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
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(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: 10/31/06
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ITEM 1. REPORTS TO STOCKHOLDERS.
[GRAPHIC OMITTED]
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OCTOBER 31, 2006
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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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[GRAPHIC OMITTED]
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 ....................................................... 12
Your Fund's Expenses ...................................................... 15
Financial Highlights and Statement of Investments ......................... 17
Financial Statements ...................................................... 52
Notes to Financial Statements ............................................. 56
Shareholder Information ................................................... 64
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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*
Based on Total Long-Term Investments as of 10/31/06**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ......................................... 62.8%
AA .......................................... 11.8%
A ........................................... 5.8%
BBB ......................................... 12.0%
Below Investment Grade ...................... 1.3%
Not Rated by S&P ............................ 6.3%
* 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 3.2% 0.3%
AA or Aa 0.3% --
A 0.8% --
BBB or Baa 0.4% 0.1%
Below Investment Grade 0.1% 1.1%
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Total 4.8% 1.5%
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We are pleased to bring you Franklin Federal Tax-Free Income Fund's semiannual
report for the period ended October 31, 2006.
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. To avoid the imposition of 28% backup withholding on all Fund
distributions and redemption proceeds, U.S. investors must be properly
certified on Form W-9 and non-U.S. investors on Form W-8BEN.
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 21.
Semiannual Report | 7
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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.
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DIVIDEND DISTRIBUTIONS 2
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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 4.38 cents 3.81 cents 3.81 cents 4.47 cents
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June 4.38 cents 3.84 cents 3.84 cents 4.48 cents
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July 4.38 cents 3.84 cents 3.84 cents 4.47 cents
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August 4.60 cents 4.06 cents 4.06 cents 4.69 cents
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September 4.60 cents 4.04 cents 4.05 cents 4.69 cents
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October 4.60 cents 4.04 cents 4.05 cents 4.69 cents
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PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$11.99 on April 30, 2006, to $12.19 on October 31, 2006. The Fund's Class A
shares paid dividends totaling 26.94 cents per share for the same period. 2 The
Performance Summary beginning on page 12 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.34%, based on an
annualization of October's 4.6 cent per share dividend and the maximum offering
price of $12.73 on October 31, 2006. An investor in the 2006 maximum federal
personal income tax bracket of 35.00% would need to earn a distribution rate of
6.68% 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.
During the reporting period, one of the Fund's holdings came out of default and
became current in its payments. This enabled us to raise the Fund's dividend, 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, 2006, the municipal bond market
continued to face moderate inflation expectations, mixed economic releases,
volatile oil prices, concerns about the dollar, and geopolitical instability.
Municipal bonds underperformed U.S. Treasury bonds for the six-month period. The
Lehman Brothers Municipal Bond Index returned +4.12%, while the Lehman Brothers
U.S. Treasury Index returned +4.57%. 3
During the period, the Federal Reserve Board (Fed) raised the federal funds
target rate from 4.75% to 5.25%. However, since June, the Fed left the rate
unchanged, citing moderate economic growth, a cooling housing market, and the
lagging effect of prior tightening. The Fed stated that some inflation risk may
remain and the extent and timing of any additional interest rate hikes will
depend upon incoming data on inflation and economic growth.
Over the reporting period, interest rates on the short end of the Treasury yield
curve (the spread between short-term and long-term yields) rose, while
longer-term interest rates decreased. The municipal yield curve flattened over
the reporting period but remained steeper than the Treasury curve. According to
Municipal Market Data, the 2-year municipal note yield declined 13 basis points
(100 basis points equal one percentage point), the 10-year yield decreased 44
basis points and the 30-year yield fell 46 basis points during the period. 4
Consequently, long-maturity municipal bonds continued to perform comparatively
well.
Motivated by a relatively low interest rate environment, along with expectations
that rates might rise, municipal bond issuers had been refunding higher yielding
outstanding debt and accessed the debt market to finance capital needs. As a
result of generally higher interest rates in 2006, refunding activity declined
substantially from 2005. So far in 2006, overall supply has been
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 $7
million and be issued as part of a transaction of at least $75 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.
4. Source: Thomson Financial.
Semiannual Report | 9
PORTFOLIO BREAKDOWN
10/31/06
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% OF TOTAL
LONG-TERM INVESTMENTS*
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Prerefunded 23.7%
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Utilities 16.4%
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Transportation 16.3%
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General Obligation 10.4%
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Hospital & Health Care 8.9%
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Subject to Government Appropriations 6.0%
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Tax-Supported 5.3%
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Other Revenue 5.0%
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Higher Education 4.4%
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Corporate-Backed 1.9%
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Housing 1.7%
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* Does not include short-term investments and other net assets.
nearly 12% lighter than the same period in 2005. 5 Demand for municipal bonds
remained strong over the first half of the Fund's fiscal year as investors found
municipal bonds' taxable equivalent yields attractive. Healthy demand came from
a wide range of traditional buyers such as mutual funds, individuals, property
and casualty companies, and also from nontraditional crossover participants.
Crossover buyers typically invest in taxable securities; however, they will
enter the municipal bond market when municipal valuations are attractive. This
broad base of buyers and tight bond supply supported the municipal bond market.
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.
The Fund's credit quality improved during the six months under review as we
found value in AAA-rated insured bonds. We also sought to take advantage of
tightening spreads between higher- and lower-rated securities to reduce or
eliminate our exposure to riskier bonds such as OfficeMax. Credit spreads
tightened to the point where we felt investors were not being adequately
compensated for higher credit risk.
5. Source: THE BOND BUYER.
10 | Semiannual Report
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, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, STATE,
INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE, BUT THE INVESTMENT MANAGER 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.
Semiannual Report | 11
Performance Summary as of 10/31/06
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 10/31/06 4/30/06
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Net Asset Value (NAV) +$0.20 $12.19 $11.99
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DISTRIBUTIONS (5/1/06-10/31/06)
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Dividend Income $0.2694
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CLASS B (SYMBOL: FFTBX) CHANGE 10/31/06 4/30/06
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Net Asset Value (NAV) +$0.20 $12.18 $11.98
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DISTRIBUTIONS (5/1/06-10/31/06)
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Dividend Income $0.2363
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CLASS C (SYMBOL: FRFTX) CHANGE 10/31/06 4/30/06
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Net Asset Value (NAV) +$0.19 $12.18 $11.99
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DISTRIBUTIONS (5/1/06-10/31/06)
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Dividend Income $0.2365
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ADVISOR CLASS (SYMBOL: FAFTX) CHANGE 10/31/06 4/30/06
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Net Asset Value (NAV) +$0.19 $12.19 $12.00
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DISTRIBUTIONS (5/1/06-10/31/06)
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Dividend Income $0.2749
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12 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. 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;
ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE FOR REDEMPTIONS
MADE WITHIN SEVEN DAYS OF PURCHASE.
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CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +3.98% +5.94% +28.28% +70.63%
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Average Annual Total Return 2 -0.43% +1.47% +4.21% +5.03%
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Avg. Ann. Total Return (9/30/06) 3 +0.18% +4.25% +5.06%
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Distribution Rate 4 4.34%
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Taxable Equivalent Distribution Rate 5 6.68%
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30-Day Standardized Yield 6 3.44%
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Taxable Equivalent Yield 5 5.29%
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CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
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Cumulative Total Return 1 +3.69% +5.35% +24.77% +39.63%
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Average Annual Total Return 2 -0.31% +1.35% +4.19% +4.35%
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Avg. Ann. Total Return (9/30/06) 3 +0.05% +4.24% +4.31%
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Distribution Rate 4 3.98%
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Taxable Equivalent Distribution Rate 5 6.12%
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30-Day Standardized Yield 6 3.05%
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Taxable Equivalent Yield 5 4.69%
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CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +3.61% +5.27% +24.75% +61.18%
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Average Annual Total Return 2 +2.61% +4.27% +4.52% +4.89%
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Avg. Ann. Total Return (9/30/06) 3 +3.06% +4.59% +4.93%
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Distribution Rate 4 3.99%
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Taxable Equivalent Distribution Rate 5 6.14%
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30-Day Standardized Yield 6 3.05%
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Taxable Equivalent Yield 5 4.69%
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ADVISOR CLASS 7 6-MONTH 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +3.93% +5.94% +28.78% +71.29%
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Average Annual Total Return 2 +3.93% +5.94% +5.19% +5.53%
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Avg. Ann. Total Return (9/30/06) 3 +4.73% +5.25% +5.57%
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Distribution Rate 4 4.62%
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Taxable Equivalent Distribution Rate 5 7.11%
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30-Day Standardized Yield 6 3.70%
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Taxable Equivalent Yield 5 5.69%
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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.
Semiannual Report | 13
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 OF 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. 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 10/31/06.
5. Taxable equivalent distribution rate and yield assume the 2006 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 10/31/06.
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 +29.70% and +5.80%.
14 | Semiannual Report
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 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.
Semiannual Report | 15
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.
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BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,039.80 $3.14
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Hypothetical (5% return before expenses) $1,000 $1,022.13 $3.11
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,036.90 $6.01
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Hypothetical (5% return before expenses) $1,000 $1,019.31 $5.96
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,036.10 $6.00
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Hypothetical (5% return before expenses) $1,000 $1,019.31 $5.96
- ----------------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,039.30 $2.67
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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.
16 | Semiannual Report
Franklin Federal Tax-Free Income Fund
FINANCIAL HIGHLIGHTS
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SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
--------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period . $ 11.99 $ 12.23 $ 11.91 $ 11.99 $ 11.81 $ 11.77
--------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............. 0.29 0.53 0.57 0.58 0.59 0.62
Net realized and unrealized gains
(losses) ........................... 0.18 (0.22) 0.31 (0.10) 0.18 0.04
--------------------------------------------------------------------------------------
Total from investment operations ..... 0.47 0.31 0.88 0.48 0.77 0.66
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Less distributions from net investment
income .............................. (0.27) (0.55) (0.56) (0.56) (0.59) (0.62)
--------------------------------------------------------------------------------------
Redemption fees ...................... -- d -- d -- d -- -- --
--------------------------------------------------------------------------------------
Net asset value, end of period ....... $ 12.19 $ 11.99 $ 12.23 $ 11.91 $ 11.99 $ 11.81
======================================================================================
Total return c ....................... 3.98% 2.55% 7.62% 4.08% 6.72% 5.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .... $6,420,246 $6,279,940 $6,324,986 $6,357,878 $6,835,209 $6,633,281
Ratios to average net assets:
Expenses ............................ 0.61% e 0.61% 0.61% 0.61% 0.61% 0.59%
Net investment income ............... 4.79% e 4.33% 4.72% 4.79% 4.98% 5.20%
Portfolio turnover rate .............. 3.03% 7.98% 6.74% 6.94% 13.18% 12.95%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 17
Franklin Federal Tax-Free Income Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
---------------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 11.98 $ 12.22 $ 11.90 $ 11.99 $ 11.81 $ 11.77
---------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.26 0.46 0.50 0.51 0.53 0.55
Net realized and unrealized gains (losses) ... 0.18 (0.22) 0.31 (0.11) 0.18 0.04
---------------------------------------------------------------------------
Total from investment operations .............. 0.44 0.24 0.81 0.40 0.71 0.59
---------------------------------------------------------------------------
Less distributions from net investment income . (0.24) (0.48) (0.49) (0.49) (0.53) (0.55)
---------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- -- --
---------------------------------------------------------------------------
Net asset value, end of period ................ $ 12.18 $ 11.98 $ 12.22 $ 11.90 $ 11.99 $ 11.81
===========================================================================
Total return c ................................ 3.69% 1.99% 7.00% 3.41% 6.13% 5.13%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $249,509 $260,416 $289,490 $298,252 $293,285 $220,757
Ratios to average net assets:
Expenses ..................................... 1.17% e 1.17% 1.17% 1.17% 1.17% 1.16%
Net investment income ........................ 4.23% e 3.77% 4.16% 4.23% 4.42% 4.63%
Portfolio turnover rate ....................... 3.03% 7.98% 6.74% 6.94% 13.18% 12.95%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
18 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Federal Tax-Free Income Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
---------------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 11.99 $ 12.23 $ 11.90 $ 11.99 $ 11.81 $ 11.77
---------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.26 0.46 0.50 0.51 0.53 0.55
Net realized and unrealized gains (losses) ... 0.17 (0.22) 0.32 (0.11) 0.18 0.04
---------------------------------------------------------------------------
Total from investment operations .............. 0.43 0.24 0.82 0.40 0.71 0.59
---------------------------------------------------------------------------
Less distributions from net investment income . (0.24) (0.48) (0.49) (0.49) (0.53) (0.55)
---------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- -- --
---------------------------------------------------------------------------
Net asset value, end of period ................ $ 12.18 $ 11.99 $ 12.23 $ 11.90 $ 11.99 $ 11.81
===========================================================================
Total return c ................................ 3.61% 1.99% 7.09% 3.39% 6.15% 5.13%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $419,702 $403,084 $371,438 $373,431 $394,026 $320,087
Ratios to average net assets:
Expenses ..................................... 1.17% e 1.17% 1.17% 1.17% 1.17% 1.16%
Net investment income ........................ 4.23% e 3.77% 4.16% 4.23% 4.42% 4.63%
Portfolio turnover rate ....................... 3.03% 7.98% 6.74% 6.94% 13.18% 12.95%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 19
Franklin Federal Tax-Free Income Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
-----------------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002 f
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 12.00 $ 12.23 $ 11.92 $ 12.00 $ 11.82 $ 11.70
-----------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.30 0.54 0.58 0.59 0.60 0.07
Net realized and unrealized gains (losses) ... 0.16 (0.21) 0.30 (0.10) 0.18 0.10
-----------------------------------------------------------------------------
Total from investment operations .............. 0.46 0.33 0.88 0.49 0.78 0.17
-----------------------------------------------------------------------------
Less distributions from net investment income . (0.27) (0.56) (0.57) (0.57) (0.60) (0.05)
-----------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- -- --
-----------------------------------------------------------------------------
Net asset value, end of period ................ $ 12.19 $ 12.00 $ 12.23 $ 11.92 $ 12.00 $ 11.82
=============================================================================
Total return c ................................ 3.93% 2.63% 7.71% 4.17% 6.81% 1.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $177,025 $155,857 $112,032 $ 97,303 $ 88,142 $ 84,479
Ratios to average net assets:
Expenses ..................................... 0.52% e 0.52% 0.52% 0.52% 0.52% 0.51% e
Net investment income ........................ 4.88% e 4.42% 4.81% 4.88% 5.07% 5.17% e
Portfolio turnover rate ....................... 3.03% 7.98% 6.74% 6.94% 13.18% 12.95%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f For the period March 20, 2002 (effective date) to April 30, 2002.
