project, AMBAC Insured,
1/01/25 ................................................................................... 3,080,000 1,193,377
1/01/26 ................................................................................... 3,815,000 1,395,756
1/01/27 ................................................................................... 3,000,000 1,035,600
1/01/28 ................................................................................... 13,315,000 4,342,820
1/01/29 ................................................................................... 8,410,000 2,590,196
---------------
10,557,749
---------------
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 6,420,300
---------------
TEXAS 0.3%
Hays Consolidated ISD, GO, Capital Appreciation, Pre-Refunded,
8/15/19 ................................................................................... 5,285,000 2,633,885
8/15/21 ................................................................................... 8,420,000 3,703,116
8/15/22 ................................................................................... 8,470,000 3,502,769
Texas State Turnpike Authority Central Texas Turnpike System Revenue, Capital Appreciation,
AMBAC Insured, 8/15/31 ...................................................................... 43,500,000 10,279,050
---------------
20,118,820
---------------
48 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON/STEP-UP BONDS (CONT.)
WASHINGTON 0.3%
Washington State Public Power Supply System Revenue, Nuclear Project No. 3,
Capital Appreciation, Series B, 7/01/14 ................................................ $ 12,450,000 $ 8,540,077
Capital Appreciation, Series B, ETM, 7/01/14 ........................................... 2,550,000 1,771,536
Refunding, Series B, 7/01/12 ........................................................... 6,400,000 4,826,944
Refunding, Series B, 7/01/13 ........................................................... 11,000,000 7,934,410
---------------
23,072,967
---------------
TOTAL ZERO COUPON/STEP-UP BONDS (COST $304,583,158) ....................................... 329,910,738
---------------
TOTAL LONG TERM INVESTMENTS (COST $6,597,780,940) ......................................... 6,946,998,387
---------------
SHORT TERM INVESTMENTS 0.7%
CALIFORNIA 0.1%
(e)California State Economic Recovery Revenue, Series C-9, Daily VRDN and Put, 2.67%,
7/01/23 ................................................................................ 4,100,000 4,100,000
---------------
GEORGIA 0.1%
(e)Athens-Clarke County Unified Government Authority Revenue, University of Georgia Athletic
Assn. Project, Daily VRDN and Put, 2.71%, 8/01/33 ...................................... 4,015,000 4,015,000
(e)Atlanta Water and Wastewater Revenue, Series C, FSA Insured, Daily VRDN and Put, 2.72%,
11/01/41 ............................................................................... 1,600,000 1,600,000
---------------
5,615,000
---------------
LOUISIANA 0.0%(c)
(e)Louisiana State Offshore Terminal Authority Deepwater Port Revenue, Loop Inc. Project,
First Stage, ACES, Refunding, Daily VRDN and Put, 2.72%, 9/01/17 ....................... 800,000 800,000
---------------
MASSACHUSETTS 0.1%
(e)Massachusetts State Health and Educational Facilities Authority Revenue, Capital Assets
Program, Series D, MBIA Insured, Daily VRDN and Put, 2.65%, 1/01/35 .................... 5,360,000 5,360,000
---------------
MICHIGAN 0.0%(c)
(e)Michigan State University Revenues, Series A, Daily VRDN and Put, 2.72%, 8/15/32 .......... 600,000 600,000
---------------
MISSOURI 0.0%(c)
(e)Missouri State Health and Educational Facilities Authority Educational Facilities Revenue,
Washington University, Series B, Daily VRDN and Put, 2.69%, 2/15/33 .................... 2,500,000 2,500,000
---------------
NEW MEXICO 0.1%
(e)Farmington PCR, Arizona Public Service Co., Refunding, Series B, Daily VRDN and Put,
2.72%, 9/01/24 ......................................................................... 3,600,000 3,600,000
---------------
NEW YORK 0.2%
(e)Long Island Power Authority Electric System Revenue,
Sub Series 2, Daily VRDN and Put, 2.68%, 5/01/33 ....................................... 3,300,000 3,300,000
Sub Series 3B, Daily VRDN and Put, 2.69%, 5/01/33 ...................................... 2,700,000 2,700,000
(e)New York City GO,
Sub Series A-7, Daily VRDN and Put, 2.68%, 8/01/20 ..................................... 1,100,000 1,100,000
Sub Series E-3, Daily VRDN and Put, 2.68%, 8/01/23 ..................................... 3,900,000 3,900,000
Semiannual Report | 49
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONT.)