20 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.4%
MUNICIPAL BONDS 98.4%
ALABAMA 1.2%
Alabama HFA, SFMR, Refunding, Series D-2, GNMA Secured, 5.75%, 10/01/23 .................... $ 1,365,000 $ 1,390,648
Anniston Regional Medical Center Board Revenue, Series A, AMBAC Insured, 5.125%,
6/01/28 ................................................................................... 7,000,000 7,260,400
Auburn University General Fee Revenue, AMBAC Insured, 5.00%, 6/01/34 ....................... 11,025,000 11,548,247
Courtland IDB Solid Waste Disposal Revenue, Champion International Corp. Project, Refunding,
6.00%, 8/01/29 ........................................................................... 12,000,000 12,574,560
Series A, 6.70%, 11/01/29 ................................................................ 4,000,000 4,295,240
Fairfield IDB Environmental Improvement Revenue, USX Corp. Project, Refunding, 5.45%,
9/01/14 ................................................................................... 1,445,000 1,505,690
Mobile GO, Refunding and Improvement, wts., AMBAC Insured, 5.00%, 2/15/30 .................. 5,000,000 5,316,450
Montgomery County Public Building Authority Revenue, wts., Facilities Project, MBIA Insured,
5.00%, 3/01/31 ............................................................................ 6,250,000 6,617,375
University of Alabama General Revenue, Series A,
MBIA Insured, 5.00%, 7/01/29 ............................................................. 10,000,000 10,559,100
MBIA Insured, 5.00%, 7/01/34 ............................................................. 11,500,000 12,089,030
XLCA Insured, 5.00%, 7/01/28 ............................................................. 6,065,000 6,452,068
XLCA Insured, 5.00%, 7/01/32 ............................................................. 3,000,000 3,183,990
University of Alabama University Revenues, Hospital, Series A, MBIA Insured, Pre-Refunded,
5.875%, 9/01/31 ........................................................................... 5,000,000 5,459,850
-----------
88,252,648
-----------
ALASKA 0.4%
Alaska State HFC Revenue, General Housing, Series A, FGIC Insured, 5.00%,
12/01/29 ................................................................................. 4,000,000 4,197,600
12/01/30 ................................................................................. 3,500,000 3,670,450
Alaska State International Airports Revenues, Series B,
AMBAC Insured, Pre-Refunded, 5.25%, 10/01/27 ............................................. 15,000,000 16,340,100
MBIA Insured, 5.00%, 10/01/28 ............................................................ 5,100,000 5,364,231
-----------
29,572,381
-----------
ARIZONA 2.6%
Downtown Phoenix Hotel Corp. Revenue,
Senior Series A, FGIC Insured, 5.00%, 7/01/29 ............................................ 14,465,000 15,325,378
Senior Series A, FGIC Insured, 5.00%, 7/01/36 ............................................ 15,000,000 15,845,550
Maricopa County IDA Health Facilities Revenue, Catholic Healthcare West Project,
Refunding, Series A, 5.00%, 7/01/16 ...................................................... 21,515,000 22,078,693
Series A, Pre-Refunded, 5.00%, 7/01/16 ................................................... 1,485,000 1,499,850
Maricopa County IDA Hospital Facility Revenue, Mayo Clinic Hospital, 5.25%, 11/15/37 ....... 19,000,000 19,654,740
Mesa IDAR, Discovery Health System, Series A, MBIA Insured, Pre-Refunded, 5.75%,
1/01/25 ................................................................................... 22,500,000 24,147,000
Phoenix Civic Improvement Corp. Distribution Revenue, Capital Appreciation, Civic Plaza,
Series B, FGIC Insured, zero cpn. to 7/01/13, 5.50% thereafter,
7/01/32 .................................................................................. 6,000,000 5,199,000
7/01/34 .................................................................................. 5,000,000 4,352,800
7/01/35 .................................................................................. 9,860,000 8,600,287
Semiannual Report | 21
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
ARIZONA (CONTINUED)
Salt River Project Agricultural Improvement and Power District Electric System Revenue,
Salt River Project,
Refunding, Series A, 5.125%, 1/01/27 ..................................................... $35,000,000 $37,187,500
Series B, 5.00%, 1/01/25 ................................................................. 17,500,000 18,436,600
Scottsdale Municipal Property Corp. Excise Tax Revenue, Series A, 5.00%, 7/01/34 ........... 7,500,000 7,919,325
University Medical Center Corp. Revenue, 5.00%, 7/01/35 .................................... 7,000,000 7,217,910
-----------
187,464,633
-----------
ARKANSAS 1.2%
Arkansas State Development Finance Authority HMR, Series B-1, GNMA Secured, 5.80%,
1/01/23 ................................................................................... 175,000 178,874
Arkansas State Development Finance Authority Revenue, White River Medical Center Project,
5.60%, 6/01/24 ............................................................................ 1,200,000 1,235,928
Arkansas State Development Finance Authority SFMR Balloon, MBS Program, Refunding,
Series B, 6.10%, 1/01/29 .................................................................. 135,000 137,801
Arkansas State Student Loan Authority Revenue, Refunding, Sub Series B, 5.60%,
6/01/14 ................................................................................... 325,000 330,184
Pope County PCR, Arkansas Power and Light Co. Project, Refunding, 6.30%,
12/01/16 ................................................................................. 2,600,000 2,604,290
11/01/20 ................................................................................. 60,500,000 61,029,375
Pulaski County Health Facilities Board Revenue, Nazareth Sisters of Charity, St. Vincent's
Infirmary, MBIA Insured, ETM, 6.05%, 11/01/09 ............................................. 125,000 133,914
Saline County Retirement Housing and Healthcare Facilities Board Revenue, Refunding,
AMBAC Insured, 5.80%, 6/01/11 ............................................................. 195,000 197,137
University of Arkansas University Revenues,
AMBAC Insured, 5.00%, 11/01/31 ........................................................... 7,705,000 8,210,371
Construction, University of Arkansas for Medical Sciences Campus, Series B, MBIA Insured,
5.00%, 11/01/28 ........................................................................ 1,000,000 1,060,120
Construction, University of Arkansas for Medical Sciences Campus, Series B, MBIA Insured,
5.00%, 11/01/34 ........................................................................ 9,000,000 9,497,160
Various Facility, Fayetteville Campus, FGIC Insured, 5.00%, 12/01/27 ..................... 5,000,000 5,242,500
-----------
89,857,654
-----------
CALIFORNIA 8.0%
Alhambra COP, Clubhouse Facility Project, 11.25%,
1/01/08 .................................................................................. 410,000 415,022
1/01/09 .................................................................................. 455,000 460,492
1/01/10 .................................................................................. 500,000 506,025
California Infrastructure and Economic Development Bank Revenue, Bay Area Toll Bridges,
first lien, Series A, AMBAC Insured, Pre-Refunded, 5.00%, 7/01/33 ......................... 24,500,000 27,898,640
California State GO,
5.90%, 5/01/08 ........................................................................... 235,000 237,914
6.00%, 5/01/18 ........................................................................... 535,000 540,789
6.00%, 5/01/20 ........................................................................... 850,000 860,659
5.90%, 4/01/23 ........................................................................... 1,200,000 1,211,388
5.125%, 2/01/26 .......................................................................... 7,500,000 7,929,000
5.25%, 4/01/27 ........................................................................... 17,500,000 18,820,725
5.00%, 2/01/32 ........................................................................... 49,000,000 50,871,800
22 | Semiannual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
California State GO, (continued)
Refunding, 5.00%, 2/01/24 ........................................................ $ 5,000,000 $ 5,244,500
Refunding, 5.125%, 6/01/25 ....................................................... 25,000,000 26,080,000
Refunding, 5.00%, 2/01/26 ........................................................ 47,000,000 49,064,540
Various Purpose, 5.25%, 11/01/25 ................................................. 16,260,000 17,458,687
Various Purpose, 5.00%, 8/01/33 .................................................. 25,000,000 26,294,250
Various Purpose, 5.50%, 11/01/33 ................................................. 2,500,000 2,738,000
California State Public Works Board Lease Revenue, Various University of California
Projects,
Refunding, Series D, 5.00%, 5/01/27 ............................................... 10,000,000 10,588,600
Foothill/Eastern Corridor Agency Toll Road Revenue,
Capital Appreciation, Refunding, zero cpn., 1/15/24 .............................. 65,000,000 24,050,650
Capital Appreciation, Refunding, zero cpn. to 7/15/09, 5.85% thereafter, 1/15/23 . 35,000,000 32,061,050
Refunding, 5.75%, 1/15/40 ........................................................ 20,000,000 20,836,400
senior lien, Series A, Pre-Refunded, 6.50%, 1/01/32 .............................. 39,240,000 39,433,453
Golden State Tobacco Securitization Corp. Tobacco Settlement Revenue,
Pre-Refunded, 5.375%, 6/01/28 .................................................... 50,000,000 53,073,500
Series 2003 A-1, 6.25%, 6/01/33 .................................................. 26,000,000 29,018,860
Hacienda La Puente USD, GO, Election of 2000, Series B, FSA Insured, 5.00%, 8/01/27 . 5,000,000 5,271,550
Los Angeles CRDA Housing Revenue, Refunding, Series A, AMBAC Insured, 6.55%,
1/01/27 ........................................................................... 155,000 155,279
a Los Angeles Regional Airports Improvement Corp. Lease Revenue,
Facilities Sub-Lease, International Airport, Refunding, 6.35%, 11/01/25 .......... 7,500,000 7,021,125
United Airlines, Los Angeles International, Refunding, 6.875%, 11/15/12 .......... 8,400,000 7,916,076
Los Angeles USD, GO, Series A, MBIA Insured, 5.00%, 1/01/28 ......................... 25,000,000 26,388,000
Los Angeles Wastewater System Revenue, Refunding, MBIA Insured, 5.00%, 6/01/25 ...... 10,000,000 10,555,300
Metropolitan Water District Southern California Waterworks Revenue, Series B-2,
FGIC Insured, 5.00%, 10/01/27 ..................................................... 9,645,000 10,210,101
Pajaro Valley USD, GO, Series A, FSA Insured, Pre-Refunded, 5.00%, 8/01/26 ......... 5,285,000 5,757,320
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 50,144,500
senior lien, 5.00%, 1/01/33 ...................................................... 5,000,000 4,985,200
senior lien, ETM, zero cpn., 1/01/23 ............................................. 7,000,000 3,541,930
------------
577,641,325
------------
COLORADO 3.3%
Colorado Health Facilities Authority Revenue,
Catholic Health Initiatives, Series A, Pre-Refunded, 5.00%, 12/01/28 ............. 2,000,000 2,064,540
Kaiser Permanente, Series A, ETM, 5.35%, 11/01/16 ................................ 13,250,000 13,579,262
Kaiser Permanente, Series B, ETM, 5.35%, 8/01/15 ................................. 20,200,000 21,548,754
Colorado Springs Airport Revenue, Series C, zero cpn.,
1/01/07 .......................................................................... 1,675,000 1,664,113
1/01/08 .......................................................................... 800,000 758,248
1/01/11 .......................................................................... 1,450,000 1,202,935
Colorado Water Resources and Power Development Authority Water Resources Revenue,
Arapahoe County Water Improvement, Series E, MBIA Insured, 5.00%, 12/01/35 ........ 10,000,000 10,613,800
Denver City and County Airport Revenue,
Refunding, Series E, MBIA Insured, 5.25%, 11/15/23 ............................... 43,000,000 44,157,990
System, Refunding, Series A, XLCA Insured, 5.00%, 11/15/25 ....................... 8,000,000 8,538,880
Semiannual Report | 23
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
COLORADO (CONTINUED)
Denver City and County School District No. 1 COP, Denver School Facilities Leasing Corp.,
AMBAC Insured, 5.50%, 12/15/08 .......................................................... $ 1,000,000 $ 1,002,210
Denver City and County Special Facilities Airport Revenue, United Airlines Inc. Project,
Series A, 6.875%, 10/01/32 .............................................................. 47,980,000 49,673,694
Denver Convention Center Hotel Authority Revenue, Senior Series A, XLCA Insured,
Pre-Refunded, 4.75%, 12/01/28 ........................................................... 13,500,000 14,462,010
E-470 Public Highway Authority Revenue, Refunding, Senior Series A, MBIA Insured, 5.00%,
9/01/21 ................................................................................. 12,715,000 12,963,960
Littleton MFHR, Riverpointe I, Refunding, Series A, FSA Insured, 5.95%, 4/01/29 .......... 10,765,000 11,300,666
Mesa State College Auxiliary Facilities Enterprise Revenue, XLCA Insured, 5.00%,
5/15/35 ................................................................................. 9,950,000 10,457,450
Northwest Parkway Public Highway Authority Revenue, Series A, AMBAC Insured, 5.125%,
6/15/31 ................................................................................. 7,500,000 7,932,300
Pueblo County School District No. 060 GO, FGIC Insured, 5.00%, 12/15/22 .................. 5,500,000 5,804,755
Thornton Water Enterprise Revenue, MBIA Insured, 5.00%, 12/01/34 ......................... 10,000,000 10,563,900
University of Colorado Hospital Authority Revenue, Series A, AMBAC Insured, 5.00%,
11/15/29 ................................................................................ 8,500,000 8,781,605
------------
237,071,072
------------
CONNECTICUT 0.5%
Connecticut State GO, Series D, Pre-Refunded, 5.00%, 11/15/20 ............................ 8,000,000 8,537,920
Connecticut State Health and Educational Facilities Authority Revenue, Yale-New Haven
Hospital, Series J-1, AMBAC Insured, 5.00%, 7/01/31 ..................................... 10,500,000 11,221,140
Connecticut State Special Tax Obligation Revenue, Transportation Infrastructure, Series B,
AMBAC Insured, Pre-Refunded, 5.00%, 12/01/17 ............................................ 11,870,000 12,796,453
Meriden Housing Authority MFR, Connecticut Baptist Housing Project, GNMA Secured,
5.80%, 8/20/39 .......................................................................... 2,670,000 2,842,162
------------
35,397,675
------------
FLORIDA 4.6%
Broward County School Board COP,
MBIA Insured, 5.00%, 7/01/28 ........................................................... 17,415,000 18,319,535
Series A, FSA Insured, 5.25%, 7/01/24 .................................................. 25,000,000 26,754,750
b Cape Coral Water and Sewer Revenue, AMBAC Insured, 5.00%, 10/01/36 ....................... 5,000,000 5,325,550
Escambia County Health Facilities Authority Revenue, Ascension Health Credit, Series A-2,
AMBAC Insured, Pre-Refunded, 5.75%, 11/15/29 ............................................ 10,000,000 10,696,200
Florida State Board of Education Capital Outlay GO, Public Education, Refunding, Series D,
5.75%, 6/01/22 ......................................................................... 10,000,000 10,747,600
6.00%, 6/01/23 ......................................................................... 17,500,000 21,808,500
Florida State Mid-Bay Bridge Authority Revenue, Series A, AMBAC Insured, zero cpn.,
10/01/23 ............................................................................... 5,000,000 2,188,450
10/01/24 ............................................................................... 3,000,000 1,242,900
Hernando County School Board COP, MBIA Insured, 5.00%, 7/01/30 ........................... 10,000,000 10,594,800
Hillsborough County IDAR, Refunding, Series A, 5.25%, 10/01/24 ........................... 13,500,000 14,400,585
Hillsborough County School Board COP,
MBIA Insured, 5.00%, 7/01/27 ........................................................... 5,000,000 5,253,750
Refunding, Series A, MBIA Insured, 5.00%, 7/01/25 ...................................... 5,000,000 5,165,000
24 | Semiannual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Jacksonville Capital Improvement Revenue, Series A, AMBAC Insured, 5.00%, 10/01/30 ... $20,175,000 $ 21,054,226
Jacksonville Excise Taxes Revenue, Series A, AMBAC Insured, 5.00%, 10/01/32 .......... 6,015,000 6,387,810
Jacksonville Sales Tax Revenue, AMBAC Insured, 5.00%,
10/01/23 ........................................................................... 6,000,000 6,300,420
10/01/26 ........................................................................... 20,000,000 20,919,400
Jacksonville Transportation Revenue, MBIA Insured, 5.00%, 10/01/31 ................... 5,000,000 5,207,200
Lake County School Board COP, Series A, AMBAC Insured, 5.00%, 6/01/30 ................ 12,000,000 12,676,200
Lee County Transportation Facilities Revenue, Sanibel Bridges and Causeway, Series B,
CIFG Insured, 5.00%, 10/01/35 ....................................................... 10,645,000 11,199,392
Miami-Dade County Aviation Revenue, Miami International Airport, Refunding, Series A,
CIFG Insured, 5.00%, 10/01/38 ....................................................... 15,000,000 15,645,750
Miami-Dade County Public Facilities Revenue, Jackson Health System, Series A,
MBIA Insured, 5.00%, 6/01/30 ........................................................ 10,630,000 11,213,374
Miami-Dade County Special Obligation Revenue,
Juvenile Courthouse Project, Series A, AMBAC Insured, 5.00%, 4/01/32 ............... 10,000,000 10,491,000
Sub Series B, MBIA Insured, zero cpn., 10/01/34 .................................... 5,500,000 1,260,215
Orlando and Orange County Expressway Authority Revenue, Series B, AMBAC Insured,
5.00%, 7/01/28 ...................................................................... 10,630,000 11,175,851
Orlando Utilities Commission Water and Electric Revenue, Refunding, 5.00%, 10/01/22 .. 7,500,000 7,930,725
Palm Beach County School Board COP,
Refunding, Series D, FSA Insured, 5.00%, 8/01/28 ................................... 25,000,000 26,061,750
Series A, FGIC Insured, Pre-Refunded, 6.00%, 8/01/23 ............................... 5,100,000 5,573,229
Port St. Lucie GO, MBIA Insured, 5.00%, 7/01/32 ...................................... 7,000,000 7,423,570
Tampa Bay Water Utility System Revenue, Series B, FGIC Insured,
5.00%, 10/01/26 .................................................................... 5,245,000 5,471,846