NEW YORK (CONT.)
(e)New York City IDAR, Liberty, 1 Bryant Park LLC, Series B, Daily VRDN and Put, 2.74%,
11/01/39 ............................................................................... $ 2,200,000 $ 2,200,000
(e)New York City Municipal Water Finance Authority Water and Sewer System Revenue,
Fiscal 2003, Refunding, Sub Series C-3, Daily VRDN and Put, 2.68%, 6/15/18 ............. 780,000 780,000
Series A, FGIC Insured, Daily VRDN and Put, 2.69%, 6/15/25 ............................. 2,800,000 2,800,000
(e)New York State Local Government Assistance Corp. Revenue, Weekly VRDN and Put, 2.59%,
4/01/23 ................................................................................ 2,400,000 2,400,000
---------------
19,180,000
---------------
TENNESSEE 0.1%
(e)Clarksville PBA Revenue, Pooled Financing, Tennessee Municipal Bond Fund, Daily VRDN and
Put, 2.72%,
1/01/33 ................................................................................ 2,800,000 2,800,000
7/01/34 ................................................................................ 3,000,000 3,000,000
(e)Montgomery County PBA Pooled Financing Revenue, Tennessee County Loan Pool, Daily VRDN and
Put, 2.72%, 7/01/34 ..................................................................... 2,000,000 2,000,000
---------------
7,800,000
---------------
TOTAL SHORT TERM INVESTMENTS (COST $49,555,000) ........................................... 49,555,000
---------------
TOTAL INVESTMENTS (COST $6,647,335,940) 99.0% ............................................. 6,996,553,387
OTHER ASSETS, LESS LIABILITIES 1.0% ....................................................... 73,046,663
---------------
NET ASSETS 100.0% ......................................................................... $ 7,069,600,050
===============
See Selected Portfolio Abbreviations on page 51.
(a) See Note 1(b) regarding securities purchased on a when-issued or delayed
delivery basis.
(b) See Note 6 regarding defaulted securities.
(c) Rounds to less than 0.05% of net assets.
(d) Upon review by the Internal Revenue Service (IRS), income generated by the
bond has been deemed to be taxable. Georgia Pacific Corp. (GP) is
contesting the IRS determination and is currently negotiating with the
Fund on this matter. In various SEC filings, GP has stated that it will
take steps to ensure that bondholders will be made whole with respect to
any tax liability caused by the IRS determination.
(e) Variable 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.
50 | See notes to financial statements. | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS, OCTOBER 31, 2005 (UNAUDITED) (CONTINUED)
SELECTED PORTFOLIO ABBREVIATIONS
ACES - Adjustable Convertible Exempt Securities
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
CIFG - CDC IXIS Financial Guaranty
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 Inc.