5.00%, 10/01/31 .................................................................... 10,000,000 10,414,400
Pre-Refunded, 5.00%, 10/01/26 ...................................................... 4,755,000 5,067,499
------------
333,971,477
------------
GEORGIA 3.8%
Atlanta Airport Passenger Facility Charge Revenue, General, sub. lien,
Refunding, Series C, FSA Insured, 5.00%, 1/01/33 ................................... 29,520,000 31,012,236
Series J, FSA Insured, 5.00%, 1/01/29 .............................................. 10,000,000 10,554,500
Atlanta Airport Revenue, General,
Series A, FGIC Insured, Pre-Refunded, 5.50%, 1/01/26 ............................... 18,295,000 19,544,000
Series G, FSA Insured, 5.00%, 1/01/30 .............................................. 18,285,000 19,298,903
Atlanta Development Authority Revenue,
Tuff Yamacraw LLC Project, Refunding, Series A, AMBAC Insured, 5.00%, 1/01/24 ...... 6,385,000 7,129,683
Tuff Yamacraw LLC Project, Refunding, Series A, AMBAC Insured, 5.00%, 1/01/25 ...... 6,955,000 7,779,307
Tuff Yamacraw LLC Project, Refunding, Series A, AMBAC Insured, 5.00%, 1/01/26 ...... 5,000,000 5,607,200
Tuff Yamacraw LLC Project, Refunding, Series A, AMBAC Insured, 5.00%, 1/01/27 ...... 5,000,000 5,620,400
Yamacraw Design Center Project, Series A, MBIA Insured, Pre-Refunded, 5.125%,
1/01/27 .......................................................................... 5,000,000 5,348,700
Atlanta Development Authority Student Housing Revenue, Facilities, Piedmont Ellis LLC,
Series A, XLCA Insured, 5.00%, 9/01/30 .............................................. 10,000,000 10,592,000
Atlanta Water and Wastewater Revenue,
FSA Insured, 5.00%, 11/01/34 ....................................................... 20,205,000 21,321,124
Refunding, Series A, MBIA Insured, 5.00%, 11/01/33 ................................. 13,000,000 13,557,310
Semiannual Report | 25
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
GEORGIA (CONTINUED)
Cobb County Hospital Authority Revenue, Refunding, AMBAC Insured, 5.00%, 4/01/28 ........ $18,000,000 $ 19,125,180
De Kalb County Water and Sewer Revenue, 5.25%, 10/01/25 ................................. 12,000,000 12,865,800
Griffin Combined Public Utility Revenue, Refunding and Improvement, AMBAC Insured,
5.00%, 1/01/25 ......................................................................... 5,000,000 5,323,450
Gwinnett County Hospital Authority Revenue, Anticipation Certificates, Gwinnett Hospital
Systems Inc. Project, Series B, MBIA Insured, 5.30%, 9/01/27 ........................... 10,000,000 10,700,700
Gwinnett County Water and Sewer Authority Revenue, Pre-Refunded, 5.25%, 8/01/25 ......... 20,000,000 21,773,400
Henry County and Henry County Water and Sewer Authority Revenue, Refunding and
Improvement, Series A, MBIA Insured, 5.00%, 2/01/26 .................................... 5,770,000 6,138,126
Metropolitan Atlanta Rapid Transit Authority Sales Tax Revenue, Second Indenture Series,
MBIA Insured, 5.00%,
7/01/23 ............................................................................... 10,150,000 10,715,862
7/01/25 ............................................................................... 12,160,000 12,810,803
7/01/26 ............................................................................... 12,800,000 13,470,720
Richmond County Development Authority Educational Facilities Revenue, MCG-PPG Cancer
Research Center, Series A, AMBAC Insured, 5.00%, 12/15/29 .............................. 5,000,000 5,314,900
------------
275,604,304
------------
HAWAII 1.1%
Hawaii State Airports System Revenue, Second Series,
ETM, 6.90%, 7/01/12 ................................................................... 500,000 551,465
MBIA Insured, ETM, 6.90%, 7/01/12 ..................................................... 400,000 441,912
Hawaii State Department of Budget and Finance Special Purpose Revenue,
Hawaiian Electric Co. Project, Series B, MBIA Insured, 5.875%, 12/01/26 ............... 500,000 510,330
Kaiser Permanente, Series A, ETM, 5.15%, 3/01/15 ...................................... 4,000,000 4,156,560
Wilcox Memorial Hospital Projects, Refunding, 5.25%, 7/01/13 .......................... 600,000 622,842
Wilcox Memorial Hospital Projects, Refunding, 5.35%, 7/01/18 .......................... 2,040,000 2,121,580
Wilcox Memorial Hospital Projects, Refunding, 5.50%, 7/01/28 .......................... 2,410,000 2,495,531
Hawaii State GO,
Refunding, Series BW, 6.375%, 3/01/11 ................................................. 95,000 105,632
Series BW, ETM, 6.375%, 3/01/11 ....................................................... 5,000 5,566
Series CA, 6.00%, 1/01/09 ............................................................. 100,000 105,069
Series CT, FSA Insured, Pre-Refunded, 5.875%, 9/01/19 ................................. 5,000,000 5,359,350
Hawaii State Housing Finance and Development Corp. SFM Purchase Revenue, Refunding,
Series A, FNMA Insured, 5.75%, 7/01/30 ................................................. 440,000 440,717
Honolulu City and County Board of Water Supply Water System Revenue, Refunding, Series A,
MBIA Insured, 5.00%, 7/01/36 ........................................................... 20,000,000 21,177,200
Honolulu City and County GO,
Refunding, Series C, FGIC Insured, 5.00%, 7/01/20 ..................................... 5,250,000 5,460,682
Series 1992, ETM, 6.00%, 12/01/14 ..................................................... 150,000 174,578
Honolulu City and County MFHR, Waipahu Towers Project, Series A, 6.90%, 6/20/35 ......... 1,190,000 1,199,520
Honolulu City and County Wastewater System Revenue,
First Bond Resolution, Senior Series, AMBAC Insured, Pre-Refunded, 5.125%,
7/01/31 ............................................................................. 8,000,000 8,543,600
Second Bond Resolution, Refunding, junior series, FGIC Insured, 5.00%, 7/01/23 ........ 10,000,000 10,378,100
Senior Series A, FGIC Insured, 5.00%, 7/01/30 ......................................... 15,000,000 15,918,900
Kauai County GO, Refunding, Series C, AMBAC Insured, 5.95%, 8/01/10 ..................... 220,000 238,346
------------
80,007,480
------------
26 | Semiannual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
IDAHO 0.0% c
Idaho Housing Agency Revenue, Refunding, Series D-1, 6.45%, 7/01/19 .................... $ 260,000 $ 260,434
-----------
ILLINOIS 5.1%
b Aurora Waterworks and Sewer Revenue, XLCA Insured, 4.75%, 12/01/36 ..................... 7,765,000 7,868,740
Chicago Board of Education GO, Chicago School Reform, MBIA Insured, Pre-Refunded,
6.00%, 12/01/16 ....................................................................... 9,700,000 9,912,042
Chicago COP, AMBAC Insured, 7.75%, 7/15/11 ............................................. 10,100,000 11,429,968
Chicago GO, Lakefront Millennium Parking Facilities, MBIA Insured, 5.75%, 1/01/23 ...... 8,955,000 10,794,626
Chicago Sales Tax Revenue, FGIC Insured, Pre-Refunded, 5.375%, 1/01/27 ................. 3,060,000 3,183,349
Chicago SFMR, Collateral, Series A, GNMA Secured, 7.25%, 9/01/28 ....................... 15,000 15,031
Cook County Tinley Park School District No. 140 GO, Refunding, Series A, AMBAC Insured,
6.00%, 12/01/15 ....................................................................... 8,750,000 8,941,275
Illinois Development Finance Authority Hospital Revenue,
Adventist Health System, Sunbelt Obligation, Pre-Refunded, 5.65%, 11/15/24 ........... 6,030,000 6,423,699
Adventist Health System, Sunbelt Obligation, Pre-Refunded, 5.50%, 11/15/29 ........... 20,000,000 21,220,400
Sisters of St. Francis Health Services, Refunding, MBIA Insured, Pre-Refunded, 5.375%,
11/01/27 ........................................................................... 5,000,000 5,189,950
Illinois Development Finance Authority Revenue, Provena Health, Refunding, Series A,
MBIA Insured, 5.50%, 5/15/21 .......................................................... 10,000,000 10,336,100
Illinois HDA Revenue,
MF Program, Series 1, 6.625%, 9/01/12 ................................................ 4,385,000 4,405,829
MF Program, Series 1, 6.75%, 9/01/21 ................................................. 3,285,000 3,302,279
MFH, Refunding, Series A, 7.10%, 7/01/26 ............................................. 9,305,000 9,321,377
Illinois Health Facilities Authority Revenue,
Children's Memorial Hospital, Series A, AMBAC Insured, Pre-Refunded, 5.75%,
8/15/25 ............................................................................ 9,120,000 9,711,888
Loyola University Health Systems, Refunding, Series A, MBIA Insured, 5.625%,
7/01/18 ............................................................................ 7,090,000 7,249,454
Loyola University Health Systems, Series A, MBIA Insured, ETM, 5.625%, 7/01/18 ....... 2,105,000 2,464,071
Methodist Medical Center, Refunding, MBIA Insured, 5.25%, 11/15/21 ................... 2,885,000 2,982,484
Northwestern Medical Facility Foundation, Refunding, MBIA Insured, 5.125%,
11/15/28 ........................................................................... 7,500,000 7,706,025
South Suburban Hospital, ETM, 7.00%, 2/15/18 ......................................... 4,200,000 5,076,750
Victory Health Services, Series A, Pre-Refunded, 5.75%, 8/15/27 ...................... 8,015,000 8,227,478
Illinois State GO, FSA Insured, 5.00%, 9/01/29 ......................................... 12,000,000 12,756,000
Kane County School District No. 129 GO, Series A, FGIC Insured, Pre-Refunded, 5.25%,
2/01/22 ............................................................................... 5,285,000 5,708,540
Metropolitan Pier and Exposition Authority Dedicated State Tax Revenue,
Capital Appreciation, 2002, Series A, FGIC Insured, ETM, zero cpn., 6/15/08 .......... 7,000,000 6,607,650
Capital Appreciation, 2002, Series A, FGIC Insured, ETM, zero cpn., 6/15/09 .......... 9,275,000 8,433,108
Capital Appreciation, 2002, Series A, FGIC Insured, zero cpn., 6/15/08 ............... 185,000 174,520
Capital Appreciation, 2002, Series A, FGIC Insured, zero cpn., 6/15/09 ............... 235,000 213,340
Capital Appreciation, McCormick Place, Refunding, Series B, MBIA Insured, zero cpn. to
6/14/12, 5.50% thereafter, 6/15/20 ................................................. 8,240,000 6,935,773
Capital Appreciation, McCormick Place, Refunding, Series B, MBIA Insured, zero cpn. to
6/14/12, 5.55% thereafter, 6/15/21 ................................................. 6,000,000 5,045,940
Capital Appreciation, McCormick Place, Refunding, Series B, zero cpn. to 6/14/17,
5.65% thereafter, 6/15/22 .......................................................... 30,000,000 20,275,500
Semiannual Report | 27
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
ILLINOIS (CONTINUED)
Metropolitan Pier and Exposition Authority Dedicated State Tax Revenue, (continued)
Capital Appreciation, Series A, FGIC Insured, ETM, zero cpn., 6/15/08 ................... $ 1,315,000 $ 1,241,294
Capital Appreciation, Series A, FGIC Insured, ETM, zero cpn., 6/15/09 ................... 1,490,000 1,354,753
FGIC Insured, ETM, 6.50%, 6/15/07 ....................................................... 5,000 5,021
McCormick Place Expansion Project, 6.50%, 6/15/22 ....................................... 5,000 5,004
McCormick Place Expansion Project, 6.50%, 6/15/27 ....................................... 555,000 555,494
McCormick Place Expansion Project, Refunding, FGIC Insured, 5.25%, 12/15/28 ............. 39,580,000 41,281,544
McCormick Place Expansion Project, Series A, FGIC Insured, 6.65%, 6/15/12 ............... 250,000 250,237
McCormick Place Expansion Project, Series A, FGIC Insured, ETM, zero cpn., 6/15/10 ...... 7,845,000 6,863,512
McCormick Place Expansion Project, Series A, FGIC Insured, ETM, zero cpn., 6/15/11 ...... 9,690,000 8,170,123
McCormick Place Expansion Project, Series A, FGIC Insured, zero cpn., 6/15/10 ........... 155,000 135,656
McCormick Place Expansion Project, Series A, MBIA Insured, 5.00%, 12/15/28 .............. 26,795,000 28,005,062
Metropolitan Pier and Exposition Authority Hospitality Facilities Revenue, McCormick
Place Convention Center, ETM, 7.00%, 7/01/26 ............................................. 12,000,000 16,038,720
Regional Transportation Authority Revenue, Series A, AMBAC Insured, 7.20%, 11/01/20 ....... 1,000,000 1,250,180
Southwestern Illinois Development Authority IDR, Spectrulite Consortium Inc. Project,
6.625%, 2/01/10 .......................................................................... 2,520,000 2,523,226
University of Illinois University Revenues,
Auxiliary Facilities, AMBAC Insured, zero cpn., 4/01/10 ................................. 14,250,000 12,553,822
Auxiliary Facilities System, Refunding, Series A, AMBAC Insured, 5.00%, 4/01/30 ......... 5,000,000 5,161,400
Auxiliary Facilities System, Refunding, Series B, FGIC Insured, 5.125%, 4/01/26 ......... 3,585,000 3,747,974
Auxiliary Facilities System, Series B, FGIC Insured, Pre-Refunded, 5.125%, 4/01/26 ...... 8,415,000 8,958,525
Upper River Valley Development Authority Environmental Facilities Revenue, General Electric
Co. Project, 5.45%, 2/01/23 .............................................................. 3,600,000 3,730,608
Will County Exempt Facilities Revenue, Mobil Oil Refining Corp. Project, 6.00%, 2/01/27 ... 7,130,000 7,234,454
------------
370,979,795
------------
INDIANA 1.4%
Indiana Bond Bank Revenue, Special Program, Hendricks Redevelopment, Series B,
Pre-Refunded, 6.20%, 2/01/23 ............................................................. 3,500,000 3,591,385
Indiana Health Facility Financing Authority Hospital Revenue,
Community Foundation Northwest Indiana, Refunding, Series A, 6.375%, 8/01/21 ............ 17,500,000 18,749,150
Jackson County Schneck Memorial Hospital, Refunding, 5.25%, 2/15/22 ..................... 1,200,000 1,228,200
Indiana Health Facility Financing Authority Revenue, Greenwood Village South Project,
Refunding, 5.625%, 5/15/28 ............................................................... 1,750,000 1,762,478
Indiana State Development Financing Authority Environmental Revenue, Refunding, 6.25%,
7/15/30 .................................................................................. 2,000,000 2,049,840
Indiana State Educational Facilities Authority Revenue,
DePauw University Project, Refunding, 5.30%, 7/01/16 .................................... 600,000 629,838
Valparaiso University, Refunding, AMBAC Insured, 5.125%, 10/01/23 ....................... 2,015,000 2,094,774
Indiana State HFA, SFMR, Refunding,
Series A, 6.75%, 1/01/10 ................................................................ 2,365,000 2,376,565
Series A, 6.80%, 1/01/17 ................................................................ 12,835,000 13,091,700
Series A-2, GNMA Secured, 6.10%, 7/01/22 ................................................ 195,000 199,333
Indiana Transportation Finance Authority Highway Revenue,
Pre-Refunded, 5.375%, 12/01/25 .......................................................... 2,235,000 2,385,885
Refunding, 5.375%, 12/01/25 ............................................................. 12,765,000 13,616,808
28 | Semiannual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
INDIANA (CONTINUED)
Indianapolis Local Public Improvement Bond Bank Revenue, Waterworks Project, Series A,
MBIA Insured, Pre-Refunded, 5.25%, 7/01/33 .................................................. $19,020,000 $20,654,008
Jasper County EDR, Georgia-Pacific Corp. Project,
5.625%, 12/01/27 ........................................................................... 3,500,000 3,530,765
Refunding, 6.70%, 4/01/29 .................................................................. 3,000,000 3,149,640
Madison County Authority Anderson Hospital Revenue, Refunding, Series A, BIG Insured,
8.00%, 1/01/14 .............................................................................. 95,000 95,157
New Albany Floyd County School Building Corp. Revenue, first mortgage, MBIA Insured,
Pre-Refunded, 5.375%, 1/15/18 ............................................................... 1,500,000 1,574,220
Petersburg PCR, 5.75%, 8/01/21 ............................................................... 5,000,000 5,367,150
PHM Multi-School Building Corp. Industry Revenue, first mortgage, FSA Insured,
Pre-Refunded, 5.90%, 7/15/14 ................................................................ 1,000,000 1,024,610
Purdue University of Indiana University Revenue, Student Fee, Series Q, 5.375%,
7/01/07 ..................................................................................... 1,355,000 1,371,219
Rochester Community Multi-School Building Corp. Revenue, first mortgage, AMBAC Insured,
Pre-Refunded, 5.20%, 1/15/18 ................................................................ 1,000,000 1,038,940
-----------
99,581,665
-----------
KANSAS 0.4%
Burlington PCR, Kansas Gas and Electric Co. Project, Refunding, Series A, MBIA Insured,
5.30%, 6/01/31 .............................................................................. 18,000,000 19,406,340
Kansas State Development Finance Authority Hospital Revenue, Susan B. Allen Memorial
Hospital, Series Z, Radian Insured, 5.25%, 12/15/23 ......................................... 2,000,000 2,107,240
Kansas State Development Finance Authority Revenue, Water Pollution Control,
Revolving Fund,
Refunding, Series II, 5.125%, 11/01/18 ..................................................... 3,450,000 3,688,533
Series II, Pre-Refunded, 5.125%, 11/01/18 .................................................. 1,550,000 1,662,298
Newton Hospital Revenue, Newton Healthcare Corp., Refunding, Series A, 5.70%,
11/15/18 .................................................................................... 1,875,000 1,910,737
Shawnee County USD No. 437 Auburn-Washburn GO, Refunding, FSA Insured, 5.00%,
9/01/20 ..................................................................................... 2,500,000 2,616,450
-----------
31,391,598
-----------
KENTUCKY 1.5%
Jefferson County Capital Projects Corp. Lease Revenue, Refunding, Series A, zero cpn.,
8/15/07 .................................................................................... 1,640,000 1,593,932
8/15/08 .................................................................................... 4,505,000 4,220,644
8/15/09 .................................................................................... 4,580,000 4,095,253
8/15/10 .................................................................................... 4,620,000 3,956,522
8/15/13 .................................................................................... 6,825,000 5,175,602
8/15/14 .................................................................................... 6,860,000 4,990,444
8/15/16 .................................................................................... 7,005,000 4,677,939
8/15/17 .................................................................................... 7,115,000 4,520,942
a Kenton County Airport Board Airport Revenue, Special Facilities, Delta Airlines Inc. Project,
Series A, 7.50%, 2/01/20 ................................................................... 10,000,000 6,075,000
Series A, 7.125%, 2/01/21 .................................................................. 9,330,000 5,644,650
Series B, 7.25%, 2/01/22 ................................................................... 3,350,000 2,026,750
Semiannual Report | 29
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
KENTUCKY (CONTINUED)
Kentucky Economic Development Finance Authority Health System Revenue, Norton
Healthcare Inc.,
Refunding, Series B, MBIA Insured, zero cpn., 10/01/18 ................................... $ 8,585,000 $ 5,052,873
Refunding, Series C, MBIA Insured, 6.05%, 10/01/19 ....................................... 7,385,000 8,482,116
Refunding, Series C, MBIA Insured, 6.10%, 10/01/21 ....................................... 6,050,000 6,951,148
Refunding, Series C, MBIA Insured, 6.10%, 10/01/23 ....................................... 11,295,000 12,947,684
Series C, MBIA Insured, Pre-Refunded, 6.05%, 10/01/19 .................................... 3,695,000 4,273,268
Series C, MBIA Insured, Pre-Refunded, 6.10%, 10/01/21 .................................... 2,875,000 3,333,678
Series C, MBIA Insured, Pre-Refunded, 6.10%, 10/01/23 .................................... 5,650,000 6,551,401
Kentucky Economic Development Finance Authority Hospital System Revenue, Appalachian
Regional Health Center Facility, Refunding and Improvement,
5.80%, 10/01/12 .......................................................................... 1,000,000 1,021,300
5.85%, 10/01/17 .......................................................................... 5,615,000 5,695,912
Owensboro Electric Light and Power Revenue, Series B, AMBAC Insured, zero cpn.,
1/01/08 ................................................................................... 5,250,000 5,032,913
------------
106,319,971
------------
LOUISIANA 2.2%
Calcasieu Parish Inc. IDB, PCR, Gulf States Utilities Co. Project, Refunding, 6.75%,
10/01/12 .................................................................................. 14,285,000 14,302,142
Calcasieu Parish Memorial Hospital Service District Revenue, Lake Charles Parish Memorial
Hospital Project, Refunding, Series A, Connie Lee Insured,
6.375%, 12/01/12 ......................................................................... 4,310,000 4,629,845
6.50%, 12/01/18 .......................................................................... 5,530,000 6,652,645
6.65%, 12/01/21 .......................................................................... 3,145,000 3,148,114
6.85%, 12/01/22 .......................................................................... 11,040,000 11,067,931
East Baton Rouge Mortgage Finance Authority SFM Purchase Revenue, Series A, 6.80%,
10/01/28 .................................................................................. 955,000 959,221
Ernest N. Morial New Orleans Exhibit Hall Authority Special Tax, senior sub. note, Series A,
AMBAC Insured, 5.00%, 7/15/33 ............................................................. 30,350,000 31,288,118
Greater New Orleans Expressway Commission Revenue, Refunding, AMBAC Insured, 5.00%,
11/01/27 .................................................................................. 5,655,000 5,944,197
Jefferson Parish Home Mortgage Authority SFMR, Refunding, Series G-2, GNMA Secured,
5.55%, 6/01/32 ............................................................................ 1,245,000 1,266,103
Lafayette Public Improvement Sales Tax GO, Series B, MBIA Insured, 4.75%, 3/01/30 .......... 5,055,000 5,268,523
Louisiana Local Government Environmental Facilities and CDA Revenue,
Jefferson Parking Garage Project, AMBAC Insured, 5.00%, 9/01/31 .......................... 4,290,000 4,438,305
MBIA Insured, 5.00%, 12/01/26 ............................................................ 5,605,000 5,861,485
Louisiana Public Facilities Authority Revenue,
Ochsner Clinic Foundation Project, Refunding, Series B, 5.75%, 5/15/23 ................... 10,000,000 10,796,400
Tulane University, Refunding, Series A, AMBAC Insured, 5.00%, 7/01/32 .................... 5,000,000 5,191,750
Louisiana State Gas and Fuels Tax Revenue, Series A,
AMBAC Insured, 5.00%, 6/01/27 ............................................................ 19,250,000 20,008,065
b FSA Insured, 5.00%, 5/01/36 .............................................................. 10,000,000 10,621,100
b FSA Insured, 4.75%, 5/01/39 .............................................................. 5,000,000 5,095,700
Louisiana State GO, Series A, FGIC Insured, Pre-Refunded, 5.00%, 11/15/19 .................. 9,000,000 9,493,200
30 | Semiannual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
LOUISIANA (CONTINUED)
Pointe Coupee Parish PCR, Gulf States Utilities Co. Project, Refunding, 6.70%, 3/01/13 .. $ 2,200,000 $ 2,208,712
West Feliciana Parish PCR, Gulf States Utilities Co. Project, 7.00%, 11/01/15 ........... 3,050,000 3,072,448
------------
161,314,004
------------
MAINE 0.2%
Jay Solid Waste Disposal Revenue, International Paper Co. Project, Refunding, Series B,
6.20%, 9/01/19 ......................................................................... 8,000,000 8,486,800
Maine Health and Higher Educational Facilities Authority Revenue, Series A, MBIA Insured,
5.00%, 7/01/32 ......................................................................... 6,045,000 6,348,217
Maine State Housing Authority Mortgage Purchase Revenue, Refunding, Series D-1, 5.05%,
11/15/16 ............................................................................... 45,000 45,079
------------
14,880,096
------------
MARYLAND 0.6%
Baltimore Convention Center Hotel Revenue, Senior Series A, XLCA Insured, 5.00%,
9/01/32 ................................................................................ 3,500,000 3,729,180
Maryland State EDC Student Housing Revenue, University of Maryland College Park Projects,
Refunding, CIFG Insured, 5.00%, 6/01/33 ................................................ 15,000,000 15,937,800
Maryland State Health and Higher Educational Facilities Authority Revenue,
Johns Hopkins University, Series A, 5.00%, 7/01/33 .................................... 10,000,000 10,539,000
b Western Maryland Health, Series A, MBIA Insured, 5.00%, 7/01/34 ....................... 10,000,000 10,629,400
Prince George's County GO, Consolidated Public Improvement, Series A, 5.00%,
10/01/23 ............................................................................... 5,385,000 5,757,480
------------
46,592,860
------------
MASSACHUSETTS 3.8%
Massachusetts Bay Transportation Authority Revenue, General Transportation System,
Refunding, Series C, 5.00%, 3/01/24 ................................................... 14,000,000 14,207,480
Series A, FGIC Insured, 5.00%, 3/01/23 ................................................ 1,035,000 1,050,339
Series A, FGIC Insured, Pre-Refunded, 5.00%, 3/01/23 .................................. 2,965,000 3,007,933
Massachusetts Bay Transportation Authority Revenue Special Assessment,
Refunding, Series A, 5.25%, 7/01/30 ................................................... 6,785,000 7,127,439
Series A, Pre-Refunded, 5.25%, 7/01/30 ................................................ 25,740,000 27,246,820
Massachusetts Bay Transportation Authority Sales Tax Revenue, Refunding, Senior Series A,
5.00%, 7/01/28 ......................................................................... 10,000,000 11,237,000
Massachusetts Special Obligation Revenue, Consolidation Loan, Series A, FGIC Insured,
Pre-Refunded, 5.00%, 6/01/22 ........................................................... 15,070,000 16,119,324
Massachusetts State Development Finance Agency Revenue, Massachusetts/Saltonstall
Redevelopment Building Corp., Series A, MBIA Insured, 5.125%, 8/01/28 .................. 6,735,000 7,112,699
Massachusetts State GO,
MBIA Insured, Pre-Refunded, 5.00%, 8/01/22 ............................................ 4,100,000 4,393,068
Series B, ETM, 6.50%, 8/01/08 ......................................................... 5,845,000 6,124,917
Massachusetts State Health and Educational Facilities Authority Revenue,
Berkshire Health System, Series E, 6.25%, 10/01/31 .................................... 2,250,000 2,420,190
Berkshire Health System, Series E, Radian Insured, 5.70%, 10/01/25 .................... 4,500,000 4,906,440
Harvard University, Series FF, 5.00%, 7/15/22 ......................................... 13,550,000 14,389,829
Semiannual Report | 31
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MASSACHUSETTS (CONTINUED)
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 $ 2,021,258
5.50%, 5/15/27 ................................................................... 5,000,000 5,146,450
Massachusetts State Industrial Finance Agency Revenue, D'Youville Senior Care,
5.65%, 10/01/17 .................................................................. 2,295,000 2,370,207
5.70%, 10/01/27 .................................................................. 7,375,000 7,613,213
Massachusetts State Port Authority Revenue, Special Facilities, Bosfuel Project,
MBIA Insured, 5.75%, 7/01/39 ...................................................... 10,150,000 10,419,381
Massachusetts State School Building Authority Dedicated Sales Tax Revenue, Series A,
FSA Insured, 5.00%, 8/15/30 ....................................................... 15,000,000 15,918,150
Massachusetts State Turnpike Authority Metropolitan Highway System Revenue,
Refunding, Series A, MBIA Insured, 5.00%, 1/01/37 ................................ 52,130,000 53,022,987
Refunding, Sub Series A, AMBAC Insured, 5.25%, 1/01/29 ........................... 5,000,000 5,191,700
sub. lien, Refunding, Series B, MBIA Insured, 5.125%, 1/01/37 .................... 21,350,000 21,792,585
Massachusetts State Water Pollution Abatement Trust Revenue,
Massachusetts Water Revenue Abatement Program, Series A, 5.00%, 8/01/32 .......... 5,000,000 5,235,750
Water Revenue Authority Program, Refunding, Sub Series A, 5.75%, 8/01/29 ......... 5,210,000 5,537,292
Water Revenue Authority Program, Sub Series A, Pre-Refunded, 5.75%, 8/01/29 ...... 1,290,000 1,376,275
Route 3 North Transportation Improvement Assn. Massachusetts Lease Revenue,
MBIA Insured, Pre-Refunded, 5.375%, 6/15/29 ....................................... 16,405,000 17,423,586
------------
272,412,312
------------
MICHIGAN 3.7%
Anchor Bay School District GO, Refunding, 5.00%, 5/01/29 ........................... 6,300,000 6,543,684
Chippewa Valley School GO, Refunding, 5.125%, 5/01/27 .............................. 5,310,000 5,610,068
Coldwater Community Schools GO, MBIA Insured, Pre-Refunded, zero cpn., 5/01/18 ..... 5,935,000 3,058,365
Detroit City School District GO,
School Building and Site Improvements, Series A, FGIC Insured, Pre-Refunded,
5.00%, 5/01/23 ................................................................. 2,000,000 2,160,860
School Building and Site Improvements, Series B, FGIC Insured, 5.00%, 5/01/33 .... 16,870,000 17,659,516
Series A, FSA Insured, Pre-Refunded, 5.125%, 5/01/31 ............................. 14,925,000 16,042,733
Detroit Sewage Disposal Revenue,
second lien, Series A, MBIA Insured, 5.00%, 7/01/30 .............................. 10,000,000 10,597,600
senior lien, Refunding, Series A, FGIC Insured, 5.125%, 7/01/31 .................. 10,000,000 10,473,500
Series A, MBIA Insured, 5.00%, 7/01/27 ........................................... 15,000,000 15,253,050
Detroit Water Supply System Revenue,
second lien, Series B, FGIC Insured, 5.50%, 7/01/33 .............................. 5,000,000 5,462,150
senior lien, Series A, FGIC Insured, 5.00%, 7/01/30 .............................. 17,575,000 18,254,098
senior lien, Series A, FGIC Insured, Pre-Refunded, 5.25%, 7/01/33 ................ 13,230,000 14,183,821
Detroit/Wayne County Stadium Authority Revenue, FGIC Insured, 5.25%, 2/01/27 ....... 8,625,000 8,827,774
Harrison Community Schools GO, AMBAC Insured, zero cpn., 5/01/20 ................... 6,000,000 2,659,800
Jackson County Building Authority Revenue, AMBAC Insured, Pre-Refunded, 5.60%,
5/01/30 ........................................................................... 4,145,000 4,424,746
Kalamazoo EDC Revenue, Limited Obligation, Friendship Village, Refunding, Series A,
6.25%, 5/15/27 .................................................................... 1,750,000 1,809,063
32 | Semiannual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
Michigan State Building Authority Revenue,
Facilities Program, Refunding, Series I, 5.00%, 10/15/24 ............................ $31,350,000 $ 32,845,081
Refunding, Series IA, FGIC Insured, 5.00%, 10/15/31 ................................. 9,475,000 10,133,797
Michigan State Hospital Finance Authority Revenue, Ascension Health Credit, Series A,
MBIA Insured, Pre-Refunded, 6.125%, 11/15/23 ......................................... 18,000,000 19,499,580
Michigan State Strategic Fund Resources Recovery Limited Obligation Revenue, Detroit
Education Exempt Facilities, Refunding, Series D, XLCA Insured, 5.25%, 12/15/32 ...... 10,000,000 10,566,300
Michigan State Trunk Line Revenue, Series A, FSA Insured, Pre-Refunded,
5.00%, 11/01/25 ..................................................................... 16,250,000 17,296,662
5.25%, 11/01/30 ..................................................................... 10,000,000 10,757,600
Royal Oak Hospital Finance Authority Revenue, William Beaumont Hospital, Series M,
MBIA Insured, 5.25%, 11/15/31 ........................................................ 10,000,000 10,504,200
Southgate Community School District GO, FGIC Insured, Pre-Refunded, 5.00%, 5/01/25 .... 5,500,000 5,667,704
Wayne State University Revenues, General, AMBAC Insured, 5.00%, 11/15/36 .............. 5,000,000 5,354,300
West Ottawa Public School District GO, Series A, 5.00%, 5/01/27 ....................... 5,000,000 5,258,700
------------
270,904,752
------------
MINNESOTA 2.1%
Cloquet PCR, Potlatch Corp. Projects, Refunding, 5.90%, 10/01/26 ...................... 9,100,000 9,283,638
Golden Valley Revenue, Covenant Retirement Communities, Series A, 5.50%, 12/01/29 ..... 1,500,000 1,555,635
Minneapolis and St. Paul Metropolitan Airports Commission Airport Revenue,
Series A, FGIC Insured, 5.125%, 1/01/31 ............................................. 10,000,000 10,343,000
Series A, FGIC Insured, 5.25%, 1/01/32 .............................................. 32,025,000 33,593,905
Series A, FGIC Insured, Pre-Refunded, 5.75%, 1/01/32 ................................ 5,000,000 5,373,750
Series C, FGIC Insured, 5.25%, 1/01/26 .............................................. 19,000,000 20,012,700
Minnesota Agriculture and Economic Development Board Revenue, Health Care System,
Refunding, Series A, MBIA Insured, 5.75%, 11/15/26 .................................. 510,000 530,477
Series A, MBIA Insured, Pre-Refunded, 5.75%, 11/15/26 ............................... 25,300,000 26,373,732
Minnesota State Municipal Power Agency Electric Revenue, 5.00%, 10/01/30 .............. 5,000,000 5,237,750
Minnetonka MFHR, Ridgepointe II Project, Refunding, Series A, GNMA Secured, 5.95%,
10/20/33 ............................................................................. 11,075,000 11,589,212
Rochester Health Care Facilities Revenue, Mayo Foundation, Series A, 5.50%, 11/15/27 .. 20,000,000 20,763,200
Roseville MFHR, Rosepointe I Project, Refunding, Series A, GNMA Secured, 5.95%,
10/20/33 ............................................................................. 8,055,000 8,418,119
University of Minnesota Revenue, Series A, ETM, 5.75%, 7/01/13 ........................ 1,250,000 1,407,850
------------
154,482,968
------------
MISSISSIPPI 1.4%
Claiborne County PCR, Systems Energy Resources Inc., Refunding, 6.20%, 2/01/26 ........ 36,500,000 36,608,040
Jackson County Environmental Improvement Revenue, International Paper Co. Project,
6.70%, 5/01/24 ....................................................................... 3,500,000 3,743,565
Mississippi Business Finance Corp. PCR, System Energy Resource Inc. Project, Refunding,
5.875%, 4/01/22 ..................................................................... 40,000,000 40,168,800
5.90%, 5/01/22 ...................................................................... 8,250,000 8,290,590
Mississippi State GO, Refunding, 5.75%, 12/01/12 ...................................... 2,000,000 2,227,020
Mississippi State University Educational Building Corp. Revenue, Residence Hall and
Campus Improvement, MBIA Insured, 5.00%, 8/01/35 ..................................... 13,265,000 14,054,002
------------
105,092,017
------------
Semiannual Report | 33
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
MISSOURI 1.2%
Jackson County Special Obligation Revenue, MBIA Insured, 5.00%, 12/01/22 ................... $ 9,095,000 $ 9,611,323
Missouri Development Finance Board Cultural Facilities Revenue, Nelson Gallery Foundation,
Series A, MBIA Insured, 5.00%, 12/01/30 ................................................... 11,500,000 12,023,365
Missouri State Board of Public Buildings Special Obligation Revenue, Series A, 4.75%,
10/15/28 .................................................................................. 8,250,000 8,485,785
Missouri State Health and Educational Facilities Authority Revenue, SSM Health Care,
Refunding, Series A, MBIA Insured, 5.00%, 6/01/22 ........................................ 230,000 235,423
Series A, AMBAC Insured, 5.25%, 6/01/21 .................................................. 8,740,000 9,337,379
Series A, AMBAC Insured, Pre-Refunded, 5.25%, 6/01/21 .................................... 8,760,000 9,466,144
Series A, MBIA Insured, Pre-Refunded, 5.00%, 6/01/22 ..................................... 4,270,000 4,407,793
St. Louis Airport Revenue,
Airport Development Program, Series A, MBIA Insured, 5.00%, 7/01/20 ...................... 5,000,000 5,260,400
Airport Development Program, Series A, MBIA Insured, 5.00%, 7/01/21 ...................... 7,250,000 7,621,200
Capital Improvement Program, Series A, MBIA Insured, 5.00%, 7/01/27 ...................... 12,390,000 12,966,755
Taney County IDA Hospital Revenue, The Skaggs Community Hospital Assn., 5.40%,
5/15/28 ................................................................................... 4,000,000 4,071,000
-----------
83,486,567
-----------
MONTANA 0.4%
Forsyth PCR, Puget Sound Energy, Refunding, Series A, AMBAC Insured, 5.00%, 3/01/31 ........ 30,000,000 31,711,800
-----------
NEBRASKA 1.0%
Adams County School District No. 018 GO, Hastings Public Schools, FSA Insured, 5.00%,
12/15/31 .................................................................................. 5,795,000 6,223,077
Lancaster County School District No. 001 GO, Lincoln Public Schools, 5.00%, 1/15/36 ........ 24,725,000 26,428,553
Lincoln Electric System Revenue, 5.00%, 9/01/31 ............................................ 8,645,000 9,202,775
Omaha Convention Hotel Corp. Revenue, Convention Center, first tier, Series A,