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
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
Semiannual Report | See notes to financial statements. | 51
FRANKLIN FEDERAL TAX-FREE INCOME FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2005 (unaudited)
Assets:
Investments in securities:
Cost .................................................. $ 6,647,335,940
===============
Value ................................................. $ 6,996,553,387
Cash ..................................................... 146,441
Receivables:
Investment securities sold ............................ 5,015,767
Capital shares sold ................................... 7,359,281
Interest .............................................. 106,481,534
---------------
Total assets ....................................... 7,115,556,410
---------------
Liabilities:
Payables:
Investment securities purchased ....................... 32,369,780
Capital shares redeemed ............................... 9,472,956
Affiliates ............................................ 3,646,475
Accrued expenses and other liabilities ................... 467,149
---------------
Total liabilities .................................. 45,956,360
---------------
Net assets, at value ............................ $ 7,069,600,050
===============
Net assets consist of:
Paid-in capital .......................................... $ 6,753,497,965
Undistributed net investment income ...................... 532,958
Net unrealized appreciation (depreciation) ............... 349,217,447
Accumulated net realized gain (loss) ..................... (33,648,320)
---------------
Net assets, at value ............................ $ 7,069,600,050
===============
52 | See notes to financial statements. | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2005 (unaudited)
CLASS A:
Net assets, at value ..................................... $ 6,272,816,471
================
Shares outstanding ....................................... 521,314,682
================
Net asset value per share(a) ............................. $ 12.03
================
Maximum offering price per share
(net asset value per share / 95.75%) ..................... $ 12.56
================
CLASS B:
Net assets, at value ..................................... $ 275,202,707
================
Shares outstanding ....................................... 22,891,040
================
Net asset value and maximum offering price per share(a) .. $ 12.02
================
CLASS C:
Net assets, at value ..................................... $ 390,870,419
================
Shares outstanding ....................................... 32,501,960
================
Net asset value and maximum offering price per share(a) .. $ 12.03
================
ADVISOR CLASS:
Net assets, at value ..................................... $ 130,710,453
================
Shares outstanding ....................................... 10,858,070
================
Net asset value and maximum offering price per share(a) .. $ 12.04
================
(a) Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Semiannual Report | See notes to financial statements. | 53
FRANKLIN FEDERAL TAX-FREE INCOME FUND
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the six months ended October 31, 2005 (unaudited)
Investment income:
Interest ................................................... $ 172,071,929
---------------
Expenses:
Management fees (Note 3a) .................................. 16,193,808
Distribution fees: (Note 3c)
Class A ................................................... 2,834,645
Class B ................................................... 928,974
Class C ................................................... 1,255,563
Transfer agent fees (Note 3e) .............................. 1,654,775
Custodian fees ............................................. 52,857
Reports to shareholders .................................... 163,201
Registration and filing fees ............................... 144,321
Professional fees .......................................... 54,774
Directors' fees and expenses ............................... 72,058
Other ...................................................... 226,309
---------------
Total expenses ........................................ 23,581,285
---------------
Net investment income ............................... 148,490,644
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments .................. (2,054,929)
Net change in unrealized appreciation
(depreciation) on investments .............................. (100,610,500)
---------------
Net realized and unrealized gain (loss) ..................... (102,665,429)
---------------
Net increase (decrease) in net assets
resulting from operations ................................... $ 45,825,215
===============
54 | See notes to financial statements. | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2005 YEAR ENDED
(UNAUDITED) APRIL 30, 2005
-----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................... $ 148,490,644 $ 327,787,820
Net realized gain (loss) from investments ................ (2,054,929) 16,299,382
Net change in unrealized appreciation
(depreciation) on investments ........................... (100,610,500) 165,156,255
-----------------------------------
Net increase (decrease) in net assets
resulting from operations ........................... 45,825,215 509,243,457
-----------------------------------
Distributions to shareholders from:
Net investment income:
Class A .................................................. (145,345,230) (293,736,178)
Class B .................................................. (5,784,101) (11,959,143)
Class C .................................................. (7,730,129) (14,969,105)
Advisor Class ............................................ (2,836,505) (4,684,334)
-----------------------------------
Total distributions to shareholders ........................ (161,695,965) (325,348,760)
-----------------------------------
Capital share transactions: (Note 2)
Class A .................................................. 50,582,913 (197,130,415)
Class B .................................................. (9,694,917) (16,379,740)
Class C .................................................. 25,870,358 (11,503,182)
Advisor Class ............................................ 20,763,831 12,196,210
-----------------------------------
Total capital share transactions ........................... 87,522,185 (212,817,127)
-----------------------------------
Redemption fees ............................................ 2,910 3,741
-----------------------------------
Net increase (decrease) in net assets ................ (28,345,655) (28,918,689)
-----------------------------------
Net assets:
Beginning of period ....................................... 7,097,945,705 7,126,864,394
-----------------------------------
End of period ............................................. $ 7,069,600,050 $ 7,097,945,705
===================================
Undistributed net investment income
included in net assets:
End of period ............................................. $ 532,958 $ 13,738,279
===================================
Semiannual Report | See notes to financial statements. | 55
FRANKLIN FEDERAL TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 may utilize independent pricing services,
quotations from bond dealers, and information with respect to bond and note
transactions, to assist in determining a current market value for each security.