AMBAC Insured, 5.125%, 4/01/26 ............................................................ 12,500,000 13,246,375
Omaha Public Power District Separate Electricity Revenue, System, Nebraska City 2, Series A,
AMBAC Insured, 5.00%, 2/01/30 ............................................................. 12,165,000 12,997,086
University of Nebraska University Revenues, Kearney Student Fees and Facilities, 5.00%,
7/01/30 ................................................................................... 5,000,000 5,289,600
-----------
73,387,466
-----------
NEVADA 1.9%
Clark County Airport Revenue, sub. lien,
Series A-2, FGIC Insured, 5.125%, 7/01/27 ................................................ 10,000,000 10,667,500
Series B, FGIC Insured, Pre-Refunded, 5.25%, 7/01/31 ..................................... 20,000,000 21,465,600
Director of the State Department of Business and Industry Revenue,
Las Vegas Monorail Project,
AMBAC Insured, zero cpn., 1/01/25 ........................................................ 3,080,000 1,350,888
AMBAC Insured, zero cpn., 1/01/26 ........................................................ 3,815,000 1,593,030
AMBAC Insured, zero cpn., 1/01/27 ........................................................ 3,000,000 1,192,200
AMBAC Insured, zero cpn., 1/01/28 ........................................................ 13,315,000 5,033,736
AMBAC Insured, zero cpn., 1/01/29 ........................................................ 8,410,000 3,029,955
first tier, AMBAC Insured, 5.625%, 1/01/32 ............................................... 21,995,000 23,727,106
first tier, AMBAC Insured, 5.625%, 1/01/34 ............................................... 15,000,000 16,143,750
34 | Semiannual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEVADA (CONTINUED)
Henderson Health Care Facility Revenue, Catholic Healthcare West, Series A,
5.25%, 7/01/18 .......................................................................... $13,815,000 $ 14,220,746
Pre-Refunded, 5.25%, 7/01/18 ............................................................ 9,870,000 10,230,946
Humboldt County PCR, Sierra Pacific Power Co., Refunding, Series A, AMBAC Insured,
6.30%, 7/01/22 ........................................................................... 4,500,000 4,504,500
Nevada State GO, Municipal Bond Bank Project No. 40-41, Series A, ETM, 6.375%,
12/01/17 ................................................................................. 10,275,000 10,298,838
Sparks RDA Tax Allocation Revenue, Refunding, Series A, Radian Insured, 6.00%,
1/15/23 .................................................................................. 5,000,000 5,308,600
Washoe County Gas and Water Facilities Revenue, Refunding, AMBAC Insured, 6.30%,
12/01/14 ................................................................................. 5,000,000 5,100,100
Washoe County GO, Reno Sparks Convention, Refunding, Series A, FGIC Insured, 5.00%,
7/01/24 .................................................................................. 5,000,000 5,191,050
------------
139,058,545
------------
NEW HAMPSHIRE 0.3%
Nashua Housing Authority MFR, Clocktower Project, Refunding, GNMA Secured, 6.25%,
6/20/33 .................................................................................. 5,681,000 5,842,852
New Hampshire Health and Education Facilities Authority Revenue, Exeter Project,
6.00%, 10/01/24 ......................................................................... 2,000,000 2,204,420
5.75%, 10/01/31 ......................................................................... 1,000,000 1,068,450
New Hampshire Health and Educational Facilities Authority Revenue, The Memorial Hospital,
Refunding, 5.25%,
6/01/26 ................................................................................. 1,000,000 1,032,020
6/01/36 ................................................................................. 1,100,000 1,124,882
New Hampshire Higher Educational and Health Facilities Authority Revenue,
The Hitchcock Clinic, MBIA Insured, Pre-Refunded, 6.00%, 7/01/27 ........................ 4,275,000 4,428,986
New Hampshire Catholic Charities, 5.80%, 8/01/22 ........................................ 1,000,000 1,010,490
Rivier College, Refunding, 5.60%, 1/01/28 ............................................... 4,590,000 4,738,670
New Hampshire State HFA, SFMR, Series E,
6.75%, 7/01/19 .......................................................................... 345,000 345,569
6.80%, 7/01/25 .......................................................................... 265,000 265,474
------------
22,061,813
------------
NEW JERSEY 2.4%
Health Care Facilities Financing Authority Revenue, Englewood Hospital, MBIA Insured,
5.00%, 8/01/23 ........................................................................... 5,000,000 5,251,450
Hudson County Improvement Authority Solid Waste Systems Revenue, Refunding,
Series 1, 6.00%, 1/01/19 ................................................................ 2,100,000 2,122,638
Series 1, 6.00%, 1/01/29 ................................................................ 5,000,000 5,043,800
Series 2, 6.125%, 1/01/19 ............................................................... 2,000,000 2,028,700
Series 2, 6.125%, 1/01/29 ............................................................... 5,000,000 5,061,650
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 5,374,950
New Jersey EDA Revenue,
Cigarette Tax, 5.75%, 6/15/29 ........................................................... 20,000,000 21,582,600
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/29 ................. 10,000,000 10,572,600
Semiannual Report | 35
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEW JERSEY (CONTINUED)
New Jersey EDA Revenue, (continued)
Motor Vehicle Surcharge Revenue, Series A, MBIA Insured, 5.00%, 7/01/34 ............ $ 5,000,000 $ 5,286,300
School Facilities Construction, Series C, MBIA Insured, 4.75%, 6/15/25 ............. 7,500,000 7,692,825
School Facilities Construction, Series O, 5.125%, 3/01/28 .......................... 20,000,000 21,374,600
New Jersey State Transportation Trust Fund Authority Revenue, Transportation System,
Series B, MBIA Insured, Pre-Refunded, 5.00%, 12/15/21 ............................... 12,400,000 13,246,052
New Jersey State Turnpike Authority Turnpike Revenue,
Growth and Income Securities, Series B, AMBAC Insured, zero cpn. to 1/01/15,
5.15% thereafter, 1/01/35 ........................................................ 10,000,000 7,040,200
Series A, MBIA Insured, Pre-Refunded, 5.60%, 1/01/22 ............................... 7,500,000 7,960,125
Series A, MBIA Insured, Pre-Refunded, 5.50%, 1/01/25 ............................... 13,000,000 13,759,070
Series C, FSA Insured, 5.00%, 1/01/30 .............................................. 15,845,000 16,858,763
Tobacco Settlement Financing Corp. Revenue, Asset-Backed, Refunding, 5.75%, 6/01/32 .. 22,300,000 23,876,164
------------
174,132,487
------------
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 1,081,370
------------
NEW YORK 11.4%
Liberty Development Corp. Revenue, Goldman Sachs Headquarters, 5.25%, 10/01/35 ....... 25,000,000 29,091,250
Long Island Power Authority Electric System Revenue, General, Series A, MBIA Insured,
Pre-Refunded, 5.25%, 12/01/26 ....................................................... 10,000,000 10,360,700
MTA Commuter Facilities Revenue, Series A,
FGIC Insured, Pre-Refunded, 6.00%, 7/01/16 ......................................... 8,950,000 9,307,552
Pre-Refunded, 5.25%, 7/01/28 ....................................................... 5,000,000 5,366,400
Pre-Refunded, 6.125%, 7/01/29 ...................................................... 15,040,000 16,026,173
MTA Dedicated Tax Fund Revenue, Series A,
FGIC Insured, Pre-Refunded, 6.00%, 4/01/30 ......................................... 12,500,000 13,483,625
FGIC Insured, Pre-Refunded, 5.00%, 11/15/31 ........................................ 14,250,000 15,208,170
MBIA Insured, ETM, 6.25%, 4/01/11 .................................................. 1,280,000 1,421,018
MTA Revenue,
Refunding, Series E, 5.25%, 11/15/31 ............................................... 10,000,000 10,636,500
Refunding, Series U, 5.125%, 11/15/31 .............................................. 20,720,000 21,867,266
Series A, MBIA Insured, 4.75%, 11/15/27 ............................................ 15,000,000 15,706,650
MTA Transit Facilities Revenue,
Series A, FSA Insured, Pre-Refunded, 6.00%, 7/01/16 ................................ 3,630,000 3,775,018
Series A, Pre-Refunded, 6.00%, 7/01/24 ............................................. 5,000,000 5,312,100
Series A, Pre-Refunded, 5.625%, 7/01/27 ............................................ 10,800,000 11,217,636
Service Contract, Series 8, Pre-Refunded, 5.375%, 7/01/21 .......................... 15,000,000 16,563,750
Nassau County GO,
Improvement, Refunding, Series F, 6.625%, 3/01/08 .................................. 7,325,000 7,606,426
Water Utility Improvements, Series F, 6.625%, 3/01/07 .............................. 7,070,000 7,138,791
Nassau Health Care Corp. Health System Revenue, Nassau County Guaranteed, FSA Insured,
Pre-Refunded, 5.75%, 8/01/29 ........................................................ 10,000,000 10,759,700
New York City GO,
Refunding, Series B, 6.125%, 8/01/09 ............................................... 5,000 5,005
Refunding, Series H, 6.25%, 8/01/15 ................................................ 725,000 745,293
36 | Semiannual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEW YORK (CONTINUED)
New York City GO, (continued)
Refunding, Series H, 6.125%, 8/01/25 .................................................. $ 4,155,000 $ 4,268,473
Series D, 8.00%, 8/01/16 .............................................................. 5,000 5,051
Series D, 5.50%, 6/01/24 .............................................................. 16,405,000 17,785,809
Series D, Pre-Refunded, 5.50%, 6/01/24 ................................................ 7,535,000 8,268,382
Series E, 6.50%, 12/01/12 ............................................................. 20,000 20,042
Series F, 5.25%, 1/15/23 .............................................................. 20,000,000 21,258,000
Series G, Pre-Refunded, 6.00%, 10/15/26 ............................................... 15,335,000 15,852,863
Series H, Pre-Refunded, 6.25%, 8/01/15 ................................................ 12,310,000 12,680,408
Series H, Pre-Refunded, 6.125%, 8/01/25 ............................................... 61,630,000 63,428,363
Series I, 6.25%, 4/15/13 .............................................................. 1,480,000 1,510,991
Series I, Pre-Refunded, 6.25%, 4/15/13 ................................................ 35,130,000 35,910,237
Series I, Pre-Refunded, 6.25%, 4/15/27 ................................................ 7,000,000 7,157,010
Series J, Pre-Refunded, 6.00%, 8/01/21 ................................................ 28,260,000 29,058,910
New York City Municipal Water Finance Authority Water and Sewer System Revenue,
Pre-Refunded, 5.50%, 6/15/33 .......................................................... 55,000,000 59,228,400
Refunding, Series D, 5.25%, 6/15/25 ................................................... 10,000,000 10,723,100
Series A, FGIC Insured, Pre-Refunded, 5.50%, 6/15/32 .................................. 10,000,000 10,594,600
Series A, Pre-Refunded, 5.75%, 6/15/30 ................................................ 8,000,000 8,525,280
Series B, AMBAC Insured, Pre-Refunded, 5.25%, 6/15/29 ................................. 8,000,000 8,167,600
Series B, FGIC Insured, Pre-Refunded, 5.25%, 6/15/29 .................................. 4,855,000 4,956,712
Series B, FSA Insured, Pre-Refunded, 5.25%, 6/15/29 ................................... 4,030,000 4,114,428
Series B, Pre-Refunded, 5.75%, 6/15/29 ................................................ 15,000,000 15,354,900
Series G, FSA Insured, 5.125%, 6/15/32 ................................................ 24,215,000 25,414,369
New York City Transitional Finance Authority Revenue, Future Tax Secured,
Series B, 5.00%, 5/01/30 .............................................................. 7,500,000 7,847,400
Series B, Pre-Refunded, 6.00%, 11/15/29 ............................................... 10,000,000 10,919,400
Series C, Pre-Refunded, 5.50%, 11/01/20 ............................................... 5,000,000 5,373,950
Series C, Pre-Refunded, 5.50%, 11/01/24 ............................................... 4,200,000 4,514,118
Series D, 5.00%, 2/01/27 .............................................................. 10,000,000 10,507,700
Series E, 5.00%, 2/01/28 .............................................................. 8,885,000 9,321,076
New York City Transportation Authority MTA Triborough COP, Series A, AMBAC Insured,
Pre-Refunded, 5.40%, 1/01/19 ........................................................... 15,000,000 15,988,800
New York City Trust Cultural Resources Revenue, Museum of Modern Art 2001, Series D,
AMBAC Insured, 5.125%, 7/01/31 ......................................................... 8,000,000 8,484,720
New York Convention Center Development Corp. Revenue, Hotel Unit Fee Secured,
AMBAC Insured, 5.00%, 11/15/30 ......................................................... 10,000,000 10,650,300
New York State Dormitory Authority Lease Revenue, Court Facilities, Pre-Refunded, 6.00%,
5/15/39 ................................................................................ 16,000,000 17,443,200
New York State Dormitory Authority Revenue, State University Educational Facilities,
Refunding, 5.125%, 5/15/21 ............................................................. 7,165,000 7,382,386
New York State Dormitory Authority Revenues,
City University System, Consolidated Third, Refunding, Series 1, 5.25%, 7/01/25 ....... 10,000,000 10,400,500
Mental Health Services, Series A, Pre-Refunded, 6.00%, 8/15/17 ........................ 14,290,000 14,675,544
Mental Health Services, Series A, Pre-Refunded, 5.75%, 2/15/27 ........................ 4,830,000 4,956,981
Second Hospital, Interfaith Medical Center, Series D, 5.30%, 2/15/19 .................. 5,000,000 5,155,300
Second Hospital, Interfaith Medical Center, Series D, 5.40%, 2/15/28 .................. 8,000,000 8,260,480
Semiannual Report | 37
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NEW YORK (CONTINUED)
New York State Dormitory Authority Revenues, (continued)
Supported Debt, Mental Health Services, Refunding, Series A, 6.00%, 8/15/17 ........ $ 245,000 $ 251,417
Supported Debt, Mental Health Services, Refunding, Series A, 5.75%, 2/15/27 ........ 80,000 82,028
Supported Debt, Mental Health Services, Series A, Pre-Refunded, 6.00%, 8/15/17 ..... 3,465,000 3,558,486
Supported Debt, Mental Health Services, Series A, Pre-Refunded, 5.75%, 2/15/27 ..... 90,000 92,366
Supported Debt, Upstate Community Colleges, Refunding, Series A, 5.00%, 7/01/28 .... 6,570,000 6,772,882
Supported Debt, Upstate Community Colleges, Series A, Pre-Refunded, 5.00%,
7/01/28 .......................................................................... 3,430,000 3,593,440
New York State HFA Service Contract Obligation Revenue, Refunding, Series C, 5.50%,
9/15/22 ............................................................................. 17,505,000 18,124,852
New York State HFAR, Housing Project Mortgage, Refunding, Series A, FSA Insured,
6.10%, 11/01/15 .................................................................... 4,370,000 4,464,436
6.125%, 11/01/20 ................................................................... 3,660,000 3,743,155
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 1,546,735
New York State Urban Development Corp. Revenue, Youth Facilities, Pre-Refunded, 6.00%,
4/01/17 ............................................................................. 11,720,000 12,071,366
Onondaga County GO,
5.875%, 2/15/12 .................................................................... 300,000 333,315
ETM, 5.875%, 2/15/12 ............................................................... 700,000 779,163
Triborough Bridge and Tunnel Authority Revenues, General Purpose,
Refunding, Series A, 5.00%, 1/01/27 ................................................ 5,000,000 5,226,050
Series A, 5.00%, 1/01/32 ........................................................... 3,085,000 3,199,731
Series A, Pre-Refunded, 5.00%, 1/01/32 ............................................. 16,915,000 18,094,483
Series B, Pre-Refunded, 5.50%, 1/01/30 ............................................. 15,000,000 17,417,250
Series X, ETM, 6.625%, 1/01/12 ..................................................... 1,800,000 2,028,204
Series Y, ETM, 5.90%, 1/01/07 ...................................................... 500,000 501,950
Series Y, ETM, 6.00%, 1/01/12 ...................................................... 1,000,000 1,083,110
------------
830,729,225
------------
NORTH CAROLINA 3.1%
Charlotte Airport Revenue, Series A, MBIA Insured, 5.00%, 7/01/34 .................... 6,000,000 6,339,540
Charlotte COP, Transit Projects, Phase II, Series E, 5.00%, 6/01/30 .................. 15,940,000 16,850,015
North Carolina Eastern Municipal Power Agency Power System Revenue,
Refunding, Series A, 5.75%, 1/01/26 ................................................ 65,350,000 69,058,613
Refunding, Series B, 6.00%, 1/01/22 ................................................ 1,250,000 1,466,450
Refunding, Series B, 6.25%, 1/01/23 ................................................ 39,030,000 47,062,764
Refunding, Series B, 5.75%, 1/01/24 ................................................ 35,140,000 37,164,415
Refunding, Series B, FGIC Insured, 6.25%, 1/01/23 .................................. 1,280,000 1,281,254
Refunding, Series D, 5.125%, 1/01/23 ............................................... 12,000,000 12,484,080
Refunding, Series D, 5.125%, 1/01/26 ............................................... 3,000,000 3,111,180
Series D, 6.70%, 1/01/19 ........................................................... 2,000,000 2,186,340
Series D, 6.75%, 1/01/26 ........................................................... 5,000,000 5,474,800
North Carolina Medical Care Commission Revenue, Rowan Regional Medical Center,
FSA Insured, 4.75%, 9/01/24 ......................................................... 6,970,000 7,152,893
38 | Semiannual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
NORTH CAROLINA (CONTINUED)
University Hospital Chapel Hill Revenue, Refunding, AMBAC Insured, 5.00%, 2/15/21 ........ $ 5,000,000 $ 5,129,200
Winston-Salem Water and Sewer System Revenue, Pre-Refunded, 5.125%, 6/01/28 .............. 11,000,000 11,804,870
------------
226,566,414
------------
OHIO 3.3%
Akron Bath Copley Joint Township Hospital District Revenue, Hospital Improvement
Children's Hospital Center, FSA Insured, 5.00%, 11/15/31 ................................ 9,250,000 9,690,855
Akron Income Tax Revenue, Community Learning, FGIC Insured, 5.00%,
12/01/26 ............................................................................... 6,085,000 6,437,443
12/01/27 ............................................................................... 3,185,000 3,373,488
Cleveland Airport System Revenue, Series A, FSA Insured, 5.00%, 1/01/31 .................. 20,000,000 20,758,600
Cleveland State University General Receipt Revenue, FGIC Insured, 5.00%, 6/01/29 ......... 5,000,000 5,297,100
Columbus City School District GO, School Facilities Construction and Improvement,
FGIC Insured, Pre-Refunded, 5.00%, 12/01/28 ............................................. 16,000,000 17,301,120
Cuyahoga County Hospital Facilities Revenue, Canton Inc. Project, 7.50%, 1/01/30 ......... 17,100,000 19,185,345
Dayton Special Facilities Revenue, Emery Air Freight Corp., Emery Worldwide Air Inc.,
Refunding,
Series A, 5.625%, 2/01/18 .............................................................. 6,000,000 6,294,180
Series E, 6.05%, 10/01/09 .............................................................. 4,000,000 4,268,400
Series F, 6.05%, 10/01/09 .............................................................. 2,750,000 2,934,525
Franklin County Convention Facilities Authority Revenue, Tax and Lease Revenue,
MBIA Insured, Pre-Refunded, 5.00%, 12/01/27 ............................................ 6,145,000 6,303,971
Refunding, MBIA Insured, 5.00%, 12/01/27 ............................................... 1,355,000 1,383,536
Hamilton County Sales Tax Revenue, Refunding, Series B, AMBAC Insured, 5.25%,
12/01/32 ................................................................................ 10,000,000 10,534,900
Kettering City School District GO, School Improvement, Refunding, FGIC Insured, 5.00%,
12/01/30 ................................................................................ 7,450,000 7,872,117
Little Miami Local School District GO, School Improvement, FSA Insured, 5.00%,
12/01/34 ................................................................................ 4,000,000 4,284,400
Marysville Wastewater Treatment System Revenue, Refunding, XLCA Insured, 5.00%,
12/01/31 ............................................................................... 8,000,000 8,555,120
12/01/36 ............................................................................... 13,725,000 14,642,379
Montgomery County Health System Revenue, Series B-2, 8.10%, 7/01/18 ...................... 505,000 516,595
Montgomery County Hospital Facilities Revenue, Grandview Hospital and Medical Center,
Pre-Refunded,
5.50%, 12/01/10 ........................................................................ 1,300,000 1,372,475
5.60%, 12/01/11 ........................................................................ 1,000,000 1,058,640
5.65%, 12/01/12 ........................................................................ 925,000 980,583
Nordonia Hills Local School District GO, School Improvement, AMBAC Insured, Pre-Refunded,
5.375%, 12/01/20 ....................................................................... 4,275,000 4,609,049
5.45%, 12/01/25 ........................................................................ 3,000,000 3,242,910
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 18,489,240
Pickerington Local School District GO, School Facilities Construction and Improvement,
FGIC Insured, Pre-Refunded, 5.00%, 12/01/28 ............................................. 15,000,000 16,016,400
Semiannual Report | 39
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
OHIO (CONTINUED)
Springboro Community City School District GO, School Improvement, MBIA Insured, 5.00%,
12/01/27 ................................................................................. $10,350,000 $ 10,999,670
University of Akron General Receipts Revenue, FGIC Insured, Pre-Refunded, 5.75%,
1/01/29 .................................................................................. 11,305,000 12,150,049
University of Cincinnati COP,
Jefferson Avenue Residence Hall, MBIA Insured, 5.125%, 6/01/28 .......................... 4,000,000 4,158,480
University Center Project, MBIA Insured, Pre-Refunded, 5.125%, 6/01/24 .................. 10,500,000 10,599,435
University of Cincinnati General Receipts Revenue, Series A, FGIC Insured, 5.25%,
6/01/24 .................................................................................. 5,000,000 5,320,050
------------
238,631,055
------------
OKLAHOMA 0.1%
Stillwater Medical Center Authority Revenue,
Series A, Pre-Refunded, 6.10%, 5/15/09 .................................................. 1,485,000 1,524,813
Series B, Pre-Refunded, 6.35%, 5/15/12 .................................................. 1,130,000 1,168,736
Series B, Pre-Refunded, 6.50%, 5/15/19 .................................................. 3,390,000 3,508,854
Valley View Hospital Authority Revenue, Valley View Regional Medical Center, Refunding,
6.00%, 8/15/14 ........................................................................... 4,000,000 4,103,960
------------
10,306,363
------------
OREGON 0.9%
Health Sciences University Revenue, Series A, MBIA Insured, 5.00%, 7/01/26 ................ 10,500,000 11,103,015
Jackson County School District No. 6 Central Point GO, FGIC Insured, Pre-Refunded, 5.25%,
6/15/20 .................................................................................. 4,000,000 4,231,520
Lane County School District No. 19 Springfield GO, Refunding, FGIC Insured, 6.00%,
10/15/13 ................................................................................. 1,250,000 1,426,388
Oregon State Department of Administrative Services COP, Series A, AMBAC Insured,
Pre-Refunded, 6.00%, 5/01/26 ............................................................. 10,000,000 10,876,600
Oregon State EDR, Georgia Pacific Corp. Project,
Refunding, Series 183, 5.70%, 12/01/25 .................................................. 3,500,000 3,552,990
d Series CLVII, 6.35%, 8/01/25 ............................................................ 5,500,000 5,522,550
Oregon State GO, State Board of Higher Education, Series A, 5.00%,
8/01/26 ................................................................................. 18,630,000 19,680,584
8/01/27 ................................................................................. 6,955,000 7,463,550
------------
63,857,197
------------
PENNSYLVANIA 4.5%
Allegheny County Hospital Development Authority Revenue, Health System, Refunding,
Series A, MBIA Insured, 6.50%, 11/15/30 .................................................. 10,000,000 11,200,500
Allegheny County IDAR, Environmental Improvement, USX Corp., Refunding, 5.50%,
12/01/29 ................................................................................. 10,000,000 10,459,400
Allegheny County Port Authority Special Revenue, Transportation, Refunding, FGIC Insured,
5.00%, 3/01/29 ........................................................................... 10,000,000 10,436,000
Berks County GO, AMBAC Insured, 5.00%, 11/15/25 ........................................... 5,000,000 5,098,600
Butler Area School District GO, FGIC Insured, Pre-Refunded, 5.60%, 4/01/28 ................ 5,000,000 5,329,700
Delaware County Authority University Revenue, Villanova University, Series A, MBIA Insured,
5.00%, 12/01/18 .......................................................................... 7,090,000 7,330,989
40 | Semiannual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA (CONTINUED)
Delaware River Port Authority Pennsylvania and New Jersey Revenue, FSA Insured, 5.75%,
1/01/22 ................................................................................ $ 8,500,000 $ 9,033,120
1/01/26 ................................................................................ 10,000,000 10,618,000
Delaware Valley Regional Finance Authority Local Government Revenue, Series B,
AMBAC Insured, 5.60%, 7/01/17 ........................................................... 5,000,000 5,669,950
Erie Water Authority Water Revenue, Series A, MBIA Insured, Pre-Refunded, 5.20%,
12/01/30 ................................................................................ 18,700,000 20,139,526
Montgomery County IDA Retirement Community Revenue, Adult Community Total Services
Retirement-Life Communities Inc., 5.25%, 11/15/28 ....................................... 2,500,000 2,551,500
Northampton County General Purpose Authority Revenue, County Agreement, FSA Insured,
5.25%, 10/01/30 ......................................................................... 12,150,000 12,922,375
Pennsylvania State GO, First Series, FGIC Insured, Pre-Refunded, 5.00%, 2/01/20 .......... 5,000,000 5,341,400
Pennsylvania State Turnpike Commission Revenue, AMBAC Insured, Pre-Refunded, 5.00%,
7/15/31 ................................................................................. 5,850,000 6,268,743
Philadelphia Authority for Industrial Development Lease Revenue, Series B, FSA Insured,
5.25%, 10/01/30 ......................................................................... 15,630,000 16,492,620
Philadelphia Gas Works Revenue,
Fifth Series A-1, FSA Insured, 5.00%, 9/01/29 .......................................... 5,000,000 5,288,150
Refunding, First Series A, FSA Insured, 5.00%, 7/01/26 ................................. 5,000,000 5,077,700
Philadelphia GO, MBIA Insured, 5.00%, 5/15/25 ............................................ 5,000,000 5,075,050
Philadelphia Hospitals and Higher Educational Facilities Authority Revenue,
Mortgage, North Philadelphia Health Systems, Refunding, Series A, FHA Insured, 5.30%,
1/01/18 .............................................................................. 3,040,000 3,153,605
Mortgage, North Philadelphia Health Systems, Refunding, Series A, FHA Insured, 5.35%,
1/01/23 .............................................................................. 5,690,000 5,882,038
Mortgage, North Philadelphia Health Systems, Refunding, Series A, FHA Insured, 5.375%,
1/01/28 .............................................................................. 3,700,000 3,822,914
Temple University Hospital, 5.875%, 11/15/23 ........................................... 5,000,000 5,100,550
Philadelphia Parking Authority Parking Revenue, Airport, FSA Insured, 5.25%, 9/01/29 ..... 15,000,000 15,703,800
Philadelphia RDA Revenue, Neighborhood Transformation, Series C, FGIC Insured, 5.00%,
4/15/29 ................................................................................ 10,965,000 11,639,457
4/15/30 ................................................................................ 12,000,000 12,729,240
Philadelphia School District GO, Series A, FSA Insured, Pre-Refunded, 5.75%, 2/01/30 ..... 14,050,000 15,268,697
Philadelphia Water and Wastewater Revenue, Series A, FGIC Insured, 5.00%, 11/01/31 ....... 25,000,000 26,117,500
Pittsburgh and Allegheny County Public Auditorium Hotel Room Revenue, AMBAC Insured,
5.125%, 2/01/35 ......................................................................... 15,000,000 15,560,250
Pittsburgh and Allegheny County Public Auditorium Revenue, Regional Asset District Sales
Tax, AMBAC Insured, 5.25%, 2/01/31 ...................................................... 5,000,000 5,229,400
Southmoreland School District GO, MBIA Insured, 5.00%, 4/01/25 ........................... 6,800,000 7,266,344
State Public School Building Authority School Revenue,
Daniel Boone School District Project, MBIA Insured, 5.00%, 4/01/28 ..................... 9,500,000 9,988,300
Philadelphia School District Project, FSA Insured, 5.00%, 6/01/33 ...................... 32,000,000 33,513,280
Washington County Authority Revenue, Capital Projects and Equipment Program, Refunding,
AMBAC Insured, 6.15%, 12/01/29 .......................................................... 2,400,000 2,599,104
------------
327,907,802
------------
Semiannual Report | 41
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
RHODE ISLAND 1.1%
Narragansett Bay Commission Wastewater System Revenue, Series A, MBIA Insured, 5.00%,
8/01/30 ..................................................................................... $ 7,990,000 $ 8,459,253
Rhode Island Health and Educational Building Corp. Revenue, Hospital Financing, Series A,
Pre-Refunded,
5.875%, 9/15/23 ........................................................................... 2,000,000 2,081,340
6.00%, 9/15/33 ............................................................................ 3,000,000 3,128,700
Rhode Island Housing and Mortgage Finance Corp. Revenue, Homeownership Opportunity,
Refunding, Series 15-A, 6.85%, 10/01/24 ................................................... 620,000 625,078
Refunding, Series 25-A, 4.95%, 10/01/16 ................................................... 140,000 140,902
Series 10-A, 6.50%, 10/01/22 .............................................................. 475,000 476,876
Series 10-A, 6.50%, 4/01/27 ............................................................... 265,000 267,173
Rhode Island State Economic Development Corp. Airport Revenue, Series B, MBIA Insured,
5.00%,
7/01/27 ................................................................................... 12,280,000 12,922,612
7/01/30 ................................................................................... 14,965,000 15,725,970
Rhode Island State Health and Educational Building Corp. Revenue,
Health Facilities, St. Antoine, Series B, 6.125%, 11/15/29 ................................ 8,250,000 8,717,362
Higher Education Facility, University of Rhode Island, Refunding, Series A, AMBAC Insured,
5.00%, 9/15/30 ........................................................................... 10,000,000 10,670,600
Hospital Financing, Lifespan Obligated Group, 6.375%, 8/15/21 ............................. 925,000 1,033,817
Hospital Financing, Lifespan Obligated Group, Pre-Refunded, 6.375%, 8/15/21 ............... 6,075,000 6,944,272
Hospital Financing, Lifespan Obligated Group, Refunding, Series A, FSA Insured, 5.00%,
5/15/26 .................................................................................. 5,000,000 5,311,500
Hospital Financing, Lifespan Obligated Group, Refunding, Series A, FSA Insured, 5.00%,
5/15/32 .................................................................................. 3,000,000 3,172,410
-----------
79,677,865
-----------
SOUTH CAROLINA 1.3%
Beaufort-Jasper Water and Sewer Authority Waterworks and Sewer System Revenue,
Refunding, FSA Insured, 5.00%, 3/01/26 ...................................................... 7,750,000 8,121,922
Charleston Educational Excellence Finance Corp. Revenue, Charleston County School District,
5.25%, 12/01/30 ............................................................................. 8,000,000 8,584,560
Dorchester County Waterworks and Sewer System Revenue, Refunding, MBIA Insured,
5.00%, 10/01/28 ............................................................................. 8,000,000 8,444,000
Greenville County School District Installment Purchase Revenue, Building Equity Sooner
Tomorrow, Refunding, 5.00%, 12/01/28 ........................................................ 7,500,000 7,931,775
Lancaster Educational Assistance Program Inc. Revenue, School District of Lancaster County
Project, 5.00%, 12/01/26 .................................................................... 10,000,000 10,233,100
Medical University of South Carolina Hospital Authority Hospital Facilities Revenue, Mortgage,
Refunding, Series A, MBIA Insured, 5.00%, 8/15/31 ........................................... 13,860,000 14,541,912
Newberry Investing in Children's Education Installment Revenue, Newberry County School
District Project, 5.00%, 12/01/30 ........................................................... 4,000,000 4,111,520
South Carolina Public Service Authority Revenue, Series B, FSA Insured, 5.25%, 1/01/33 ....... 31,835,000 33,641,955
-----------
95,610,744
-----------
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 16,588,662
-----------
42 | Semiannual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
TENNESSEE 0.8%
Clarksville Natural Gas Acquisition Corp. Gas Revenue, 5.00%, 12/15/19 .................... $ 6,000,000 $ 6,549,780
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 7,577,290
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 5,250,900
Knoxville Wastewater System Revenue, Improvement, Series A, MBIA Insured, 5.00%,
4/01/30 .................................................................................. 7,850,000 8,353,813
Memphis GO, Pre-Refunded, 5.00%, 4/01/17 .................................................. 3,000,000 3,087,810
Metropolitan Government of Nashville and Davidson County District Energy Revenue, Series A,
AMBAC Insured, 5.00%, 10/01/25 ........................................................... 5,460,000 5,750,581
Tennessee Energy Acquisition Corp. Gas Revenue, Series A, 5.25%, 9/01/26 .................. 20,000,000 22,718,400
Tennessee HDA Revenue, Homeownership Program, Refunding, Series 1D, 4.70%,
7/01/15 .................................................................................. 470,000 474,160
-----------
59,762,734
-----------
TEXAS 5.1%
Austin Electric Utility System Revenue, Refunding, MBIA Insured, 5.00%, 11/15/28 .......... 10,000,000 10,487,700
Bexar County Health Facilities Development Corp. Revenue, Incarnate Word Health Services,
FSA Insured, ETM,
6.00%, 11/15/15 ......................................................................... 7,500,000 7,672,950
6.10%, 11/15/23 ......................................................................... 8,300,000 8,803,312
Bexar County HFC, MFHR,
American Opportunity Housing, Series A, MBIA Insured, 5.80%, 1/01/31 .................... 6,000,000 6,313,020
Honey Creek Apartments Project, Series A, MBIA Insured, 6.125%, 4/01/20 ................. 1,000,000 1,062,100
Honey Creek Apartments Project, Series A, MBIA Insured, 6.20%, 4/01/30 .................. 2,845,000 3,025,544
Bexar Metropolitan Water District Waterworks Systems Revenue, Refunding, MBIA Insured,
5.875%, 5/01/22 ......................................................................... 2,860,000 2,890,030
6.35%, 5/01/25 .......................................................................... 1,890,000 1,910,280
Bridge City ISD, GO, Refunding, 5.375%, 2/15/32 ........................................... 2,005,000 2,122,112
Carrollton GO, Improvement, FSA Insured, 5.25%, 8/15/19 ................................... 1,000,000 1,067,320
Dallas ISD, GO, Refunding, 5.25%, 2/15/20 ................................................. 2,000,000 2,143,460
Dallas-Fort Worth International Airport Revenue, Refunding and Improvement, Series A,
FGIC Insured, 5.625%, 11/01/26 ........................................................... 85,000,000 90,959,350
Decatur Hospital Authority Hospital Revenue, Series A, ETM, 5.75%, 9/01/29 ................ 4,095,000 4,678,128
Duncanville ISD, GO,
Refunding, Series B, 5.25%, 2/15/32 ..................................................... 50,000 53,118
Series B, Pre-Refunded, 5.25%, 2/15/32 .................................................. 9,850,000 10,630,021
Edcouch Elsa ISD, GO, Pre-Refunded, 5.50%, 2/15/30 ........................................ 2,000,000 2,119,120
Gulf Coast Waste Disposal Authority Environmental Improvement Revenue, USX Corp.