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. 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
continue to qualify as a regulated investment company under the Internal Revenue
Code and to distribute to shareholders substantially all of its income and net
realized gains.
56 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividends from net investment income are normally declared daily and
distributed monthly to shareholders. Distributions to shareholders are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with generally accepted accounting principles. These differences may
be permanent or temporary. Permanent differences are reclassified among capital
accounts to reflect their tax character. These reclassifications have no impact
on net assets or the results of operations. Temporary differences are not
reclassified, as they will reverse in subsequent periods.
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
A short-term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Fund and accounted for as an addition to 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.
Semiannual Report | 57
FRANKLIN FEDERAL TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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.
At October 31, 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:
--------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
OCTOBER 31, 2005 APRIL 30, 2005
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
CLASS A SHARES:
Shares sold ...................................... 23,356,575 $ 284,943,723 35,302,588 $ 425,107,576
Shares issued in reinvestment of distributions ... 6,245,800 76,156,114 12,715,155 152,440,892
Shares redeemed .................................. (25,469,980) (310,516,924) (64,650,759) (774,678,883)
--------------------------------------------------------------
Net increase (decrease) .......................... 4,132,395 $ 50,582,913 (16,633,016) $ (197,130,415)
==============================================================
CLASS B SHARES:
Shares sold ...................................... 70,633 $ 861,473 1,302,907 $ 15,656,956
Shares issued in reinvestment of distributions ... 286,394 3,491,807 595,905 7,142,139
Shares redeemed .................................. (1,152,347) (14,048,197) (3,275,089) (39,178,835)
--------------------------------------------------------------
Net increase (decrease) .......................... (795,320) $ (9,694,917) (1,376,277) $ (16,379,740)
==============================================================
CLASS C SHARES:
Shares sold ...................................... 3,831,511 $ 46,748,693 3,816,575 $ 46,010,614
Shares issued in reinvestment of distributions ... 392,791 4,789,130 778,028 9,328,022
Shares redeemed .................................. (2,105,071) (25,667,465) (5,582,812) (66,841,818)
--------------------------------------------------------------
Net increase (decrease) .......................... 2,119,231 $ 25,870,358 (988,209) $ (11,503,182)
==============================================================
ADVISOR CLASS:
Shares sold ...................................... 2,243,068 $ 27,378,043 2,419,643 $ 29,232,794
Shares issued in reinvestment of distributions ... 7,178 87,571 9,508 114,124
Shares redeemed .................................. (548,876) (6,701,783) (1,438,483) (17,150,708)
--------------------------------------------------------------
Net increase (decrease) .......................... 1,701,370 $ 20,763,831 990,668 $ 12,196,210
==============================================================
58 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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
A. MANAGEMENT FEE
The Fund pays an investment management fee to Advisers based on the month-end
net assets of the Funds as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.63% Up to and including $100 million
0.50% Over $100 million, up to and including $250 million
0.45% Over $250 million, up to and including $10 billion
0.44% Over $10 billion, up to and including $12.5 billion
0.42% Over $12.5 billion, up to and including $15 billion
0.40% Over $15 billion, up to and including $17.5 billion
0.38% Over $17.5 billion, up to and including $20 billion
0.36% In excess of $20 billion
B. ADMINISTRATIVE FEES
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's Board of Directors has adopted distribution plans for each share
class, with the exception of Advisor class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund
reimburses Distributors up to 0.10% per year of Class A's average daily net
assets for costs incurred in connection with the sale and distribution of the
Fund's shares. Under the Class A reimbursement distribution plan, costs
exceeding the maximum for the current plan year cannot be reimbursed in
subsequent periods.