Projects, Refunding, 5.50%, 9/01/17 ...................................................... 3,250,000 3,381,657
Gulf Coast Waste Disposal Authority Revenue, Valero Energy Corp. Project, 5.70%,
4/01/32 .................................................................................. 3,000,000 3,112,380
Hays Consolidated ISD GO, Capital Appreciation, Pre-Refunded, zero cpn.,
8/15/19 ................................................................................. 5,285,000 2,766,645
8/15/21 ................................................................................. 8,420,000 3,889,787
8/15/22 ................................................................................. 8,470,000 3,679,283
Hidalgo County GO, Certificates of Obligation, FSA Insured, Pre-Refunded, 5.25%,
8/15/21 .................................................................................. 2,500,000 2,678,500
Semiannual Report | 43
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
TEXAS (CONTINUED)
Houston Airport System Revenue, sub. lien, Refunding, Series B, FSA Insured, 5.50%,
7/01/30 .................................................................................. $ 2,000,000 $ 2,119,280
Houston Area Water Corp. Contract Revenue, Northeast Water Purification Project,
FGIC Insured, 5.125%, 3/01/28 ............................................................ 15,000,000 15,721,050
Houston GO, Public Improvement, Refunding, MBIA Insured, 5.00%, 3/01/25 ................... 5,000,000 5,205,850
Houston Water and Sewer Systems Revenue, junior lien, Series B, FGIC Insured, Pre-Refunded,
5.00%, 12/01/25 ......................................................................... 9,710,000 10,046,354
5.25%, 12/01/30 ......................................................................... 14,000,000 14,862,960
Joshua ISD, GO, Refunding, Series B, 6.125%, 2/15/26 ...................................... 20,000 20,022
Keller ISD, GO,
Pre-Refunded, 5.375%, 8/15/25 ........................................................... 1,330,000 1,414,668
Refunding, 5.375%, 8/15/25 .............................................................. 170,000 179,466
Kerrville ISD, GO, Pre-Refunded, 6.00%, 8/15/13 ........................................... 1,000,000 1,085,590
Laredo ISD, GO, Pre-Refunded, 5.25%, 8/01/24 .............................................. 4,000,000 4,176,120
Little Cypress Mauriceville Consolidated ISD, GO, Refunding, 5.90%, 8/01/29 ............... 2,130,000 2,253,945
Lower Colorado River Authority Revenue,
Refunding, FSA Insured, 5.00%, 5/15/31 .................................................. 10,000,000 10,411,200
Refunding and Improvement, Series A, MBIA Insured, 5.00%, 5/15/26 ....................... 1,870,000 1,944,445
Refunding and Improvement, Series A, MBIA Insured, Pre-Refunded, 5.00%, 5/15/26 ......... 130,000 137,771
Lubbock HFC, SFMR, MBS Program, Refunding, Series A, GNMA Secured, 6.125%,
12/01/17 ................................................................................. 155,000 159,067
North Central Texas Health Facility Development Corp. Revenue,
Children's Medical Center Dallas, Refunding, AMBAC Insured, 5.25%, 8/15/24 .............. 19,335,000 20,662,348
Texas Health Resources System, Refunding, Series B, MBIA Insured, 5.125%,
2/15/22 ............................................................................... 5,985,000 6,182,565
Northside ISD, GO, Refunding, 5.00%, 2/15/26 .............................................. 2,500,000 2,597,375
Onalaska ISD, GO, 5.375%, 2/15/32 ......................................................... 2,840,000 3,040,902
Pasadena GO, Certificates of Obligation, FGIC Insured,Pre-Refunded, 5.25%, 4/01/32 ........ 3,000,000 3,205,170
Port Corpus Christi IDC Revenue, Valero, Refunding, Series B, 5.40%, 4/01/18 .............. 4,000,000 4,158,880
Port Corpus Christi Nueces County General Revenue, Union Pacific, Refunding, 5.65%,
12/01/22 ................................................................................. 15,000,000 15,852,000
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 12,254,760
Richardson GO, Hotel Occupancy Certificates, Series A, FGIC Insured, 5.75%, 2/15/21 ....... 2,500,000 2,668,100
San Antonio Water Revenue, Systems, Refunding, FSA Insured, 5.00%,
5/15/25 ................................................................................. 5,000,000 5,220,700
5/15/28 ................................................................................. 5,000,000 5,215,650
Southmost Regional Water Authority Water Supply Contract Revenue, MBIA Insured, 5.00%,
9/01/25 .................................................................................. 5,000,000 5,236,200
Tarrant County Health Facilities Development Corp. Health System Revenue, Harris Methodist
Health System, FGIC Insured, ETM, 6.00%, 9/01/24 ......................................... 4,000,000 4,757,520
Tarrant County Health Facilities Development Corp. Revenue, Bethesda Living Centers,
Series C, 5.75%,
8/15/18 ................................................................................. 1,570,000 1,564,536
8/15/28 ................................................................................. 3,900,000 3,786,549
Texas City IDC Marine Terminal Revenue, ARCO Pipe Line Co. Project, Refunding, 7.375%,
10/01/20 ................................................................................. 500,000 662,805
44 | Semiannual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
TEXAS (CONTINUED)
Texas State Turnpike Authority Central Texas Turnpike System Revenue, Capital Appreciation,
AMBAC Insured, zero cpn., 8/15/31 ........................................................... $43,500,000 $ 11,192,985
Tyler Health Facilities Development Corp. Hospital Revenue, East Texas Medical Center Project,
Refunding, Series A, MBIA Insured, 5.50%, 11/01/17 ......................................... 1,735,000 1,789,010
Series D, FSA Insured, 5.375%, 11/01/27 .................................................... 11,880,000 12,425,767
University of Texas University Revenues, Financing System, Series A, Pre-Refunded, 5.70%,
8/15/20 ..................................................................................... 1,000,000 1,056,440
Wylie ISD, GO,
Pre-Refunded, 7.00%, 8/15/24 ............................................................... 660,000 755,878
Refunding, 7.00%, 8/15/24 .................................................................. 340,000 388,270
------------
369,858,015
------------
UTAH 0.5%
Intermountain Power Agency Power Supply Revenue,
2006, Refunding, Series A, 6.15%, 7/01/14 .................................................. 70,000 71,506
ETM, 6.15%, 7/01/14 ........................................................................ 16,225,000 16,931,436
Salt Lake County College Revenue, Westminster College Project,
5.70%, 10/01/17 ............................................................................ 1,000,000 1,027,300
5.75%, 10/01/27 ............................................................................ 1,000,000 1,027,380
5.625%, 10/01/28 ........................................................................... 3,305,000 3,460,071
South Jordan Sales Tax Revenue, AMBAC Insured, Pre-Refunded, 5.20%, 8/15/26 .................. 4,770,000 5,117,542
South Valley Water Reclamation Facility Sewer Revenue, AMBAC Insured, 5.00%,
8/15/30 ..................................................................................... 5,730,000 6,089,443
Utah State HFAR, SFM, Series B, 6.55%, 7/01/26 ............................................... 20,000 20,023
------------
33,744,701
------------
VERMONT 0.5%
Burlington Airport Revenue, Series A, MBIA Insured, 5.00%, 7/01/28 ........................... 5,780,000 6,090,559
University of Vermont and State Agricultural College Revenue, Refunding, MBIA Insured,
5.00%, 10/01/30 ............................................................................. 12,210,000 13,032,344
Vermont Educational and Health Buildings Financing Agency Revenue, Fletcher Allen Health,
Series A, AMBAC Insured, 6.125%, 12/01/27 ................................................... 13,000,000 14,201,590
------------
33,324,493
------------
VIRGINIA 0.4%
Greater Richmond Convention Center Authority Hotel Tax Revenue, Refunding, MBIA Insured,
5.00%, 6/15/30 .............................................................................. 12,260,000 13,053,590
Medical College Hospital Authority Revenue, General Revenue Bonds, MBIA Insured, 5.125%,
7/01/18 ..................................................................................... 2,000,000 2,078,100
Norfolk Parking System Revenue, Refunding, Series A, MBIA Insured, 5.00%, 2/01/27 ............ 5,000,000 5,337,050
Virginia State HDA Commonwealth Mortgage Revenue, Series H, Sub Series H-1,
MBIA Insured, 5.35%, 7/01/31 ................................................................ 10,000,000 10,450,600
------------
30,919,340
------------
WASHINGTON 4.1%
Bellingham Housing Authority Revenue, Pacific Rim and Cascade Meadows Project,
Refunding, MBIA Insured, 5.20%, 11/01/27 .................................................... 200,000 202,832
Central Puget Sound Regional Transportation Authority Sales and Use Tax Revenue, Series A,
AMBAC Insured, 5.00%, 11/01/30 .............................................................. 20,000,000 21,221,200
Semiannual Report | 45
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
WASHINGTON (CONTINUED)
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 $ 5,160,400
Chelan County PUD No. 1 Consolidated Revenue, Chelan Hydroelectric, Division I,
Mandatory Put 7/01/28, Series A, FSA Insured, 5.25%, 7/01/33 ......................... 200,000 206,292
Clark County PUD No. 1 Generating System Revenue,
FGIC Insured, ETM, 6.00%, 1/01/08 ................................................... 200,000 205,630
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 ............... 200,000 200,336
Energy Northwest Electric Revenue,
Columbia Generating Station, Refunding, Series B, FSA Insured, 5.35%, 7/01/18 ....... 11,500,000 12,393,550
Columbia Station, Refunding, Series A, 5.00%, 7/01/24 ............................... 15,255,000 16,315,222
Goat Hill Properties Lease Revenue, Government Office Building Project, MBIA Insured,
5.00%, 12/01/33 ...................................................................... 18,500,000 19,517,315
Grant County PUD No. 2 Wanapum Hydro Electric Revenue, Refunding,
Second Series A, MBIA Insured, 5.20%, 1/01/23 ....................................... 250,000 258,642
Series D, FSA Insured, 5.20%, 1/01/23 ............................................... 6,000,000 6,349,620
King County GO, Sewer, Refunding, Series C, 6.25%, 1/01/32 ............................ 8,715,000 8,924,683
King County Housing Authority Revenue, Woodridge Park Project, 6.25%, 5/01/15 ......... 160,000 161,722
King County School District No. 400 Mercer Island GO, Pre-Refunded, 5.90%, 12/01/15 ... 100,000 100,183
King County School District No. 408 Auburn GO, FSA Insured, 5.00%, 12/01/24 ........... 5,000,000 5,281,750
Pierce County School District No. 320 Sumner GO, FSA Insured, Pre-Refunded, 6.00%,
12/01/14 ............................................................................. 2,000,000 2,186,020
Pierce County School District No. 403 Bethel GO, FGIC Insured, 5.25%, 12/01/22 ........ 5,000,000 5,361,950
Port Seattle Revenue, Refunding, Series A,
FGIC Insured, 5.00%, 4/01/31 ........................................................ 21,680,000 22,393,055
MBIA Insured, 5.00%, 7/01/33 ........................................................ 10,000,000 10,418,800
Seattle Municipal Light and Power Revenue, 5.40%, 12/01/25 ............................ 10,000,000 10,680,600
Seattle Water System Revenue, FGIC Insured, 5.00%, 10/01/23 ........................... 300,000 311,415
Snohomish County Housing Authority Revenue, Pooled, 6.30%, 4/01/16 .................... 200,000 201,998
Snohomish County USD No. 6 GO, 6.50%, 12/01/11 ........................................ 7,000,000 7,916,790
Spokane County GO, Pre-Refunded, 6.00%, 12/01/14 ...................................... 130,000 130,248
Tacoma GO, Series A, MBIA Insured, 5.625%, 12/01/22 ................................... 300,000 306,837
Twenty-Fifth Avenue Properties Washington Student Housing Revenue, MBIA Insured,
5.125%, 6/01/22 ..................................................................... 2,925,000 3,096,961
5.25%, 6/01/33 ...................................................................... 9,770,000 10,319,856
Washington State GO,
AMBAC Insured, 5.00%, 1/01/31 ....................................................... 24,945,000 26,526,264
Motor Vehicle Fuel Tax, Series B, FGIC Insured, 5.00%, 7/01/27 ...................... 10,000,000 10,513,500
Series A, FGIC Insured, 5.00%, 7/01/27 .............................................. 10,000,000 10,513,500
Various Purpose, Series C, FSA Insured, 5.25%, 1/01/26 .............................. 10,120,000 10,747,339
Washington State Health Care Facilities Authority Revenue,
Multicare Health Systems, MBIA Insured, 5.00%, 8/15/22 .............................. 250,000 255,838
Providence Health Care Services, Refunding, Series A, FGIC Insured, 5.00%, 10/01/36 . 10,000,000 10,584,500
Providence Services, MBIA Insured, Pre-Refunded, 5.50%, 12/01/26 .................... 6,000,000 6,397,380
46 | Semiannual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
WASHINGTON (CONTINUED)
Washington State Higher Education Facilities Authority Revenue, Pacific Lutheran University
Project, Refunding, Connie Lee Insured, 5.70%, 11/01/26 ................................... $ 200,000 $ 204,310
Washington State Public Power Supply System Revenue,
Nuclear Project No. 2, Refunding, Series A, 6.30%, 7/01/12 ............................... 7,700,000 8,701,077
Nuclear Project No. 3, Capital Appreciation, Refunding, Series B, zero cpn., 7/01/14 ..... 12,450,000 9,164,071
Nuclear Project No. 3, Capital Appreciation, Series B, ETM, zero cpn., 7/01/14 ........... 2,550,000 1,898,271
Nuclear Project No. 3, Refunding, Series B, zero cpn., 7/01/12 ........................... 6,400,000 5,117,376
Nuclear Project No. 3, Refunding, Series B, zero cpn., 7/01/13 ........................... 11,000,000 8,465,820
------------
294,924,999
------------
WEST VIRGINIA 0.6%
Braxton County Solid Waste Disposal Revenue, Weyerhaeuser Co. Project, Refunding, 5.40%,
5/01/25 ................................................................................... 10,000,000 10,207,000
West Virginia State GO, Series A, FGIC Insured, 5.20%, 11/01/26 ............................ 10,000,000 11,248,500
West Virginia State Water Development Water Revenue, Loan Program 2, Refunding, Series B,
AMBAC Insured, 5.00%, 11/01/29 ............................................................ 7,500,000 7,914,300
West Virginia University Revenues, Improvement, West Virginia University Projects, Series C,
FGIC Insured, 5.00%, 10/01/34 ............................................................. 10,000,000 10,561,000
------------
39,930,800
------------
WISCONSIN 0.7%
Janesville IDR, Simmons Manufacturing Co., 7.00%, 10/15/17 ................................. 2,200,000 2,202,948
Wisconsin State Health and Educational Facilities Authority Revenue,
Children's Hospital of Wisconsin Inc., AMBAC Insured, 5.375%, 2/15/28 .................... 21,050,000 21,398,167
Franciscan Sisters Christian, Series A, 5.50%, 2/15/18 ................................... 1,500,000 1,529,355
Franciscan Sisters Christian, Series A, 5.50%, 2/15/28 ................................... 1,000,000 1,018,570
Mercy Health Systems Corp., AMBAC Insured, 6.125%, 8/15/13 ............................... 6,500,000 6,569,875
Mercy Health Systems Corp., AMBAC Insured, 6.125%, 8/15/17 ............................... 7,500,000 7,580,625
Thedacare Inc., AMBAC Insured, 5.00%, 12/15/30 ........................................... 10,000,000 10,507,500
------------
50,807,040
------------
WYOMING 0.0% c
Wyoming CDA, MFMR, Series A,
6.90%, 6/01/12 ........................................................................... 230,000 230,191
6.95%, 6/01/24 ........................................................................... 815,000 816,345
------------
1,046,536
------------
U.S. TERRITORIES 3.5%
DISTRICT OF COLUMBIA 1.6%
District of Columbia GO,
Series A, AMBAC Insured, 5.00%, 6/01/30 .................................................. 22,860,000 24,181,994
Series A, FGIC Insured, 5.00%, 6/01/28 ................................................... 22,475,000 23,643,475
Series A, FSA Insured, 5.375%, 6/01/24 ................................................... 3,580,000 3,767,664
Series A, FSA Insured, Pre-Refunded, 5.375%, 6/01/24 ..................................... 1,420,000 1,497,305
Series E, MBIA Insured, ETM, 6.00%, 6/01/13 .............................................. 15,000 15,033
Semiannual Report | 47
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
U.S. TERRITORIES (CONTINUED)
DISTRICT OF COLUMBIA (CONTINUED)
District of Columbia Revenue, Capital Appreciation, Georgetown
University, Series A, MBIA Insured, zero cpn.,
4/01/20 ................................................................ $ 8,860,000 $ 4,441,163
4/01/22 ................................................................ 12,870,000 5,702,697
4/01/23 ................................................................ 14,160,000 5,892,684
District of Columbia Tobacco Settlement Financing Corp. Revenue,
Refunding, Asset-Backed Bonds, 6.50%, 5/15/33 .......................... 35,000,000 42,023,800
--------------
111,165,815
--------------
PUERTO RICO 1.8%
Children's Trust Fund Puerto Rico Tobacco Settlement Revenue,
Asset-Backed Bonds, Refunding, 5.375%, 5/15/33 .......................... 22,410,000 23,573,527
Puerto Rico Commonwealth GO, Public Improvement, Pre-Refunded, 5.75%,
7/01/17 ................................................................. 250,000 257,295
Puerto Rico Commonwealth Highway and Transportation Authority Highway
Revenue, Series Y, 5.00%, 7/01/36 ....................................... 69,000,000 72,553,380
Puerto Rico Commonwealth Highway and Transportation Authority
Transportation Revenue, Refunding, Series K, 5.00%, 7/01/30 ............. 19,190,000 20,038,774
Puerto Rico Housing Bank and Financing Authority SFMR, Affordable Housing
Mortgage, First Portfolio, Pre-Refunded, 6.25%, 4/01/29 ................. 130,000 131,412
Puerto Rico Industrial Medical and Environmental Pollution Control
Facilities Financing Authority Revenue, PepsiCo Inc. Project,
6.25%, 11/15/13 ......................................................... 350,000 367,738
Puerto Rico Industrial Tourist Educational Medical and Environmental
Control Facilities Financing Authority Industrial Revenue,
Guaynabo Warehouse, Series A, 5.15%, 7/01/19 ........................... 850,000 865,861
Teacher's Retirement System Revenue, Series B, ETM, 5.50%, 7/01/21 ..... 250,000 256,043
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.25%, 7/01/27 .................................... 3,265,000 3,430,927
Series D, Pre-Refunded, 5.25%, 7/01/27 ................................. 8,735,000 9,462,101
University of Puerto Rico Revenues, Series M, MBIA Insured, 5.25%, 6/01/25 285,000 287,183
--------------
131,224,241
--------------
VIRGIN ISLANDS 0.1%
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A,
5.50%, 10/01/18 ........................................................ 1,400,000 1,451,198
5.50%, 10/01/22 ........................................................ 5,000,000 5,177,200
5.625%, 10/01/25 ....................................................... 1,900,000 1,969,540
Virgin Islands Water and Power Authority Electric System Revenue,
Refunding, 5.30%, 7/01/18 ................................................ 500,000 503,930
--------------
9,101,868
--------------
TOTAL U.S. TERRITORIES ................................................... 251,491,924
--------------
TOTAL LONG TERM INVESTMENTS (COST $6,726,573,116) ........................ 7,149,659,078
--------------
48 | Semiannual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 0.7%
CALIFORNIA 0.0% c
e California State Department of Water Resources Power Supply Revenue, Series C-7,
FSA Insured, Weekly VRDN and Put, 3.45%, 5/01/22 ....................................... $ 600,000 $ 600,000
-----------
CONNECTICUT 0.0% c
e Connecticut State Health and Educational Facilities Authority Revenue, Yale University,
Series V-1, Daily VRDN and Put, 3.60%, 7/01/36 ......................................... 1,300,000 1,300,000
-----------
GEORGIA 0.1%
e Athens-Clarke County Unified Government Development Authority Revenue, University of
Georgia Athletic Assn. Project, Series B, Daily VRDN and Put, 3.64%, 7/01/35 ........... 1,225,000 1,225,000
e Atlanta Water and Wastewater Revenue, Series C, FSA Insured, Daily VRDN and Put, 3.59%,
11/01/41 ............................................................................... 600,000 600,000
e Hapeville IDAR, Hapeville Hotel Ltd., Daily VRDN and Put, 3.62%, 11/01/15 ............... 3,500,000 3,500,000
-----------
5,325,000
-----------
LOUISIANA 0.0% c
e Louisiana Public Facilities Authority Revenue, Kenner Hotel Ltd., Daily VRDN and Put,
3.62%, 12/01/15 ........................................................................ 1,500,000 1,500,000
-----------
MARYLAND 0.0% c
e Maryland State EDC Revenue, U.S. Pharmacopeial Project, Refunding, Series A,
AMBAC Insured, Daily VRDN and Put, 3.64%, 7/01/34 ...................................... 1,625,000 1,625,000
-----------
MASSACHUSETTS 0.1%
e Massachusetts State Health and Educational Facilities Authority Revenue,
Capital Assets Program,
Series D, MBIA Insured, Daily VRDN and Put, 3.62%, 1/01/35 ............................ 2,700,000 2,700,000
Series E, Daily VRDN and Put, 3.64%, 1/01/35 .......................................... 2,800,000 2,800,000
-----------
5,500,000
-----------
MICHIGAN 0.0% c
e Detroit Sewage Disposal Revenue, senior lien, Series B, FSA Insured, Daily VRDN and Put,
3.59%, 7/01/33 ......................................................................... 600,000 600,000
-----------
MISSOURI 0.0% c
e Missouri State Health and Educational Facilities Authority Health Facilities Revenue,
SSM Health Care Corp., Refunding, Series C-1, FSA Insured, Daily VRDN and Put, 3.58%,
6/01/19 ............................................................................... 400,000 400,000
-----------
NEW YORK 0.3%
e Long Island Power Authority Electric System Revenue, Sub Series 2, Daily VRDN and Put,
3.55%, 5/01/33 ......................................................................... 2,300,000 2,300,000
e MTA Revenue, Transportation, Sub Series G-2, Daily VRDN and Put, 3.62%, 11/01/26 ........ 9,200,000 9,200,000
e New York City GO,
Sub Series E-3, Daily VRDN and Put, 3.55%, 8/01/23 .................................... 900,000 900,000
Sub Series H-4, Daily VRDN and Put, 3.55%, 3/01/34 .................................... 4,700,000 4,700,000
e New York City IDAR, Liberty, 1 Bryant Park LLC, Series B, Daily VRDN and Put, 3.65%,
11/01/39 ............................................................................... 1,600,000 1,600,000
e New York City Municipal Water Finance Authority Water and Sewer System Revenue,
Series G, FGIC Insured, Daily VRDN and Put, 3.55%, 6/15/24 ............................. 600,000 600,000
-----------
19,300,000
-----------
Semiannual Report | 49
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
NORTH CAROLINA 0.0% c
e Charlotte-Mecklenburg Hospital Authority Health Care System Revenue, Carolinas Health
Care, Refunding, Series C, Daily VRDN and Put, 3.64%, 1/15/26 ........................... $ 700,000 $ 700,000
--------------
OHIO 0.0% c
e Ohio State Air Quality Development Authority Revenue, Pollution Control, Ohio Edison Co.,
Series C, Daily VRDN and Put, 3.65%, 6/01/23 ............................................ 700,000 700,000
e Ohio State Water Development Authority Pollution Control Facilities Revenue, First Energy
General Corp., Refunding, Series A, Daily VRDN and Put, 3.64%, 5/15/19 .................. 1,200,000 1,200,000
--------------
1,900,000
--------------
TENNESSEE 0.1%
e Clarksville PBA Revenue, Pooled Financing, Tennessee Municipal Bond Fund, Daily VRDN
and Put, 3.64%,
1/01/33 ................................................................................ 2,280,000 2,280,000
7/01/34 ................................................................................ 7,100,000 7,100,000
e Montgomery County PBA Pooled Financing Revenue, Tennessee County Loan Pool,
Daily VRDN and Put, 3.64%, 7/01/34 ...................................................... 400,000 400,000
--------------
9,780,000
--------------
NEVADA 0.1%
e Las Vegas Valley Water District GO, Water Improvement Series C, Daily VRDN and Put,
3.59%, 6/01/36 .......................................................................... 4,700,000 4,700,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $53,230,000) .......................................... 53,230,000
--------------
TOTAL INVESTMENTS (COST $6,779,803,116) 99.1% ............................................ 7,202,889,078
OTHER ASSETS, LESS LIABILITIES 0.9% ...................................................... 63,592,578
--------------
NET ASSETS 100.0% ........................................................................ $7,266,481,656
==============
See Selected Portfolio Abbreviations on page 51.
a See Note 6 regarding defaulted securities.
b See Note 1(b) regarding securities purchased on a when-issued or delayed
delivery basis.
c Rounds to less than 0.1% of net assets.
d See Note 7 regarding other considerations.
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 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Federal Tax-Free Income Fund
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED)
SELECTED PORTFOLIO ABBREVIATIONS
AMBAC - American Municipal Bond Assurance Corp.
BIG - Bond Investors Guaranty 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 Revenue
HFC - Housing Finance Corp.
HMR - Home Mortgage Revenue
IDA - Industrial Development Authority/Agency
IDAR - Industrial Development Authority Revenue
IDB - Industrial Development Bond/Board
IDC - Industrial Development Corp.
IDR - Industrial Development Revenue
ISD - Independent School District
MBIA - Municipal Bond Investors Assurance Corp.
MBS - Mortgage-Backed Security
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
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
USD - Unified/Union School District
XLCA - XL Capital Assurance
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 51
Franklin Federal Tax-Free Income Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2006 (unaudited)
Assets:
Investments in securities:
Cost ................................................ $ 6,779,803,116
===============
Value ............................................... $ 7,202,889,078
Cash ................................................. 38,147
Receivables:
Capital shares sold ................................. 8,467,371
Interest ............................................ 107,596,884
---------------
Total assets .................................. 7,318,991,480
---------------
Liabilities:
Payables:
Investment securities purchased ..................... 38,918,246
Capital shares redeemed ............................. 9,341,993
Affiliates .......................................... 3,767,507
Accrued expenses and other liabilities ............... 482,078
---------------
Total liabilities ............................. 52,509,824
---------------
Net assets, at value ....................... $ 7,266,481,656
===============
Net assets consist of:
Paid-in capital ...................................... $ 6,858,470,923
Undistributed net investment income .................. 14,527,186
Net unrealized appreciation (depreciation) ........... 423,085,962
Accumulated net realized gain (loss) ................. (29,602,415)
---------------
Net assets, at value ....................... $ 7,266,481,656
===============
52 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Federal Tax-Free Income Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2006 (unaudited)
CLASS A:
Net assets, at value ................................................ $ 6,420,245,779
===============
Shares outstanding .................................................. 526,762,044
===============
Net asset value per share a ......................................... $ 12.19
===============
Maximum offering price per share (net asset value per share / 95.75%) $ 12.73
===============
CLASS B:
Net assets, at value ................................................ $ 249,508,574
===============
Shares outstanding .................................................. 20,488,995
===============
Net asset value and maximum offering price per share a .............. $ 12.18
===============
CLASS C:
Net assets, at value ................................................ $ 419,702,211
===============
Shares outstanding .................................................. 34,455,597
===============
Net asset value and maximum offering price per share a .............. $ 12.18
===============
ADVISOR CLASS:
Net assets, at value ................................................ $ 177,025,092
===============
Shares outstanding .................................................. 14,517,146
===============
Net asset value and maximum offering price per share a .............. $ 12.19
===============
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 |
The accompanying notes are an integral part of these financial statements. | 53
Franklin Federal Tax-Free Income Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the six months ended October 31, 2006 (unaudited)
Investment income:
Interest .......................................................... $193,731,318
------------
Expenses:
Management fees (Note 3a) ......................................... 16,207,471
Distribution fees: (Note 3c)
Class A .......................................................... 2,916,047
Class B .......................................................... 828,194
Class C .......................................................... 1,335,766
Transfer agent fees (Note 3e) ..................................... 1,592,270
Custodian fees .................................................... 53,366
Reports to shareholders ........................................... 92,704
Registration and filing fees ...................................... 247,030
Professional fees ................................................. 63,577
Directors' fees and expenses ...................................... 99,810
Other ............................................................. 220,855
------------
Total expenses ............................................. 23,657,090
------------
Net investment income .................................... 170,074,228
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ......................... 4,072,156
Net change in unrealized appreciation (depreciation) on investments 99,259,263
------------
Net realized and unrealized gain (loss) ............................ 103,331,419
------------
Net increase (decrease) in net assets resulting from operations .... $273,405,647
============
54 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Federal Tax-Free Income Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED
(UNAUDITED) APRIL 30, 2006
-----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................. $ 170,074,228 $ 305,468,659
Net realized gain (loss) from investments ......................... 4,072,156 (2,143,176)
Net change in unrealized appreciation (depreciation) on investments 99,259,263 (126,001,248)
-----------------------------------
Net increase (decrease) in net assets resulting from operations ..... 273,405,647 177,324,235
-----------------------------------
Distributions to shareholders from:
Net investment income:
Class A ......................................................... (140,988,342) (284,380,969)
Class B ......................................................... (5,003,449) (10,969,401)
Class C ......................................................... (8,028,295) (15,401,430)
Advisor Class ................................................... (3,718,507) (6,069,676)
-----------------------------------
Total distributions to shareholders ................................ (157,738,593) (316,821,476)
-----------------------------------
Capital share transactions: (Note 2)
Class A ......................................................... 38,059,064 78,601,334
Class B ......................................................... (14,920,418) (23,662,643)
Class C ......................................................... 9,959,087 39,431,043
Advisor Class ................................................... 18,410,570 46,469,718
-----------------------------------
Total capital share transactions ................................... 51,508,303 140,839,452
-----------------------------------
Redemption fees .................................................... 10,378 8,005
-----------------------------------
Net increase (decrease) in net assets ....................... 167,185,735 1,350,216
Net assets:
Beginning of period ................................................ 7,099,295,921 7,097,945,705
-----------------------------------
End of period ...................................................... $ 7,266,481,656 $ 7,099,295,921
===================================
Undistributed net investment income included in net assets:
End of period ...................................................... $ 14,527,186 $ 2,191,551
===================================
Semiannual Report |
The accompanying notes are an integral part of these 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 Fund offers four classes of shares: Class A, Class B, Class C, and Advisor
Class. 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.
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.
56 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNT POLICIES (CONTINUED)
C. INCOME TAXES
No provision has been made for U.S. income taxes because the Fund intends 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.
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. Distributions to shareholders are recorded on the ex-dividend date and
are determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States.
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 may 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. Differences in class-level
expenses may result in payment of different per share distributions by 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.
Semiannual Report | 57
Franklin Federal Tax-Free Income Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNT POLICIES (CONTINUED)
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. Currently, the Fund expects the
risk of loss to be remote.
2. CAPITAL STOCK
At October 31, 2006, there were ten billion shares authorized (no par value) of
which 6.6 billion were allocated to the Fund and 3.4 billion were reserved for
future allocation. Transactions in the Fund's shares were as follows:
-------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
OCTOBER 31, 2006 APRIL 30, 2006
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
CLASS A SHARES:
Shares sold ................. 26,372,844 $ 317,120,118 49,809,420 $ 603,828,031
Shares issued in reinvestment
of distributions ........... 6,486,641 77,729,441 12,547,251 151,953,227
Shares redeemed ............. (29,727,052) (356,790,495) (55,909,347) (677,179,924)
-------------------------------------------------------------
Net increase (decrease) ..... 3,132,433 $ 38,059,064 6,447,324 $ 78,601,334
=============================================================
CLASS B SHARES:
Shares sold ................. 95,848 $ 1,148,239 166,927 $ 2,022,472
Shares issued in reinvestment
of distributions ........... 252,420 3,023,190 547,518 6,631,324
Shares redeemed ............. (1,590,381) (19,091,847) (2,669,697) (32,316,439)
-------------------------------------------------------------
Net increase (decrease) ..... (1,242,113) $ (14,920,418) (1,955,252) $ (23,662,643)
=============================================================
CLASS C SHARES:
Shares sold ................. 3,084,946 $ 37,078,239 7,215,517 $ 87,515,522
Shares issued in reinvestment
of distributions ........... 426,156 5,106,827 793,363 9,607,336
Shares redeemed ............. (2,682,582) (32,225,979) (4,764,532) (57,691,815)
-------------------------------------------------------------
Net increase (decrease) ..... 828,520 $ 9,959,087 3,244,348 $ 39,431,043
=============================================================
ADVISOR CLASS SHARES:
Shares sold ................. 2,601,370 $ 31,343,534 5,376,839 $ 65,172,266
Shares issued in reinvestment
of distributions ........... 68,872 826,081 31,859 384,737
Shares redeemed ............. (1,142,289) (13,759,045) (1,576,205) (19,087,285)
-------------------------------------------------------------
Net increase (decrease) ..... 1,527,953 $ 18,410,570 3,832,493 $ 46,469,718
=============================================================
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
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) Admistrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to Advisers based on the month-end
net assets of the Fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
0.440% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% Over $15 billion, up to and including $17.5 billion
0.380% Over $17.5 billion, up to and including $20 billion
0.360% 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:
Sales charges retained net of commissions paid to unaffiliated
broker/dealers .................................................... $705,486
Contingent deferred sales charges retained ......................... $225,503
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $1,592,270, of which $1,039,749 was
retained by Investor Services.
4. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At April 30, 2006, the capital loss carryforwards were as
follows:
Capital loss carryforwards expiring in:
2009 ........................................................ $ 4,844,273
2010 ........................................................ 133,009
2012 ........................................................ 26,579,286
2014 ........................................................ 1,937,789
-----------
$33,494,357
===========
For tax purposes, realized capital losses occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At April 30, 2006, the Fund deferred realized capital losses of
$143,391.
At October 31, 2006, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments ..................................... $ 6,778,735,260
===============
Unrealized appreciation ................................. $ 434,756,341
Unrealized depreciation ................................. (10,602,523)
---------------
Net unrealized appreciation (depreciation) .............. $ 424,153,818
===============
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.
60 | Semiannual Report
FRANKLIN FEDERAL TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended October 31, 2006, aggregated $263,932,148 and $212,736,023,
respectively.
6. DEFAULTED SECURITIES
The Fund held defaulted securities and/or other securities for which the income
has been deemed uncollectible. At October 31, 2006, the aggregate value of these
securities was $28,683,601, representing 0.39% 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. OTHER CONSIDERATIONS
The Oregon Economic Development Department ("OEDD"), the issuer of Oregon
Economic Development Department Revenue Bonds (Georgia-Pacific Corporation 1995
Project), Series 157, maturing on August 1, 2025 (the "OEDD Bonds") held by
Franklin Federal Tax-Free Income Fund (the Fund), received a proposed adverse
determination letter during the fiscal year ended April 30, 2006, from the
Internal Revenue Service ("IRS") in which the IRS indicated that the interest
paid to bondholders of the Bonds is not excludable from gross income. In
addition, on December 6, 2006, Georgia-Pacific Corporation (GP) released a
notice that the IRS had also issued proposed adverse determination letters for
the Jasper County, Indiana Economic Development Refunding Revenue Bonds
(Georgia-Pacific Corporation Project), Series 1997 and Series 1999 Bonds ("the
Jasper Bonds"). The Fund has been holding the OEDD Bonds since January 1996 and
the Jasper Bonds since November 1997, and has passed through the interest earned
on both the OEDD Bonds and the Jasper Bonds to the shareholders of the Fund in
the form of non-taxable dividends during the holding period. In addition, the
Fund has been contacted by the IRS informing it of the determination for the
OEDD bonds. The GP notice indicates that GP disagrees with the adverse
determinations and that notices of appeal and protest have been filed or will be
filed as provided by applicable IRS procedures and within applicable time
frames. However, the ultimate outcome of these matters is unknown at this time.
If there were not favorable final determinations in these matters, the Fund
could be subject to tax expense plus interest which is estimated to be
approximately $1,063,000 at October 31, 2006. In various prior SEC filings, GP
has stated that it will take steps to ensure the OEDD bondholders will be made
whole with respect to any liability caused by the IRS determination. The Fund's
management believes that the final outcome of these matters will not have a
material adverse impact to the Fund.
Semiannual Report | 61
Franklin Federal Tax-Free Income Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. 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 separate plans for the distribution
of the respective settlement monies. The CAGO approved the distribution plan
pertaining to the distribution of the monies owed under the CAGO settlement
agreement, and in March 2005, the disbursement of monies to the relevant funds
in accordance with the terms and conditions of that settlement was completed.
The Fund did not participate in the CAGO Settlement.
On June 23, 2006, the SEC approved the IDC's proposed plan of distribution
arising from the December 13, 2004 SEC Order and disbursement of the settlement
monies to the designated funds in accordance with the terms and conditions of
the SEC's order and the plan was completed in September 2006. The Fund did not
participate in the December 13, 2004 SEC Order.
The IDC has also completed a proposed Plan of Distribution under the August 2,
2004 SEC Order resolving the SEC's market timing investigation and has submitted
that plan to the SEC staff, where it is under review. The SEC has announced the
following expected schedule with respect to the market timing Plan of
Distribution. The SEC anticipates that Notice of the Plan will be published on
or after November 15, 2006. After publication and comment, the proposed
Distribution Plan will be submitted to the SEC for approval. When the SEC
approves the proposed Distribution Plan, with modifications as appropriate,
distributions will begin pursuant to that Plan.
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.
62 | Semiannual Report
Franklin Federal Tax-Free Income Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. 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.
9. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. The Fund is currently evaluating the impact, if any, of
applying the various provisions of FIN 48.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Fund believes the adoption of SFAS 157
will have no material impact on its financial statements.
Semiannual Report | 63
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 1-954/527-7678 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.
64 | Semiannual Report
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 BRIC 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 Balanced Fund
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 Global Real Estate 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
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
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 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
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 Michigan 7
Arizona Minnesota 7
California 8 Missouri
Colorado New Jersey
Connecticut New York 8
Florida 8 North Carolina
Georgia Ohio 7
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts 7 Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products
Trust 9
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. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
09/06 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 S2006 12/06
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 27, 2006
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 27, 2006
By /S/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date December 27, 2006