Under the Fund's compensation distribution plans, the Fund pays Distributors for
costs incurred in connection with the sale and distribution of the Fund's shares
up to a certain percentage per year of its average daily net assets of each
class as follows:
Class B ............................................... 0.65%
Class C ............................................... 0.65%
Semiannual Report | 59
FRANKLIN FEDERAL TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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 period:
Net sales charge received(a) .......................... $722,267
Contingent deferred sales charges retained ............ $204,470
(a) Net of commissions paid to unaffiliated broker/dealers.
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $1,654,775, of which $1,106,168 was
retained by Investor Services.
4. INCOME TAXES
At April 30, 2005, the Fund had tax basis capital losses which may be carried
over to offset future capital gains, if any. At April 30, 2005, the capital loss
carryforwards were as follows:
Capital loss carryforwards expiring in:
2009 .................................................. $ 4,844,273
2010 .................................................. 133,009
2012 .................................................. 26,579,284
------------
$ 31,556,566
============
At October 31, 2005, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments ................................... $ 6,646,256,134
===============
Unrealized appreciation ............................... $ 379,439,894
Unrealized depreciation ............................... (29,142,641)
---------------
Net unrealized appreciation ........................... $ 350,297,253
===============
Net investment income 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 treatments of wash sales, bond workout expenditures,
and bond discounts.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended October 31, 2005, aggregated $470,683,905 and $381,368,104,
respectively.
60 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. DEFAULTED SECURITIES
The Fund held defaulted securities and/or other securities for which the income
has been deemed uncollectible. At October 31, 2005, the value of these
securities was $70,789,070, representing 1.00% 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. The
securities have been identified on the accompanying Statement of Investments.
7. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, 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 (collectively, the "Company"), entered into
settlements with certain of those regulators.
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop a plan for distribution of the
respective settlement monies. The CAGO approved the distribution plan under the
CAGO Settlement and, in accordance with the terms and conditions of that
settlement, the monies were disbursed to the relevant funds. The Fund did not
participate in the CAGO Settlement. The SEC has not yet approved the
distribution plan pertaining to the December 13, 2004 SEC Order. When approved,
disbursements of settlement monies will be made promptly to the relevant funds,
in accordance with the terms and conditions of that order. The IDC continues to
develop the plan of distribution under the August 2, 2004 SEC Order that
resolved the SEC's market timing investigation.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.
Semiannual Report | 61
FRANKLIN FEDERAL TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. REGULATORY MATTERS (CONTINUED)
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intend 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. 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.
62 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
SHAREHOLDER INFORMATION
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.
Semiannual Report | 63
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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
Mutual European Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth
Fund Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II(1)
VALUE
Franklin Balance Sheet Investment Fund(2)
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(2)
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund(3)
Mutual Shares Fund
BLEND
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund(4)
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund(4)
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(4)
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME(5)
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(6)
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term
Tax-Free Income Fund
Federal Intermediate-Term
Tax-Free Income Fund
New York Intermediate-Term
Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California(7)
Colorado
Connecticut
Florida(7)
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(6)
Michigan(6)
Minnesota(6)
Missouri
New Jersey
New York(7)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(8)
(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) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
(6) Portfolio of insured municipal securities.
(7) 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).
(8) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
09/05 Not part of the semiannual report
[LOGO](R)
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.
SEMIANNUAL 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 S2005 12/05
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)(1), 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. N/A
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 Directors 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) (1) Code of Ethics
(a) (2) 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) 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 December 19, 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 December 19, 2005
By /s/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date December 19, 2005